What is Percentage Rent?

What it is

Additional rent calculated as a percent of tenant's gross sales above a defined breakpoint. Common in retail and shopping centers, typically 4% to 8% of sales above a natural breakpoint (annual minimum rent divided by percentage rate).

Why it matters in your deal

For commercial tenants and ETA buyers inheriting site obligations, percentage rent matters because it can change economics, leverage, closing certainty, post-close exposure, or the attorney questions that need to be answered before capital is committed. Risk signal: Medium. High-margin retail tenants benefit; low-margin tenants get hit hard.

Real example

A commercial tenants and ETA buyers inheriting site obligations can see percentage rent language that looks routine until it controls leverage, money, timing, remedies, or closing risk. The practical question is not just what the clause says, but what it lets the other side do when the deal becomes stressed.

Red flags to watch

• •One-sided language that gives the other party discretion while limiting your consent, notice, cure, or remedy rights.
• •Undefined dollar caps, timing rules, notice methods, survival periods, territory, or trigger conditions.
• •Cross-references that move the real obligation into an exhibit, schedule, FDD item, lease addendum, or outside policy.
• •Terms that conflict with the commercial tenants and ETA buyers inheriting site obligations diligence plan, financing assumptions, operating model, or counsel review checklist.

What to do

1. 1Quote the operative percentage rent language and send the full surrounding section to counsel.
2. 2Tie the clause to economics, timing, remedies, assignment rights, consent requirements, and any closing condition it affects.
3. 3Ask for revisions that replace discretion with objective standards, defined notice periods, measurable caps, and clear cure rights.
4. 4Confirm the governing law, jurisdiction, and document cross-references before relying on the clause in negotiation.

Sources

1. Cornell Legal Information Institute - lease
2. California Civil Code section 1950.9 - building operating costs
3. California SB 1103 - commercial real property operating-cost protections