Rent & Operating Costs
Percentage rent
Also called: overage rent, percentage lease
Percentage rent is additional rent a retail tenant pays based on gross sales above a stated breakpoint, letting the landlord participate in the location's performance. It is calculated as a percentage of sales over the breakpoint, and the breakpoint is often set as base rent divided by that percentage.
Percentage rent aligns a landlord with a retailer's results. It also creates an ongoing reporting obligation and an audit right that most tenants underestimate.
Natural versus artificial breakpoint
- Natural breakpoint: annual base rent divided by the percentage rate. At $180,000 base rent and a 6 percent rate, the natural breakpoint is $3,000,000, and the tenant pays 6 percent of sales above that.
- Artificial breakpoint: any negotiated number. A breakpoint set below natural means the tenant starts paying percentage rent before it has covered base rent through sales, which is meaningfully more expensive.
Tenants should default to a natural breakpoint and treat any artificial one as a rent increase to be priced accordingly.
The definition of gross sales is the whole negotiation
The percentage is fixed; what it applies to is not. Exclusions worth securing:
- Sales taxes and other taxes collected from customers
- Returns, refunds, and exchanges
- Gift card sales at issuance, recognized instead at redemption
- Employee discounts and sales to employees
- Online orders shipped from a distribution center, and the treatment of buy online pick up in store, which is now the single most contested item in retail percentage rent
- Sales of fixtures and equipment not in the ordinary course
- Credit card and delivery platform fees, where negotiable
- Interdepartmental transfers
Reporting, records and audit
Expect monthly or annual sales reporting, a requirement to keep records for three to five years, and a landlord audit right. Where the audit reveals an understatement above a threshold, often 2 to 3 percent, the tenant typically pays the audit cost and interest. Tenants should confirm the threshold is not zero and that a good faith reporting error does not constitute a lease default triggering termination.
Interaction with other clauses
Percentage rent is the reason continuous operation clauses exist: a landlord relying on sales participation wants the store open. It also supplies the measurement for a kick-out clause and often for the alternate rent under a co-tenancy clause. Changes to the gross sales definition therefore ripple into three other provisions, which is easy to miss when reviewing a round article by article.
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A kick-out clause gives a retail tenant the right to terminate its lease early if sales fail to reach a stated threshold by a measurement date, usually after the third or fourth year.
A co-tenancy clause lets a retail tenant reduce rent or terminate its lease if named anchor tenants close or if overall occupancy at the center falls below a stated threshold.
A continuous operation clause requires a tenant to remain open for business during stated hours throughout the term, rather than merely paying rent.
A go dark clause governs whether a retail tenant may close its store while continuing to pay rent through the end of the term.
This page is general information, not legal advice. Review lease language with qualified counsel.