The short answer
Percentage rent is additional rent a retail tenant owes based on a stated share of its gross sales above a breakeven point, on top of the base rent already due under the lease. The breakeven can be natural, the point where base rent divided by the percentage rate equals the sales figure that would produce the same amount, or artificial, a number the parties negotiate directly instead of deriving from base rent. The tenant reports sales on a schedule the lease sets, the landlord calculates what is owed above breakeven, and most leases give the landlord audit rights to verify the reported figures. Almost every dispute traces back to one of two questions: what counts as gross sales, and whether the breakeven was calculated the way the lease actually says.
How the breakeven point gets set
A natural breakeven is derived mathematically from the lease's own numbers: divide the annual base rent by the percentage rate, and the result is the sales level at which percentage rent would equal what base rent already covers. Below that sales figure, percentage rent would be less than base rent, so the tenant pays base rent alone. Above it, the tenant owes the percentage of sales that exceeds the breakeven, in addition to base rent.
An artificial breakeven is a number the lease states directly instead of calculating from base rent and the percentage rate. Landlords sometimes negotiate an artificial breakeven below the natural one to start collecting percentage rent sooner, or a tenant negotiates one above it to delay the obligation. Either way, the lease has to say explicitly which method applies, because the two produce different numbers and the difference compounds over the term.
What counts as gross sales, and what does not
The percentage rent clause is only as good as its definition of gross sales, and that definition is negotiated line by line. Most leases start from all revenue generated at or from the premises, then carve out categories: sales tax and other taxes collected on behalf of a government, returns and refunds, employee discounts, sales of fixtures or equipment not part of ordinary business, and often revenue from vending machines, gift card sales until redeemed, or online orders fulfilled from outside the premises.
Retailers with a physical store and an online channel create the exclusion that gets contested most often: whether an online sale attributed to the store, through a ship-from-store or buy-online-pickup-in-store model, counts toward that location's gross sales. The lease has to address it directly, because silence leaves the parties applying different assumptions to the same sales report.
Reporting, payment, and audit rights
Tenants typically report gross sales monthly or quarterly on an unaudited statement, with an annual statement, sometimes certified by an accountant, reconciling the year. Percentage rent above breakeven is usually paid on the same cadence as the reporting, so the landlord is not waiting until year end to collect what is owed on a strong sales month.
Most leases give the landlord the right to audit the tenant's books and sales records, often within a set window after receiving the annual statement, to verify the reported figures against actual point-of-sale or accounting records. Audit clauses commonly shift the cost of the audit to the tenant if it turns up an underreporting above a stated threshold, which gives both sides a reason to get the reporting right rather than treat it as a formality.
Where percentage rent connects to the rest of the lease
Percentage rent rarely stands alone in a retail lease. Co-tenancy clauses can reduce a tenant's rent, sometimes including percentage rent, if an anchor tenant leaves and traffic drops, which changes what the landlord can expect to collect. Radius restrictions limit where else the tenant can operate a competing location nearby, protecting the sales base the percentage rent is calculated against. Exclusivity provisions do similar work by keeping a competing use out of the same property.
This is general information about how percentage rent provisions typically work, not legal advice. What counts as gross sales under a specific lease, how a breakeven should be calculated after an amendment changes base rent, and what an audit finding actually entitles a landlord to collect are questions that turn on the lease's exact language, and where meaningful money is involved, they belong with counsel.
Common questions
Does percentage rent replace base rent?
No. Percentage rent is additional rent owed on top of base rent once sales cross the breakeven point. The tenant always owes base rent regardless of sales performance, and percentage rent is the extra amount tied to sales above breakeven.
What happens if a tenant does not report sales on time?
It depends on the lease. Many percentage rent clauses treat a late or missing sales report as a default or allow the landlord to estimate sales and bill accordingly until an accurate report is delivered, but the specific remedy is whatever that lease provides for.
Can the breakeven point change during the lease term?
Only if the lease says so or an amendment changes it. Because the natural breakeven is derived from base rent, any amendment that changes base rent without addressing the breakeven can create ambiguity about which figure now applies, which is exactly the kind of gap that should be resolved in writing rather than assumed.
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