Percentage Rent Clauses in Ontario Commercial Leases

Percentage rent is a rent structure, most often seen in retail leases, where the tenant pays a base rent plus an additional amount calculated as a percentage of the gross sales generated from the leased premises. It is a way of linking part of the rent directly to how well the specific location performs, rather than relying on a flat dollar figure alone.

This structure is especially common in shopping centres, malls, and other multi-tenant retail properties, where a landlord’s own success depends heavily on customer traffic and the collective performance of its tenants. It is less common in office and industrial leases, where sales figures generally are not a meaningful measure of how the space is being used. For a broader look at how commercial rent is structured more generally, see our guide to commercial lease agreements in Ontario.

A percentage rent clause almost always sits on top of a guaranteed base rent rather than replacing it. This gives the landlord a predictable minimum return from the space regardless of how the tenant’s sales perform in a given year, while also allowing the landlord to benefit when the tenant does particularly well.

In practice, the tenant pays the base rent every month as usual. Separately, once the tenant’s gross sales for the relevant period exceed an agreed threshold — the breakpoint — the tenant also owes a percentage of the sales above that threshold as additional rent. If sales never reach the breakpoint in a given period, no percentage rent is owed for that period at all, and the tenant simply continues paying base rent as normal.

Some tenants negotiate a lower base rent in exchange for agreeing to a percentage rent component, effectively trading rent certainty for a structure that shares more of the upside — and the risk — with the landlord. Whether that trade makes sense depends heavily on the specific location and the tenant’s realistic sales expectations for it.

It is worth remembering that percentage rent is calculated separately from, and in addition to, any other additional rent the lease may charge, such as a share of property tax, insurance, or common area maintenance under a net or triple net structure. A tenant budgeting for a location should account for all of these components together, rather than focusing only on the base rent figure quoted at the outset.

The breakpoint is the sales threshold a tenant must cross before percentage rent kicks in, and leases generally calculate it in one of two ways. A natural breakpoint is calculated by dividing the annual base rent by the agreed percentage rate, so that the tenant effectively starts paying percentage rent only once sales reach the point where the base rent equals that same percentage of sales. An artificial breakpoint is simply a fixed dollar figure the parties negotiate directly, independent of the base rent calculation.

The choice between a natural and an artificial breakpoint can have a meaningful effect on how much percentage rent ends up being owed in a given year, so it is worth working through the actual numbers for the specific space rather than treating the two approaches as interchangeable. A lower breakpoint generally means the tenant starts paying percentage rent sooner, while a higher breakpoint delays it.

How “gross sales” is defined in the lease is often more consequential than the percentage rate itself, since it determines exactly what gets counted toward the breakpoint and the percentage rent calculation. Most definitions capture all sales made from the leased premises, but leases differ on whether items like merchandise returns, employee discounts, gift card redemptions, delivery or online orders fulfilled from the location, and applicable sales tax are included or excluded.

Because this definition drives the entire calculation, it is worth reading closely rather than assuming it matches a “standard” definition — there is no single uniform definition used across all Ontario commercial leases. Tenants operating a business with significant online or delivery sales in particular should pay close attention to how those transactions are treated.

It is also common for a lease to specifically exclude certain categories from gross sales even where they technically pass through the leased premises — for example, sales of lottery tickets, transit passes, or third-party gift cards, where the tenant is really acting as a collection agent rather than earning the full sale price as revenue. Confirming how these edge cases are treated before signing can avoid a disagreement later over what should, and shouldn’t, count toward the breakpoint calculation.

Reporting obligations are usually tied to this same definition. Most leases require the tenant to submit periodic sales reports — commonly monthly or quarterly — along with an annual reconciliation statement, sometimes requiring certification by the tenant or an accountant confirming the figures are accurate.

Because percentage rent depends on figures the tenant itself reports, landlords typically reserve a contractual right to audit or verify those sales records. This commonly includes the right to review point-of-sale data, sales tax filings related to the specific location, and underlying financial records tied to the leased premises, usually subject to reasonable advance notice and some limit on how often the audit can occur.

Leases often specify who bears the cost of an audit. A common structure has the landlord cover the cost unless the audit uncovers a material discrepancy — commonly defined as underreporting by more than a set percentage — in which case the tenant may be responsible for the audit cost in addition to paying the shortfall, often with interest.

Percentage rent lets a landlord align part of the rent it collects with how well a location actually performs, rather than relying solely on a fixed figure set at the start of a multi-year lease term. In a strong retail location, this can mean meaningfully higher total rent over time than a flat base rent alone would generate, while still providing the landlord a guaranteed minimum through the base rent component.

It can also help a landlord justify granting a tenant a somewhat lower base rent than it might otherwise charge, since the landlord retains the ability to share in strong sales performance if the location does well. For related reading on other rent structures used in Ontario commercial leases, see our guides on triple net leases and rent escalation clauses.

Tenants considering a lease with a percentage rent component generally benefit from working through realistic sales projections for the specific location before agreeing to a rate, a breakpoint, or a definition of gross sales. A clause that looks modest on paper can become a significant added cost if sales at that location consistently exceed expectations, so it is worth understanding what the numbers are likely to mean in practice.

The percentage rate, the breakpoint calculation method, the definition of gross sales, and the scope and cost allocation of any audit right are all generally open to negotiation, particularly where the tenant brings strong bargaining power to the table. More general guidance on negotiating commercial lease terms in Ontario is available on the Commercial Leases hub, and specific questions about a proposed percentage rent clause can be directed through our contact page.