- A percentage rent clause usually combines two elements: - Base rent — a fixed minimum amount payable regardless of sales performance.
- Because percentage rent depends on the tenant's own sales performance, a change in who is operating the business — and therefore who is generating those sales — naturally raises…
- Because percentage rent ties the landlord's own income to the tenant's performance, landlords in this situation frequently want more information — not less — before consenting to an…
Retail and food-service leases often include a percentage rent clause: on top of (or sometimes instead of) a fixed base rent, the tenant pays the landlord a percentage of gross sales above a certain level, often called a breakpoint. It's a common structure in shopping centres and malls, and it raises a set of questions that a straightforward fixed-rent lease doesn't when the business behind that lease is sold.
This article looks at how percentage rent clauses generally work, what a change of tenant means for how they're calculated and reported, and what buyers and sellers should check before closing.
How Percentage Rent Typically Works
A percentage rent clause usually combines two elements:
- Base rent — a fixed minimum amount payable regardless of sales performance.
- Percentage rent — an additional amount, calculated as a percentage of the tenant's gross sales once they exceed an agreed threshold (the breakpoint), paid on top of base rent.
The lease defines exactly what counts as "gross sales" for this purpose (often excluding things like sales taxes or returns, though the precise definition varies lease to lease), how often the tenant must report sales to the landlord, and what records or audit rights the landlord has to verify those reports.
Why a Business Sale Raises Extra Questions
Because percentage rent depends on the tenant's own sales performance, a change in who is operating the business — and therefore who is generating those sales — naturally raises questions that a simple assignment of a fixed-rent lease wouldn't:
| Question | Why it needs an answer before closing |
|---|---|
| Does the buyer inherit the seller's sales history for breakpoint purposes? | Some leases calculate the breakpoint or reporting periods based on a full year of sales; a mid-year change in operator can create a gap or ambiguity. |
| Who reports the sales for the transition period? | The seller generated sales up to closing, and the buyer afterward — the lease may not clearly say how a split reporting period is handled. |
| Does the buyer's business generate "gross sales" the same way the seller's did? | If the buyer plans to change the concept or product mix, the practical revenue reported to the landlord may shift materially, which the landlord may want to understand before consenting. |
| Are there co-tenancy or exclusivity terms tied to the seller's specific use? | Some percentage-rent leases include related clauses tied to the type of business operated in the space, which the buyer needs to review if it plans any changes. |
What Landlords Often Want to Confirm
Because percentage rent ties the landlord's own income to the tenant's performance, landlords in this situation frequently want more information — not less — before consenting to an assignment. It's common for a landlord to ask about the buyer's business plan for the space, particularly if the buyer intends to operate differently than the seller did, since that can directly affect the rent the landlord collects going forward.
Practical Steps to Take Before Closing
- [ ] Pull the lease and identify exactly how gross sales are defined and how percentage rent is calculated.
- [ ] Confirm reporting obligations for the transition period straddling closing — who reports what, and by when.
- [ ] Ask whether the landlord requires a sales history reset, a pro-rated breakpoint, or any special handling for the sale transition.
- [ ] If the buyer plans to change the business concept, discuss this with the landlord early — it may affect both consent to the assignment and the landlord's expectations about future rent.
- [ ] Address any outstanding percentage rent owed by the seller for the period before closing explicitly in the purchase agreement.
Frequently asked questions
Does the buyer become responsible for percentage rent the seller owed before closing?
This should be addressed directly in the purchase agreement — typically, the seller remains responsible for rent (including percentage rent) accrued up to closing, with the buyer responsible from closing forward, but the lease and purchase agreement both need to be checked to confirm this is handled cleanly.
What if the buyer plans to run a completely different type of business in the space?
This is worth raising with the landlord as early as possible. A percentage rent clause built around one type of retail concept may not translate well to a very different one, and the landlord may have views (or contractual rights) about permitted use that affect whether the assignment can proceed as planned.
Can the percentage rent formula itself be changed as part of the assignment?
It's possible, but that would require the landlord's agreement — an assignment on its own doesn't automatically renegotiate the underlying rent formula. Any change would need to be documented in an amendment to the lease.
Is percentage rent common outside of shopping centres?
It shows up most often in retail settings, particularly shopping centres and malls, though the specific terms vary widely from lease to lease. It's less common in office or industrial leases, but every lease needs to be read on its own terms rather than assumed based on the type of property.
This is a business purchase or sale question
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