A percentage lease charges you base rent plus a cut of your sales once those sales pass an agreed threshold. It’s standard in shopping centers, malls, and a lot of restaurant space, and on paper it looks friendly: lower fixed rent, and the landlord only wins when you win.
Then you start taking delivery and online orders, and a question appears that the lease may or may not answer clearly. When a customer orders through your website and a van drops it at their door, did you just make a “gross sale” at that location?
That answer can be worth five figures a year. This guide covers how a percentage lease works, how the breakpoint math runs, and how the definition of gross sales decides whether your delivery revenue gets taxed as rent.
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The Bottom Line
- Percentage rent = (gross sales − breakpoint) × the agreed percentage. Nothing is owed below the breakpoint.
- The natural breakpoint is base rent ÷ the percentage rate. Anything else is an artificial breakpoint, negotiated on purpose.
- The definition of “gross sales” matters more than the percentage. That’s where delivery, catering, and online orders get swept in or carved out.
- Landlords increasingly want a share of orders fulfilled from the store. Tenants increasingly want that revenue excluded. Both positions are normal, and it’s negotiable.
- Get every exclusion written down. Ambiguous wording is what produces disputes at audit time.
How a percentage lease works
Two components. You pay a fixed base rent every month, the same as any other lease. On top of that, once your gross sales for the year cross a threshold called the breakpoint, you pay the landlord an agreed percentage of every dollar above it.
Nolo’s explainer on percentage rent sets out the basic structure, and Northmarq’s knowledge-center piece covers why landlords use it: in retail and food space, the landlord is partly betting on your traffic, and percentage rent is how they take a position in it.
Percentage rent sits alongside the other structures you’ll be quoted: gross leases, where the landlord absorbs most operating costs, and net leases, where taxes, insurance, and maintenance pass to you. Plenty of deals combine them, so a percentage lease in a shopping center often comes with CAM charges as well. Before you compare structures, walk the whole document, and what to look for in a commercial lease covers the clause-by-clause review that sits around this one.
| Base rent | Operating costs | Extra on sales | |
|---|---|---|---|
| Gross lease | Fixed, higher | Mostly landlord | None |
| Net lease (N/NN/NNN) | Fixed, lower | Tenant, in layers | None |
| Percentage lease | Often reduced | Usually still passed through | Yes, above breakpoint |
What percentage rent rate is normal?
It depends on the sector and the traffic.
Beancount.io’s guide for retail and restaurant tenants puts percentage rent at typically 5–10% of gross sales above the breakpoint in shopping-center, mall, and restaurant leases, with 6% the standard figure in retail. In high-traffic locations, restaurant tenants may see rates closer to 9–15%.
The rate is only half the picture though. What you care about is total rent as a share of sales. Paytronix’s analysis of restaurant rent as a percentage of sales suggests keeping rent between 5% and 8% of yearly sales, and Austin Tenant Advisors puts general retail at a base rental rate of no more than 5–10% of gross annual sales. Run your projected base rent plus projected percentage rent against those bands before you sign.
How to calculate the percentage rent breakpoint
The breakpoint is the sales figure that switches percentage rent on. There are two kinds.
A natural breakpoint is derived from your rent. Per Tango Analytics’ walkthrough of percentage rent, it’s the annual minimum base rent divided by the agreed percentage rate. The percentage rent owed is then:
(Gross sales − breakpoint) × agreed percentage = percentage rent
Tango’s worked example: base rent of $200,000 at 7% gives a natural breakpoint of $2,857,143, because 200,000 ÷ 0.07 = 2,857,142.86.
An artificial breakpoint is just a number both sides agree on. Tango notes it’s less common, and that it tilts the deal: set higher than the natural breakpoint it favors the tenant, set lower it favors the landlord. If a landlord proposes an artificial breakpoint, calculate the natural one first so you know which direction you’re being moved.
The math on a smaller, more typical food business. Say base rent is $5,000 a month, or $60,000 a year, at 6%:
| Figure | |
|---|---|
| Annual base rent | $60,000 |
| Percentage rate | 6% |
| Natural breakpoint ($60,000 ÷ 0.06) | $1,000,000 |
| Gross sales for the year | $1,200,000 |
| Sales above breakpoint | $200,000 |
| Percentage rent owed (6%) | $12,000 |
| Total rent | $72,000 (6% of sales) |
Does delivery revenue count as gross sales?
This is the clause that decides whether the table above costs you $12,000 or nothing.
