Percentage Rent in a Commercial Lease (2024)

Nolo was born in 1971 as a publisher of self-help legal books. Guided by the motto “law for all,” our attorney authors and editors have been explaining the law to everyday people ever since. Learn more about our history and our editorial standards.

Each article that we publish has been written or reviewed by one of our editors, who together have over 100 years of experience practicing law. We strive to keep our information current as laws change. Learn more about our editorial standards.

Landlords in shopping centers and some strip malls may demand a shareof a retail tenant's profits in addition to the monthly rent. If youhave a retail business and are headed for the mall, you may be asked topay what's known as percentage rent. Typically, only rather large andsophisticated tenants, with hefty sales, fall into this group, thoughit's certainly possible that lesser tenants will face this situation. Ifthe landlord expects percentage rent from you, you'll find out early inyour dealings with the owner or management company.

With a percentage rent lease, you first pay a minimum rent under agross or net lease. Then, when your gross sales surpass a specifiedmark, you begin to pay a certain percent of every additional dollar insales as additional rent. The percent that's applied is usually anindustry standard (7% on every dollar) and isn't subject to muchnegotiation. The breakpoint is the amount of gross sales you must reachbefore the landlord will begin to apply the percentage multiplier andexact a share of your income.

Calculating the Breakpoint

Most real estate brokers and professional landlords use a standardway to calculate the breakpoint. This accepted method yields what'sknown as the natural breakpoint. Here's how it's calculated: Thelandlord asks for your yearly minimum sales, then figures out what youwould have to make in gross profits if you were paying rent equalingonly 7% of sales and had to come up with that same minimum rent amount.That figure is your natural break-point. If your gross receipts neverget to that point, you never pay percentage rent. But if your grosssales meet and exceed that figure, you begin paying percentage rent onevery additional dollar.

Example: Moonbucks Coffee leases space in a shopping centerand pays $5,000 a month ($60,000 a year) on a gross lease. In addition,Moonbucks is subject to percentage rent of 7%, with a naturalbreakpoint.

The natural breakpoint is the point where the base rent equals thepercentage rent. To calculate it, divide the base rent by thepercentage. In this case:$5,000 ÷ 7% = $71,428. When Moonbucks' sales exceed $71,428, it must paythe landlord 7% of every dollar it brings in as sales.

Negotiating the Breakpoint

Many landlords will calculate the natural breakpoint and leave it atthat—charging you a minimum rent and collecting percentage rent onlyafter your gross receipts have surpassed the natural breakpoint. Butthere is no law requiring you to stick to the natural breakpoint whenyou negotiate the lease. Landlords and tenants can negotiate thebreakpoint higher (which means that you won't have to share until yougross more than you would if you were using the break-point based on 7%)or (in which case you'll begin sharing your income with the landlordsooner than the natural breakpoint).

You may want to take the lead in suggesting a percentage greater than7%. You may, for example, offer to pay a higher percentage of rent ifyou think that your income will not be rising rapidly and when it does,it will be sufficient to cover the extra expense (remember, up to thatpoint the income is all yours). You may want to "trade" this concessionfor an important gain on another issue. For example, agreeing to ahigher rate in exchange for a lease renewal option right might be worthit to you.

Conversely, you may want to bargain for a higher minimum rent inexchange for a breakpoint that's above the natural point. Especially ifyou think your income will rise quickly, you won't want to share it withthe landlord until the last possible moment.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman