Posted by Jennifer M. Settles, Esq. September 9, 2026
Percentage Rent in Retail Leases: When You Pay the Landlord a Cut of Sales
Most commercial tenants pay a predictable monthly rent and that’s the end of it. But in retail (particularly in shopping centers and malls) leases often include something different: percentage rent, where the tenant pays the landlord a share of the store’s sales on top of, or sometimes instead of, a base rent. If you’re a retail business signing a lease, understanding how percentage rent works is essential, because it ties your rent directly to how well you perform.
How Percentage Rent Works
In a typical percentage rent arrangement, you pay a base rent plus a percentage of your gross sales above a certain threshold. That threshold is often called the “breakpoint.” Below the breakpoint, you just pay base rent; once your sales exceed it, you also owe the landlord an agreed percentage of the sales above that line. The idea is that the landlord shares in your success: if your store thrives in their location, they participate in the upside.
Understanding the Breakpoint
The breakpoint is the number that determines when percentage rent kicks in, so it’s one of the most important figures in the lease. A “natural” breakpoint is calculated by dividing the base rent by the percentage rate, but breakpoints can also be negotiated to a specific dollar figure. The higher the breakpoint, the more sales you keep before owing a cut—so where this number lands directly affects how much you ultimately pay. It deserves as much attention as the base rent itself.
How “Gross Sales” Is Defined Is Everything
Since percentage rent is based on your sales, the definition of “gross sales” in the lease carries enormous weight. Does it include online orders fulfilled from the store? Returns and refunds? Sales taxes? Gift card sales? Employee discounts? Each inclusion or exclusion changes what you owe. Landlords tend to prefer broad definitions; tenants want sensible exclusions for items that aren’t really store profit. Negotiating a fair, clearly worded definition of gross sales is one of the most valuable things a retail tenant can do.
Reporting and Audit Rights
Percentage rent requires you to report your sales to the landlord, usually periodically, and leases typically give the landlord the right to audit your records to verify those figures. Understand what you’ll be required to track and report, how often, and what the landlord can inspect. These obligations are an ongoing administrative reality of a percentage rent lease, and inaccurate reporting—even unintentional—can create disputes or penalties. Know what you’re signing up to maintain.
The Tradeoffs for Tenants
Percentage rent isn’t inherently bad for tenants. Sometimes it comes with a lower base rent, which reduces your fixed costs and your risk if sales are slow—you pay more only when you’re doing well enough to afford it. The downside is that a successful store effectively pays more rent, and the reporting and audit obligations add complexity. Whether the arrangement favors you depends on the base rent, the breakpoint, the percentage rate, and your realistic sales expectations. Run the numbers across different sales scenarios before agreeing.
What to Watch and Negotiate
If your lease includes percentage rent, focus your attention on the levers that matter: the percentage rate, the breakpoint, and the gross sales definition, plus the reporting and audit terms. Push for a breakpoint and definition that reflect how your business actually operates, and make sure online and other sales are treated in a way that’s fair to you. Consider how the structure interacts with the base rent and any co-tenancy or exclusivity protections in the lease. Small changes to these terms can mean meaningful money over a multi-year lease.
The Bottom Line
Percentage rent links your rent to your sales, letting the landlord share in your store’s performance—which can work for you if it comes with a lower base rent, or against you if the terms are unfavorable. The breakpoint, the percentage rate, and especially the definition of gross sales determine how much you actually pay, and the reporting obligations are an ongoing commitment. Before signing a retail lease with percentage rent, model the real-world cost and negotiate the terms that drive it.
If you’re signing a retail lease with percentage rent, the breakpoint and the definition of gross sales can quietly determine how much you pay for years. Schedule a free consultation to make sure the structure works for your business, not just the landlord’s. Contact us at www.jsettleslaw.com or (602) 617-3938.
About the Author Jennifer M. Settles makes business owners’ lives easier. As a fractional General Counsel with 25+ years structuring M&A deals, commercial contracts, corporate governance, and complex real estate transactions, including over two decades as lead in-house transactions counsel for major corporations, she brings big-firm firepower to the founders, dealmakers, and growing companies who need it most. Clients describe her as knowledgeable, refreshingly direct, and relentlessly focused on their best interests. Jennifer offers white-glove, direct-access service and transparent, predictable fees. Learn more or schedule a consultation.
