If you’re negotiating a retail lease for your shop, cafe, pop-up space or showroom, you might come across a term that sounds simple but can have a big impact on your cash flow: percentage rent.
Percentage rent is common in certain retail and hospitality leasing arrangements, especially in shopping centres or other “high foot traffic” precincts. For some small businesses, it can feel fair (your rent rises when your revenue rises). For others, it can be risky or confusing, particularly when you’re trying to forecast costs and you’re not sure what the lease treats as “sales”.
Below, we break down what percentage rent is, how it’s calculated, where it usually appears in Australian retail leases, and what you should check before you sign anything.
What Is Percentage Rent (And Why Do Retail Leases Use It)?
Percentage rent is a rent structure where you pay:
- a fixed base rent (sometimes called “minimum rent”); plus
- an extra amount based on a percentage of your sales (usually sales over an agreed threshold).
In other words, part of your rent is linked to how your business performs.
Why landlords use percentage rent
Landlords may use percentage rent because it:
- aligns the landlord’s income with the success of the retail precinct (if you do well, they do well);
- can help justify a lower base rent (at least at the start); and
- gives them comfort that strong-performing tenants contribute more to occupancy costs.
This model can be particularly common where the landlord has a strong influence over foot traffic (for example, a shopping centre operator who runs marketing campaigns, manages tenant mix, and controls trading hours).
Why tenants agree to percentage rent
As a tenant, you might agree to percentage rent because:
- it can reduce fixed overheads during quieter periods (depending on how the base rent is set);
- it can be a way to secure a location you otherwise couldn’t afford on a purely fixed rent; and
- it may feel more “shared risk” than a high fixed rent from day one.
But there’s a catch: to work properly, the definitions and reporting rules need to be very clear. Otherwise, percentage rent can become a source of disputes or unexpected costs.
There isn’t one universal calculation, but most percentage rent clauses follow a familiar structure.
The common structure
Percentage rent often looks like:
- Base rent (a fixed monthly/annual amount), and
- Turnover rent (an extra amount calculated as a percentage of “gross sales” above a “breakpoint”).
Breakpoint is the sales threshold above which percentage rent applies. The breakpoint might be:
- natural breakpoint (usually base rent ÷ percentage rate); or
- artificial breakpoint (a negotiated sales figure that may be higher or lower than the “natural” outcome).
Example 1: Percentage rent above a breakpoint
Let’s say your lease says:
- Base rent: $80,000 per year
- Percentage rent: 7% of gross sales
- Breakpoint: $1,200,000 gross sales per year
If your gross sales for the year are $1,500,000, the turnover portion might be calculated on the excess:
- Excess sales = $1,500,000 - $1,200,000 = $300,000
- Percentage rent = 7% of $300,000 = $21,000
- Total rent (excluding outgoings) = $80,000 + $21,000 = $101,000
Example 2: “Natural breakpoint” approach
If the clause uses a natural breakpoint, it could be calculated as:
- Breakpoint = base rent ÷ percentage rate
- Breakpoint = $80,000 ÷ 0.07 = $1,142,857 (approx.)
Then you only pay turnover rent on sales above that figure.
Make sure you separate rent from “outgoings”
In retail leases, the total occupancy cost can include more than just rent. You may also pay:
- outgoings (centre management fees, maintenance, council rates, etc.);
- marketing or promotion levies;
- utilities; and
- other fees (for example, after-hours air conditioning).
Percentage rent usually applies to turnover (sales), not to outgoings. Still, you should confirm how the lease defines each payment type so you can forecast your total costs.
What Counts As “Sales”? The Definitions That Matter Most
The biggest legal and commercial risk with percentage rent is that it relies on a defined sales figure. The clause might refer to “gross sales”, “turnover”, “gross revenue” or similar terms.
Those words sound straightforward, but the lease definition is what actually matters.
