Rent is one of the major factors for commercial tenants when taking a lease and when rent provisions are reviewed, they are usually ‘upward only’ and do not take into account any of the tenant’s profit and success. In contrast, turnover rent is when a tenant pays a percentage of their turnover rather than a fixed monthly or annual sum to their landlord which can offer a degree of flexibility.
One way in which it operates is the turnover rent usually forms only part of the total rent payable. There will be an agreed basic rent which will then be topped up with an agreed percentage of the tenant’s turnover rent. This helps to ensure the landlord is not out of pocket if the rent does not fall below a certain market rent minimum.
Turnover leases can have implications for rent review, so a tenant must negotiate changes to standard rent review clauses and ensure that there is a restriction on alienation and break rights to be disregarded at rent review so that the base rent at review is not inflated.
In practice, turnover rent seeks to work so that when the tenant’s business is doing well, their turnover increase means the amount of rent they pay also increases. When the business is not doing so well, then the landlord will receive less rent as the business will not be trading as well financially.
Turnover rents may be seen as an attractive model for some tenants who face difficulty in market trading situations, such as high street retailers. They are becoming more widely used with businesses using them to reduce their overheads and compensate from the result of the economic impact of the pandemic.
They are seen as an advantageous mechanism, as negotiating turnover rent means a tenant’s rent decreases in accordance with their situation in difficult times which can be helpful. It also means the risk is spread between the parties, the landlord will be able to gain the potential for increased income if the tenant performs wells and the market rate increases.
Similarly, for landlords who may have empty units and leases which have had to be transferred or forfeited due to the economy, this may be a sensible approach towards filling these premises and having some income rather than nothing. There is no legal obligation for a landlord to accept turnover rent and much will depend on the negotiating strengths of either party and the drafting provisions, which can lead to disputes if not done correctly.
Other pitfalls for the landlord include the fact that turnover rent can be difficult to manage, classify and prove. They also impose an administrative burden and may be risky for lenders to lend against.
Calculation of the turnover should not include internet sales or online returns as these can cause misapplication of the figures for a shop in question, especially if detailed records are not kept and the connection between customers purchasing online or in the stores is not fully understood.
If you are interested in having a discussion or more information about turnover rent, please contact Nick Attwell at nick.attwell@attwells.com.
