A percentage rent clause requires a tenant to pay the landlord a percentage of the tenant's gross revenue (or sometimes net revenue) in addition to, or sometimes instead of, a base rent. This is commonly used in retail leases where the landlord wants to share in the tenant's business success. For example, a tenant might pay $2,000 monthly base rent plus 5% of all sales above a certain threshold. The clause incentivizes landlords to maintain quality properties and support tenant success, since the landlord's income directly correlates with tenant profitability. However, this creates complexity in accounting, auditing, and potential disputes over what counts as "revenue" and how it should be calculated and verified.
The percentage rent mechanism protects landlords from inflation and underperforming tenants while allowing successful tenants to benefit from lower base rents. It also creates ongoing administrative burdens, as landlords typically retain audit rights to verify reported sales figures. Disputes frequently arise over whether certain income streams (returns, discounts, gift card sales, online sales) count toward the percentage calculation, making the definition of "gross revenue" critically important.
Before signing, ensure the clause precisely defines what constitutes "gross revenue" or "net revenue," including explicit treatment of returns, discounts, taxes, and any online or ancillary sales. Negotiate for a reasonable audit frequency (typically annual rather than continuous) and specify who bears audit costs if discrepancies are found. Establish clear reporting procedures and deadlines, and consider requesting a cap on percentage rent or a maximum annual increase. If you're the tenant, push for exclusions of non-sales income; if you're the landlord, ensure audit rights are robust and that you can verify figures independently.
Frequently Asked Questions
What does this clause mean in simple terms?
A percentage rent clause requires a tenant to pay the landlord a percentage of the tenant's gross revenue (or sometimes net revenue) in addition to, or sometimes instead of, a base rent. This is commonly used in retail leases where the landlord wants to share in the tenant's business success.
Why should I care about this clause?
For example, a tenant might pay $2,000 monthly base rent plus 5% of all sales above a certain threshold. The clause incentivizes landlords to maintain quality properties and support tenant success, since the landlord's income directly correlates with tenant profitability.
What are my options?
However, this creates complexity in accounting, auditing, and potential disputes over what counts as "revenue" and how it should be calculated and verified. The percentage rent mechanism protects landlords from inflation and underperforming tenants while allowing successful tenants to benefit from lower base rents.
How does this affect small businesses?
It also creates ongoing administrative burdens, as landlords typically retain audit rights to verify reported sales figures. Disputes frequently arise over whether certain income streams (returns, discounts, gift card sales, online sales) count toward the percentage calculation, making the definition of "gross revenue" critically important.