Percentage rent is additional rent in a retail lease, paid as a percentage of the tenant's gross sales above an agreed threshold called the breakpoint. A tenant with a 6% rate and a $2,000,000 breakpoint who sells $2,500,000 pays 6% of the $500,000 excess, or $30,000, on top of base rent.
Percentage rent is the clause that makes a retail lease different from an office lease. The landlord shares in the tenant's success: once sales pass a threshold, a slice of every additional dollar comes back as rent. Northmarq's explainer describes the structure as base rent plus a percentage of gross sales above a breakpoint, which is the form nearly every shopping centre lease uses.
The calculation
Three inputs: base rent, the percentage rate, and the breakpoint. Sales above the breakpoint are multiplied by the rate, and the result is added to base rent.
| Input | Example |
|---|---|
| Annual base rent | $120,000 |
| Percentage rate | 6% |
| Breakpoint | $2,000,000 (natural: $120,000 divided by 6%) |
| Annual gross sales | $2,500,000 |
| Percentage rent | 6% of $500,000 = $30,000 |
| Total rent | $150,000 |
The natural breakpoint is the sales level at which the percentage rate applied to all sales equals base rent; an artificial breakpoint is any other number the parties negotiate. Divide annual base rent by the percentage rate to get the natural breakpoint.
Why it exists
For the landlord, percentage rent turns the centre's tenant mix and foot traffic into income and aligns the two parties on sales. For the tenant, it lowers fixed rent in slow years. For the property team, it creates an operating task: gross sales have to be reported every period, checked against the lease definition, and reconciled, and the reports arrive late from a predictable share of tenants every month.
Where disputes come from
Three places, in order: the definition of gross sales (online orders, returns, gift cards), the breakpoint in a partial year or after a rent change, and late or unreported sales. The lease clause handles the first two; a consistent collection and reconciliation process handles the third.
Related terms
Frequently asked questions
What is a typical percentage rent rate?
Rates vary by retail category and by the size of the base rent. Northmarq's guide describes rates commonly landing in the low to mid single digits of gross sales, with lower rates for high-volume, low-margin tenants such as grocers and higher rates for restaurants and specialty retail. The lease, not a rule of thumb, sets the number.
What counts as gross sales?
Whatever the lease defines. Most definitions include all sales made from the premises, in store and online orders fulfilled from it, and exclude returns, sales taxes, employee discounts, and sometimes gift card sales until redeemed. The exclusions are negotiated and are the usual source of disputes.
How does a landlord verify reported sales?
Through the sales reporting clause: tenants submit monthly or annual gross sales statements, often certified, and the landlord keeps an audit right. In practice the harder part is collecting the reports on time every month across a centre, which is the subject of the linked articles.
Is percentage rent paid monthly or annually?
Both structures exist. Many leases reconcile annually against audited sales, with monthly or quarterly estimated payments once sales pass the breakpoint. A partial lease year usually prorates the breakpoint, which the lease should state explicitly.