Retail tenants in New York City face high operating costs, and their leases may include more than a fixed monthly rent. Percentage rent clauses require tenants to pay extra rent based on sales, which can increase rent costs and reduce profits.
How percentage rent clauses work
A percentage rent clause links rent to a store’s sales by setting a sales threshold called a breakpoint. When sales exceed this amount, the landlord receives a percentage of the extra sales.
Commercial lease agreements may use different methods to calculate percentage rent, with some leases applying the percentage to all sales from the first dollar and others charging extra rent only on sales above the breakpoint. The exact terms depend on the lease.
How percentage rent affects profits
Percentage rent can make it harder to plan business expenses because higher sales may lead to higher rent payments, which can reduce the profit a store earns during busy periods.
Tenants must also check how the lease defines gross sales, as some agreements exclude certain sales or types of income. Disputes may arise over sales reports, excluded income or breakpoint changes, and landlords may review sales records to check reported figures.
What tenants should negotiate
Tenants can negotiate percentage rent terms before signing a lease by seeking a higher breakpoint, a narrower definition of gross sales or a cap on annual percentage rent.
These terms can help control rent costs and protect profits, while reviewing how the lease handles sales reports, audits and disputes can help tenants understand their obligations. A real estate attorney can explain these terms and help identify risks.
How to protect your business
Before signing, review the full lease and estimate how percentage rent could affect your costs at different sales levels, making sure you understand the breakpoint, payment rules and reporting duties.
Reviewing these terms can help you plan your budget and avoid unexpected rent costs.