Glossary

Breakpoint (Natural & Artificial)

Also known as: natural breakpoint, artificial breakpoint, sales breakpoint

The sales threshold above which a retail tenant begins owing percentage rent; a natural breakpoint is mathematically derived from base rent divided by the percentage rate, while an artificial breakpoint is a separately negotiated dollar figure.

The natural breakpoint formula (annual base rent / percentage rate) produces the sales level at which percentage rent, if paid from dollar one, would exactly equal base rent — meaning percentage rent above that point represents true incremental rent to the landlord. Landlords sometimes negotiate an artificial breakpoint set below the natural number to accelerate participation in tenant sales, while strong tenants negotiate artificial breakpoints set above the natural number (or a percentage-only structure with no base rent participation until a high threshold) to limit exposure. Because base rent commonly escalates annually via fixed steps or CPI, the natural breakpoint shifts each year unless the lease fixes it, which is a frequent point of drafting ambiguity. Breakpoints are typically prorated for partial lease years, such as a short first or last year of the term.