What follows are our general observations and opinions. This is not legal advice, it is not a definitive statement of California law, and every situation depends on its own facts.
Percentage rent is the provision in a retail lease that requires a tenant to pay the landlord a share of sales above an agreed threshold, on top of base rent. The number that matters is not the percentage. It is the definition of gross sales, because that definition decides what the percentage is applied to — and in our experience it is drafted broadly enough that tenants end up paying on money they never kept.
If you are signing a retail lease in Los Angeles with a percentage rent clause, our view is that the gross sales definition and its exclusions deserve more negotiating attention than almost anything else in the document, including the base rent. A tenant can win a concession on rate and lose far more to a definition nobody read closely.
How the Structure Usually Works
The common arrangement is a natural breakpoint: base rent divided by the percentage rate. If base rent is a given annual figure and the rate is a stated percentage, the tenant pays that percentage on sales above the resulting number. An artificial breakpoint is simply a negotiated figure that ignores that arithmetic, and whether it sits above or below the natural breakpoint is worth checking rather than assuming.
Two mechanical points get missed. First, whether the breakpoint is tested annually or monthly — monthly testing can produce percentage rent in a strong December even where the year as a whole never cleared the threshold. Second, whether the breakpoint adjusts when base rent escalates. If base rent rises annually and the breakpoint is fixed, the tenant is paying percentage rent earlier every year without anyone renegotiating anything.
The Definition Is the Whole Argument
A broad gross sales definition typically sweeps in every sale made at, from or through the premises, by the tenant or anyone operating within it, whether for cash or credit, and whether or not the goods are delivered from the store. That last phrase is where modern retail collides with old drafting.
The exclusions we would push hardest for are these:
- Returns, refunds, credits and allowances, and sales canceled before delivery. A tenant should not pay percentage rent on a sale it unwound.
- Sales, use and excise taxes collected from customers and paid to the authorities. This is not the tenant’s money, and yet unamended definitions routinely capture it.
- Credit card and payment processing fees, or at minimum an acknowledgement of how they are treated. On thin retail margins the difference is real.
- Online and omnichannel sales. This is the live fight. Orders placed online and merely picked up in store, or shipped from a distribution center and returned in store, should be addressed explicitly rather than left to “at, from or through”.
- Gift card sales, counted on redemption rather than on issue, so the same money is not counted twice.
- Employee discounts, bulk and wholesale transactions, and vending or ATM income, along with insurance proceeds and the sale of fixtures, none of which are retail sales in any ordinary sense.
Records, Audits and What the Landlord Gets to See
Percentage rent clauses come with reporting and audit machinery. The tenant typically reports monthly or annually, keeps records for a stated period, and the landlord may audit — often with a provision that if the audit finds an understatement above a threshold, the tenant pays for the audit and sometimes a penalty.
We would look at three things here. The retention period should be one the tenant’s systems can actually satisfy. The understatement threshold that triggers cost-shifting should be a percentage rather than a token figure, so a rounding difference does not produce an audit bill. And there should be an outside date after which the landlord cannot reach back and re-audit a settled year — open-ended look-back rights are a liability that sits on the books indefinitely.
Why This Matters Particularly in Los Angeles
Percentage rent shows up here mostly in enclosed malls, larger shopping centers and the higher-profile street retail corridors, and less often in neighborhood strip centers. Two local features are worth knowing. Landlords in centers with anchor tenants often want percentage rent tied to co-tenancy provisions, and a tenant giving up sales data should be asking for co-tenancy protection in return — if the anchor leaves and foot traffic collapses, the tenant’s sales fall while the base rent does not.
The other is that in a market where much of the retail stock is older and ownership changes hands regularly, a gross sales definition drafted in the 1990s can arrive on a renewal in its original form. We see clauses that plainly predate e-commerce being applied to businesses that now do a substantial share of their volume online. That is a drafting problem, not a legal inevitability, and renewal is the moment to fix it.
Fees
Commercial lease review and negotiation is handled on an hourly or flat-fee basis, not on a contingency. For a lease review we can usually quote a flat fee once we have seen the document and know its length and complexity, and the arrangement is set out in writing before we start.
If you are looking at a percentage rent clause in a Los Angeles retail lease, we are glad to read the gross sales definition with you before it is signed. Call us at (310) 556-9692.
Related reading: our commercial lease review resource page, along with how CAM charges and operating expenses are calculated — the other clause where the definition does the work; use clauses and exclusivity provisions — closely tied to co-tenancy in a retail center; and why we suggest a lease review before signing.
This article reflects our general views and opinions rather than legal advice, and it is not a definitive statement of California law. Reading it does not create an attorney-client relationship between you and our firm. Every matter turns on its own facts, and we would encourage you to speak with a lawyer about yours.
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