Common inclusions
Depending on the lease, “sales” may include:
- in-store sales (obviously);
- phone orders taken from the premises;
- online sales connected to the store (for example, click-and-collect or sales fulfilled from the premises);
- sales made by staff while working at the premises (even if processed through a central POS system); and
- voucher or gift card redemptions (this can be tricky).
Common exclusions (or negotiated exclusions)
Some tenants try to negotiate exclusions such as:
- GST (often excluded, but the accounting and tax treatment can vary depending on how the lease is drafted and how your sales are recorded - it’s a good idea to confirm the practical treatment with your accountant);
- refunds and returns (net of sales);
- genuine staff discounts;
- lay-by deposits (until completion);
- certain delivery fees or third-party platform fees; or
- online sales not connected to the premises (for example, online sales fulfilled from a warehouse in another state).
Why eCommerce and “omnichannel” businesses need extra clarity
If you operate both in-store and online, you should be especially careful. A percentage rent clause drafted years ago may not deal with modern selling methods (QR ordering, delivery apps, click-and-collect, influencer sales links, and so on).
From a practical standpoint, you want the clause to match how your business actually earns revenue. From a legal standpoint, you want the definition to be clear enough that both sides can consistently apply it.
It’s often worth having a lawyer review the lease wording before you commit, particularly if percentage rent is involved and the definitions are detailed. A commercial lease review can help you spot issues that don’t show up in the headline rent figure.
Reporting, Audits And Privacy: The Operational Side Of Percentage Rent
Because percentage rent depends on turnover, the landlord will usually require you to report your sales on a regular basis and may also reserve the right to audit your records.
Sales reporting obligations
Your lease might require:
- monthly turnover statements;
- quarterly turnover statements;
- an annual turnover declaration signed by you (and sometimes your accountant); and/or
- supporting reports from your POS system.
You’ll also want to check:
- when turnover rent is calculated and paid (monthly, quarterly, annually);
- whether there is an annual “true-up” (adjustment once actual yearly sales are known); and
- what happens if you report late (default interest, breach notices, penalties).
Audit rights
Many percentage rent clauses include audit rights allowing the landlord (or an auditor they appoint) to inspect:
- sales records;
- banking summaries;
- POS reports; and
- other information needed to confirm turnover.
From a small business perspective, audits aren’t automatically “bad” - but you should ensure the process is reasonable. For example, you may want to check:
- how often audits can occur;
- whether the landlord must give notice;
- whether the audit can happen during business hours; and
- who pays the audit cost (this can vary depending on whether an underpayment is found).
Data handling and confidentiality
Your turnover data can be commercially sensitive. It’s worth checking whether the lease includes confidentiality obligations about your information, including who the landlord can disclose it to (for example, centre managers, valuers, financiers, prospective buyers).
If your business collects customer data as part of sales (for example, loyalty programs, online ordering, or customer accounts), make sure your data practices are consistent with your public-facing documents, including your Privacy Policy.
Negotiating Percentage Rent: What You Can Ask For As A Small Business
You don’t always have the bargaining power to rewrite a shopping centre lease from scratch, but percentage rent is one area where small changes can make a meaningful difference.
1. Negotiate the breakpoint (and understand the “real” rent)
Ask yourself: at what sales level does percentage rent start to apply, and what does that mean for your likely turnover?
If the breakpoint is low, you could end up paying turnover rent earlier than you expected. If the breakpoint is high, percentage rent may never apply (which could make the clause feel less important - but you still need to comply with reporting and audit obligations).
2. Nail down the sales definition (especially online sales)
If your business has any online component, you’ll want the lease to clearly address questions like:
- Do “sales” include online orders picked up in-store?
- Do “sales” include online orders shipped from the store?
- Do “sales” include sales generated by the store but fulfilled elsewhere?
There’s no one “right” answer - it comes down to what’s fair in your commercial arrangement and what you can negotiate - but ambiguity is where disputes start.
