What is a percentage rent clause and how should a buyer verify it before purchasing a retail property?

A percentage rent clause requires a retail tenant to pay a base rent plus an additional amount calculated as a percentage of their gross sales once those sales cross a set threshold, common in shopping centre leases with tenants like restaurants or high-volume retailers. Because part of the landlord's income depends directly on how well the tenant's business performs, it behaves differently than a fixed-rent lease and needs its own kind of verification.

Buyers shouldn't take the rent roll's percentage rent figures at face value. The lease itself should be reviewed for exactly how gross sales is defined, including what's excluded such as returns or certain taxes, how often the tenant reports sales, and whether the landlord has audit rights to verify the tenant's figures. Just as important is looking at the tenant's actual sales history and financial statements rather than relying on a single year's number, since percentage rent income can be volatile and tied closely to that specific tenant's performance.

Because this income stream is less predictable than fixed rent, a buyer underwriting the deal should treat percentage rent conservatively rather than assuming past performance will continue unchanged.