A percentage rent clause is the lease provision that obliges a retail tenant to pay, on top of base rent, a stated percentage of gross sales above a breakpoint. A complete clause has six parts: the rate, the breakpoint, the definition of gross sales, the reporting obligation, the payment mechanics, and the landlord's audit rights. Most disputes come from the third part, because "gross sales" means whatever the lease says it means.

Below is a full example clause, then each part taken apart with the wording that matters and the wording that gets landlords into trouble. If you want the maths behind breakpoints, that's covered in how to calculate percentage rent; this post is about the words.

One caveat before the clause: this is an illustration for property and leasing teams, not legal advice. Have counsel review any clause before it goes into a lease.

The sample percentage rent clause

Section 4.3 — Percentage Rent.

(a) Obligation: In addition to Base Rent, Tenant shall pay to Landlord, as Percentage Rent, an amount equal to six percent (6%) of Gross Sales made during each Lease Year in excess of the Breakpoint.

(b) Breakpoint: The Breakpoint for each Lease Year shall be the amount obtained by dividing the annual Base Rent payable for that Lease Year by six percent (6%). For any partial Lease Year, the Breakpoint shall be prorated on a daily basis.

(c) Gross Sales: "Gross Sales" means the total selling price of all goods and services sold, leased, licensed or delivered in, on, at or from the Premises, or through any order taken at, fulfilled from, or collected at the Premises, whether for cash, credit, or otherwise, including sales made through electronic, telephone or online channels where the order is fulfilled from or collected at the Premises, and including the value of gift cards at the time of redemption. Gross Sales shall exclude: (i) sales, use, or excise taxes collected and remitted to a taxing authority; (ii) refunds, credits and allowances for merchandise returned, to the extent previously included in Gross Sales; (iii) sales to employees at a discount, not exceeding two percent (2%) of Gross Sales in any Lease Year; (iv) the transfer of merchandise to other locations of Tenant, where such transfer is not made to avoid a sale at the Premises; (v) the sale of gift cards at the time of sale; and (vi) bad debts written off, provided that any subsequent recovery shall be included in Gross Sales when received.

(d) Reporting: Within fifteen (15) days after the end of each calendar month, Tenant shall deliver to Landlord a statement of Gross Sales for that month, signed by an officer of Tenant. Within sixty (60) days after the end of each Lease Year, Tenant shall deliver an annual statement of Gross Sales for that Lease Year, certified by an independent certified public accountant or by Tenant's chief financial officer.

(e) Payment: Percentage Rent shall be paid within fifteen (15) days after the end of each calendar month in which cumulative Gross Sales for the Lease Year to date exceed the Breakpoint, calculated on cumulative Gross Sales for the Lease Year less Percentage Rent previously paid for that Lease Year. Any overpayment or underpayment determined by the annual statement shall be settled within thirty (30) days after its delivery.

(f) Records and Audit: Tenant shall keep complete and accurate books and records of Gross Sales at the Premises or Tenant's principal office for not less than three (3) years after the end of each Lease Year. Landlord may audit such records on not less than fifteen (15) days' notice, not more than once per Lease Year. If any audit discloses that Gross Sales were understated by three percent (3%) or more, Tenant shall pay the cost of the audit in addition to any Percentage Rent due, with interest at the Default Rate. If Gross Sales were understated by ten percent (10%) or more in any Lease Year, or in two consecutive audits, such understatement shall constitute an Event of Default.

Breaking down the percentage rent clause, sub-clause by sub-clause

Six sub-clauses, roughly 450 words, and every one of them carries money. What follows is each part in turn: what the sample wording does, the alternatives you'll see in other leases, and where the drafting choice turns into a billing dispute two or three years later.

(a) The rate: the number that gets negotiated once

The rate is the least interesting part of the clause and the one that gets the most attention at signing. In-line retail typically lands at 4–8%, food and beverage 6–10%, anchors and grocery 1–3%, kiosks and temporary tenants sometimes 10–15% on a percentage-only basis with no base rent at all.

What matters in the wording: say "of Gross Sales" and capitalise it, so the rate attaches to the defined term and not to whatever the tenant's accountant thinks sales are. And say "in excess of the Breakpoint" rather than "above" or "over", because those get argued as inclusive or exclusive of the breakpoint itself. The difference is one dollar. People have still argued it.

(b) The breakpoint: natural, artificial, and the escalation trap

The sample uses a natural breakpoint, defined by formula rather than by number. That is deliberate. If the clause says "the Breakpoint shall be $2,000,000", it stays $2,000,000 for the whole term while base rent escalates, and by year five the tenant is paying percentage rent on sales that a formula breakpoint would have excluded. That may be what the landlord wants (it's a landlord-favourable artificial breakpoint by another name), but it should be a choice, not an accident of drafting.

If you want a fixed number, write it as a number and add an escalation mechanism or accept that it's static. If you want the formula, write the formula, as the sample does. Either way, the proration sentence for partial years is not optional. A tenant who opens in October will otherwise face a full-year breakpoint against three months of sales, and a tenant who opens in January with a lease year ending in June gets six months of sales against a full-year breakpoint. Both produce disputes in the first true-up.

Tiered rates, where the percentage changes above a second threshold, need their own sub-clause with each tier stated separately. Don't try to squeeze tiers into sub-clause (a).

(c) Gross Sales: where every dispute lives

This is the sub-clause to read twice. The sample's definition does three things a weaker clause misses.