3. Confirm how discounts, refunds and chargebacks are treated
Retail businesses deal with returns and refunds every week. If percentage rent is calculated on gross sales without a sensible adjustment mechanism, you may pay rent on money you didn’t actually keep.
Also check how gift cards are treated. In some setups, gift card sales and gift card redemptions can create double-counting issues unless the clause is carefully drafted.
4. Watch out for “double” increases: CPI/market review plus percentage rent
Many leases already include rent increases (for example, annual CPI increases or fixed percentage increases, and sometimes a market review at renewal).
If you also have percentage rent, your occupancy costs can increase in two ways:
- your base rent rises under the review mechanism; and
- your turnover rent rises if your sales rise.
This isn’t automatically unreasonable - but you should model it so you understand the total cost if your business performs well (which is what you want!).
5. Think ahead to renewal and exit options
Percentage rent clauses can become more significant at renewal time, especially if your business has grown and your turnover is higher than in year one.
It’s also smart to understand your renewal timeline and notice requirements early, so you’re not caught off guard. Lease timing issues often come up when you’re deciding whether to keep trading, relocate, or renegotiate terms, including turnover rent. The notice rules can differ by state and lease type, so keep an eye on your key dates (for example, lease renewal notice periods can be a common pressure point in NSW negotiations).
If you need to exit early, you’ll also want to understand what the lease says about termination, make-good and any costs triggered by your departure. This is a good time to get advice, particularly where turnover data and rent calculations could be disputed. Practical support can start with lease termination advice.
Common Legal And Compliance Issues To Watch For (Beyond The Lease Itself)
Percentage rent is mainly a leasing issue, but your overall legal risk doesn’t stop at rent. Your sales performance and customer interactions can also trigger other legal obligations that feed into revenue and reporting.
Retail and hospitality businesses often run promotions to drive sales - and in a percentage rent arrangement, sales are directly tied to what you pay. That makes it even more important to avoid pricing practices that could cause disputes with customers or regulators.
For example, your advertising and signage should comply with advertised price laws, including ensuring prices are displayed clearly and accurately.
Returns, refunds and cancellation practices still matter
When turnover rent is in the mix, the way you handle refunds and cancellations can affect both:
- your customer compliance risk; and
- your net turnover and how “sales” should be recorded for rent purposes.
This is one reason it’s worth ensuring your customer terms (including cancellations) are clear and compliant. Many businesses also need to think about cancellation fees under the Australian Consumer Law (ACL), especially if you take deposits, bookings or pre-orders.
Be careful if you’re not signing a standard “lease”
Sometimes, especially for pop-ups, kiosks, or shared retail spaces, you might be offered a licence agreement rather than a formal lease.
A licence can still include turnover-based fees, but the legal rights and protections can be very different from a lease (including around renewal rights and security of tenure). If you’re offered something like a Property Licence Agreement, it’s worth slowing down and making sure you understand what you’re actually signing.
Key Takeaways
- Percentage rent is a rent structure where you pay a base rent plus an additional amount calculated as a percentage of your sales (often above a breakpoint).
- The definition of “sales” is the most important part of the clause - especially if you sell online, offer click-and-collect, or run gift cards and promotions.
- Percentage rent clauses usually come with reporting and audit obligations, so you should confirm what information you must provide and how often.
- When modelling affordability, look at the full picture: base rent increases + turnover rent + outgoings can add up quickly as your business grows.
- You can often negotiate practical points like the breakpoint, inclusions/exclusions in turnover, and audit rules to make the arrangement more workable for a small business.
- If the lease includes percentage rent, a review before signing can help you avoid ambiguity, unexpected costs, and disputes later.
Important: This article is general information only and not legal or financial advice. Retail leasing rules (and the practical treatment of items like GST and returns in turnover reporting) can vary depending on your lease terms and your accounting setup, so it’s a good idea to get legal advice on the lease and confirm any tax/accounting treatment with your accountant.
If you’d like help reviewing or negotiating a retail lease with percentage rent, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
