Percentage rent is a common feature of Canadian retail and commercial leases, particularly in shopping centres. Under this arrangement, the tenant pays a base rent plus a percentage of gross sales above a defined breakpoint. The calculation method, the definition of 'gross sales', and the exclusions from that definition can make a significant difference to your total occupancy cost. Many tenants sign percentage rent clauses without fully understanding what is included in 'gross sales' — online sales, gift cards, returns, inter-store transfers, and employee discounts can all be contentious.
What is a Percentage Rent and Breakpoint Calculation?
A percentage rent clause in a Canadian commercial lease requires the tenant to pay the landlord a percentage of their gross sales revenue above a specified threshold (the 'breakpoint'), in addition to the base rent. This is sometimes called 'overage rent'. The clause defines what constitutes gross sales, the percentage rate, reporting requirements, and audit rights.
Red flags to watch for
The natural breakpoint should be base rent ÷ percentage rate. If the breakpoint is artificially low, you start paying percentage rent before your base rent is 'earned', making the total rent disproportionate.
If customers order online from the store's website, should those sales count toward percentage rent even though the landlord's foot traffic did not drive the sale? This is increasingly contested in Canadian retail leasing.
Gross sales should be net of returns, exchanges, employee discounts, and gift card sales (to avoid double-counting when redeemed). Without these exclusions, you overpay.
The landlord should have the right to audit your sales records, but this should be limited to once per year with reasonable notice. Unlimited audit rights create disruption and cost.
Monthly or quarterly sales reporting is standard. Requirements for daily or weekly reporting create an administrative burden disproportionate to the landlord's legitimate interest.
If the anchor tenant leaves the shopping centre and foot traffic drops, a co-tenancy clause allows you to reduce to percentage rent only (no base rent) until the anchor is replaced.
Your legal rights
Commercial leases in Canada are primarily governed by provincial common law and the terms of the lease itself. There is no federal commercial tenancies statute. Key provincial legislation includes Ontario's Commercial Tenancies Act (RSO 1990, c L.7), British Columbia's Commercial Tenancy Act (RSBC 1996, c 57), and Alberta's Commercial Tenancies Protection Act. Quebec commercial leases are governed by the Civil Code of Quebec (art. 1851-1891). Percentage rent disputes are resolved through commercial arbitration or litigation. The Canadian Shopping Centre Law book by Harvey Haber is the leading practice guide.
Questions to ask before you sign
- 1What is the breakpoint, and is it a natural breakpoint based on base rent ÷ percentage rate?
- 2What is included and excluded from the definition of gross sales?
- 3Are online and e-commerce sales included in the gross sales calculation?
- 4How often can the landlord audit my sales records?
- 5Is there a co-tenancy clause that protects me if the anchor tenant leaves?
- 6How are sales during the first and last partial years of the lease calculated?
- 7What is the reporting frequency, and what documentation is required?
Disclaimer: This guide is for educational purposes only and does not constitute legal advice. Contract law varies by jurisdiction and individual circumstances. Always consult a qualified legal professional before making decisions based on this information.