Percentage Rent in Retail Leases: Base Rent Plus a Cut of Your Sales
Lease a mall unit and you may pay more than a fixed rent — once sales pass a break-even point, the landlord takes a percentage of the rest. That’s percentage rent.
How is percentage rent in a retail lease calculated?
Percentage rent is common in malls and anchored retail centres: the tenant pays a base (minimum) rent plus a percentage of sales above a “natural breakpoint.” The natural breakpoint = annual base rent ÷ the percentage rate. Example (illustration only): base rent $60,000 and a 6% rate give a breakpoint of 60,000 ÷ 6% = $1,000,000; sales above $1M are shared with the landlord at 6%. It lets the landlord share in the tenant’s success.
Source: Ontario retail leasing practice / OREA commercial clauses (2026)
I’m Arthur Zhao. First-time mall tenants — restaurants and retailers — often stall at the “percentage rent” clause: don’t I already pay rent, so why do I hand over more when business is good? It’s the classic retail-lease structure — the landlord rises and falls with you. Understanding how the breakpoint is calculated and how gross sales is defined directly determines how much you pay once the business scales.
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The structure: a floor plus a share of success
⚠️Watch for an artificially low breakpoint: if the landlord sets the breakpoint below the natural breakpoint (base rent ÷ rate), you start paying percentage rent before sales have truly ramped — effectively raising your overall rent. At signing, verify: does the breakpoint equal base rent ÷ rate? If it’s lower, ask why.
How the natural breakpoint is calculated
The definition of “gross sales” is the negotiation
💡 Percentage rent means you must report sales to the landlord periodically and submit to audits. The landlord has the right to verify your sales records to confirm the percentage rent is correct. It also means your operating data is visible to the landlord — negotiate reporting frequency, audit scope, and confidentiality to protect trade secrets.
Good or bad for the tenant? It depends on your ramp
Percentage rent can favour slow-ramp, high-ceiling retail: low sales early mean only a modest base rent and less pressure, with sharing only after you scale. But if the base rent is already high, the rate steep, and the breakpoint set low, you share heavily as soon as you do slightly well — a bad deal. At signing, look at base rent, rate, and breakpoint together, run a few scenarios against your own sales forecast, and then decide.
Frequently Asked Questions
Is percentage rent paid on top of base rent?
In most structures, yes: you pay the base (minimum) rent, and once sales exceed the breakpoint, the excess is charged at the percentage on top. A few “full percentage” structures take the greater of the two instead. Check whether yours is “base + overage” or “greater of.”
How do I calculate the natural breakpoint?
Natural breakpoint = annual base rent ÷ the percentage rate. Example: base rent $60,000, rate 6% → breakpoint $1,000,000; sales above $1M are charged at 6% on top. If the lease uses a negotiated artificial breakpoint, it won’t necessarily equal this formula — verify carefully.
Do online and delivery orders count toward gross sales?
This is a key negotiation point. If orders aren’t fulfilled at this physical store, or merely route through a third-party platform, tenants should push to exclude them from this store’s gross sales — otherwise they inflate the percentage-rent base unfairly. Nail the exclusions in the “gross sales” definition.
Is percentage rent good or bad for a tenant?
It depends on your use and ramp. For slow-ramp retail, a low base rent plus sharing only after you scale eases early pressure. But if base rent is already high, the rate steep, and the breakpoint low, you share heavily as soon as you do slightly well. Run scenarios against your own forecast before agreeing.
With percentage rent, can the landlord see all my sales data?
Yes — you report sales periodically and submit to landlord audits for verification. Negotiate reporting frequency, audit scope, and confidentiality to protect trade secrets, but transparent reporting is the premise of the percentage-rent structure.
Arthur Zhao
Real Estate Broker · FRI · ABR · SRS · PSA · MCNE · E-PRO · CLHMS & GUILD Elite · REAIS
VP & Branch Manager, Bay Street Group Inc.
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