• It captures orders "fulfilled from or collected at the Premises." A 2018 lease that says "sales made in, on or from the Premises" was written before curbside pickup, buy-online-pick-up-in-store and delivery-app orders were material. Today a tenant can run $400,000 of online orders through the back room of a 4,000 sf store, and at 6% that's $24,000 a year that turns on nine words. Newer leases say it explicitly. Older ones go to a lawyer. If you're managing retail or mall properties with leases signed before 2020, this is the clause to check in every renewal.

• It fixes the gift card timing. Gift cards are counted at redemption, not at sale, and the exclusion list says so twice to close the loop. Counting at sale is defensible too; counting at both is the error, and it happens when the inclusion list says one thing and the exclusion list is silent.

• It caps the employee discount exclusion. Without the 2% cap, "sales to employees" becomes a category tenants grow into.

Here's how the common items fall, and which ones you should expect the tenant to push on:

There is no right answer to the middle column. There is a wrong answer, which is silence. Every row in that table that the clause doesn't address will be decided in the tenant's favour, because the tenant prepares the sales report.

One more drafting point. The sample says "or otherwise" after "cash, credit". That catches store credit, loyalty points, trade-ins, and whatever payment method appears next. Leave it in.

(d) Reporting: monthly unaudited, annual certified

Two reports, two standards. The monthly statement is signed by an officer and is what you bill provisionally against. The annual statement is certified, by a CPA if you can get it and by the CFO if you can't, and it's the only figure the true-up should be settled on.

Fifteen days for the monthly report is standard; some landlords accept twenty. Sixty days for the annual is generous; ninety is common and forty-five is achievable with national tenants who close their books fast. What matters more than the number is the consequence of missing it. The sample clause doesn't state one, and it should. The usual choices are a late-reporting fee, the right for the landlord to estimate Gross Sales at the prior year's figure plus a percentage until the report arrives, or both. Add one.

If you run the annual CAM reconciliation on the same lease-year calendar, set the sales statement deadline to land before the CAM statement goes out. It saves one round of tenant correspondence.

(e) Payment: cumulative, not monthly

Sub-clause (e) is the one most leases get wrong and the sample gets right. It calculates provisional percentage rent on cumulative Gross Sales for the lease year to date, less what's already been paid. That means nothing is billed until the tenant has actually crossed the annual breakpoint, and a tenant with a strong December and a weak year never receives a bill they'll need refunded in February.

The alternative wording, "6% of Gross Sales in excess of one-twelfth of the Breakpoint in each month", bills the holiday season and then credits it back. It's easier to administer by hand, which is why older leases use it. If your billing runs through a system rather than a spreadsheet, there is no reason to keep it.

The thirty-day settlement after the annual statement covers both directions. Landlords sometimes draft it as an underpayment-only clause. Tenants notice.

(f) Audit rights: the three percent threshold

Audit rights are worth nothing without three things: a retention period long enough to audit, a cost-shift trigger, and a default trigger.

The sample keeps records for three years, allows one audit per lease year on fifteen days' notice, shifts audit cost to the tenant at a 3% understatement, and makes a 10% understatement (or two consecutive understatements) an Event of Default. Those thresholds are mainstream. Landlords push for 2% cost-shift; tenants push for 5%. Either is defensible. What isn't defensible is a clause with audit rights and no threshold, because then every audit becomes an argument about who pays for it.

Two things the sample could add. A "records at the Premises or principal office" requirement is fine for a regional tenant and useless for a national one whose records sit in a data centre; specify electronic access. And say whether the audit right survives lease expiry for the retention period. Most do; some tenants argue it doesn't.

What the clause has to become in your system

Whoever bills percentage rent needs the clause turned into fields, not a PDF. At minimum:

When lease management and billing run in one place, the monthly sales figure is entered against the lease, the cumulative calculation runs from the fields above, and the annual certified figure triggers the true-up as an invoice or credit through the same receivables flow as base rent. In RIOO on NetSuite the Gross Sales flags live on the lease record, so the person running the true-up in year four doesn't have to reread sub-clause (c). That's the practical test of a well-drafted clause: can it be abstracted into fields without a judgement call? If the answer is no, the clause isn't finished.

Frequently asked questions

Q1. What should a percentage rent clause include?
Six elements: the percentage rate, the breakpoint (natural or fixed), a definition of gross sales with explicit inclusions and exclusions, monthly and annual reporting obligations, the payment calculation and settlement timing, and the landlord's audit rights with a cost-shift threshold.

Q2. Do online sales count toward percentage rent?
Only if the lease says so. A clause limited to sales "made in or from the Premises" is ambiguous for online orders picked up at or shipped from the store. Modern clauses state that orders fulfilled from or collected at the Premises are included, and that orders shipped from a separate warehouse are not.

Q3. What is a typical audit threshold in a percentage rent clause?
Most clauses shift the cost of the audit to the tenant if gross sales were understated by 2–5%, with 3% the most common, and treat an understatement of 10% or more as a default.

Q4. Should the breakpoint be a fixed number or a formula?
A formula (annual base rent ÷ percentage rate) keeps the breakpoint in step with rent escalations. A fixed number stays flat while rent rises, which favours the landlord over time. Either works if it's intentional; the clause should also prorate the breakpoint for partial lease years.

Q5. How often is percentage rent paid?
Usually monthly on a provisional basis, then reconciled annually against a certified sales statement. Clauses that calculate on cumulative year-to-date sales avoid billing tenants in peak months and crediting them back after year end.

Related reading

• Percentage rent calculation: breakpoints and worked examples
• CAM reconciliation in commercial leases