Breakpoint Rent (Percentage Rent): Meaning, Limitations, Example
- MREI Official
- May 22
- 2 min read
Breakpoint rent, often referred to as percentage rent, is a common lease structure in commercial real estate especially in retail. Under this model, a tenant pays a base rent plus a percentage of gross sales once those sales exceed a certain threshold, known as the breakpoint.
The idea is to align the landlord’s income with the tenant’s performance. It gives tenants lower rent in slower months and provides landlords a share in the upside when the tenant’s business thrives. This structure is particularly popular in shopping centers, restaurants, and retail stores, where revenues fluctuate seasonally.
How It Works
A typical percentage lease includes:
Base Rent: A fixed monthly amount the tenant pays regardless of performance.
Breakpoint: A pre-set sales threshold. Once gross sales exceed this level, percentage rent kicks in.
Percentage Rate: A percentage (e.g., 5% or 7%) applied to gross sales above the breakpoint.
There are two types of breakpoints:
Natural Breakpoint: Calculated by dividing the base rent by the percentage rate.
Artificial Breakpoint: A negotiated sales level that may not reflect a direct formula.
For example, if a tenant pays £10,000 per month in base rent and the agreed percentage is 5%, the natural breakpoint would be £240,000 in annual sales (£10,000 x 12 ÷ 0.05). Any revenue above that would be subject to the 5% percentage rent.
Limitations of Percentage Rent Agreements
While percentage rent can benefit both parties, it also comes with limitations:
Complexity: It requires tracking and verifying tenant revenue, often through financial disclosures or audits.
Uncertainty: For landlords, income from percentage rent can fluctuate heavily with economic cycles and consumer behavior.
Negotiation friction: Disputes can arise over what constitutes gross sales, allowable deductions, or breakpoint calculations.
Landlords may prefer higher base rent for stability, while tenants might resist revenue-sharing if margins are thin.
Real-World Example
Imagine a retail clothing store signs a lease with a £5,000 monthly base rent and a 6% percentage rent on gross sales above £100,000 annually. The tenant generates £120,000 in sales in one year. Since sales exceeded the breakpoint by £20,000, the tenant owes an additional £1,200 (6% of £20,000) in percentage rent for that year, on top of the base rent.
This flexible structure allows the landlord to share in the success of a growing tenant while still collecting consistent monthly payments.
Final Thoughts
Breakpoint rent, or percentage rent, is a smart way to balance risk and reward in commercial leasing—especially in revenue-driven spaces like retail. It gives tenants room to grow without excessive upfront costs and gives landlords a stake in tenant success. However, it requires careful negotiation, clear lease language, and transparency between parties. If structured correctly, it can lead to long-term, mutually beneficial relationships in commercial real estate.