Take the same business. Suppose $250,000 of that $1.2 million came from delivery and online orders. If the lease counts it, gross sales are $1.2M, you’re $200,000 over the breakpoint, and you owe $12,000. If the lease carves it out, gross sales are $950,000, below the $1,000,000 breakpoint, and you owe zero percentage rent for the year.
Same business, same sales, same lease rate. One sentence in the definitions section.
And it’s contested. Hinckley Allen’s note to landlords is a direct argument that landlords should be accounting for e-commerce when they negotiate percentage rent. From the other direction, Arnall Golden Gregory’s analysis describes how online sales and in-store pickup muddy the calculation, and ICSC has looked at how click-and-collect sales could factor in without a settled industry answer.
The practical position: landlords want a share of orders fulfilled from or attributable to the physical location, and tenants want that revenue carved out. Modern percentage leases often do pull in curbside pickup, buy-online-pickup-in-store, and local delivery through the location. If nobody raises it, the landlord’s drafting wins by default.
Four questions to put to the landlord in writing:
- Are orders placed online but fulfilled from this location included? This is the main event for anyone running their own delivery.
- What about wholesale accounts shipped from here? Wholesale is commonly excluded when it’s separately tracked, but only if the lease says so.
- Are catering and off-premises events counted? They often sit in a grey area between the location’s sales and a separate revenue line.
- What about third-party marketplace orders? The commission you pay the platform never reaches you, so paying rent on the gross figure means paying rent on money you never had.
Which gross sales exclusions to ask for
The drafting convention runs against you here. The landlord-side approach is to define gross sales as inclusively as possible: everything is included unless expressly excluded. So anything you don’t name, you pay on.
So name them. Commonly negotiated exclusions:
- Sales taxes you collect and remit. You never keep this money.
- Refunds and returns, and merchandise returned to suppliers.
- Employee discounts and complimentary items.
- Tips and service charges passed to staff.
- Gift card sales at the point of issue, so the same dollar isn’t counted twice.
- Third-party platform commissions, or the marketplace orders entirely.
- Wholesale and delivery revenue, separately tracked and reported.
- Inter-company transfers between your own locations.
If you want to see how this language sits inside a full document, a state-specific form such as this Georgia commercial lease template shows where the rent and definitions sections usually fall, which helps when you’re locating the clause in a draft, though a form is no substitute for having your own lawyer draft the exclusions.
The underlying principle is one the drafting guidance on both sides agrees on: precise exclusions have to be spelled out, because ambiguous language is what produces disputes. Percentage leases come with reporting duties and audit rights, so a definition you and the landlord read differently will eventually surface as a bill.
While you’re negotiating the definition, negotiate the reporting with it: monthly or annual statements, what counts as acceptable records, and how much notice an audit needs. Getting the wording changed is its own exercise, and how to negotiate a commercial lease covers what landlords tend to concede and where your leverage comes from.
Is a percentage lease good or bad for you?
It depends on how predictable your sales are.
It works in your favor when revenue is seasonal or unproven. A lower base rent plus a variable top-up means a slow quarter costs you less in fixed cost, which matters for a florist whose year turns on two holidays or a new restaurant still finding its volume.
It works against you when you’re growing fast, when margins are thin, or when a large share of revenue carries platform commission. Percentage rent is charged on gross sales, not on profit, so a high-volume, low-margin delivery line can generate rent out of proportion to what it actually earns you. That’s the case for carving it out rather than arguing the rate down.
Frequently asked questions
What is a percentage lease in simple terms?
Base rent plus a percentage of your sales above an agreed sales threshold. Below that threshold you pay only base rent.
How is the natural breakpoint calculated?
Annual base rent divided by the percentage rate. Base rent of $60,000 at 6% gives a breakpoint of $1,000,000.
Do online and delivery orders count toward percentage rent?
Only if the lease’s definition of gross sales includes them, and many modern leases do include orders fulfilled from the location. It’s negotiable, and it needs to be settled in writing before signing.
Can I negotiate the percentage rate itself?
Yes, but the definition of gross sales and the breakpoint usually give you more. Moving the breakpoint up protects more of your revenue than shaving a point off the rate.
Do percentage leases require me to report sales?
Yes. Expect reporting obligations and landlord audit rights, which is another reason the definition needs to be unambiguous.
Before you agree to percentage rent
Calculate the natural breakpoint yourself, check total rent against a 5–8% share of projected sales, and then spend your negotiating effort on the definition of gross sales rather than the headline rate.
If a meaningful share of your revenue leaves the building in a van or arrives through an app, that definition is the single most valuable sentence in your lease. Read it, and get your exclusions named on the page.
