Turnover rents have historically been quite rare in England and Wales. Whilst they were starting to appear in the retail sector before the Covid-19 pandemic, the question now is whether these will be the new ‘norm’?
What is turnover rent?
Turnover rent is a term used to describe rent in commercial leases that is dependent upon a tenant’s turnover.
Turnover rent can be determined in various different ways. Some examples are:
- the tenant pays a base rent which will be a fixed amount, plus a turnover rent that will be a percentage of the turnover of the business;
- the tenant pays the open market rent for the property and an additional turnover rent if their turnover exceeds a cap that is agreed between the parties; or
- the tenant only pays a turnover rent which means that the rent payable is dependent solely on the turnover of the tenant’s business.
What to think about when considering turnover rents
There are a number of considerations to bear in mind when it comes to turnover rents. These include:
- The increased administrative burden on both parties as the tenant will have to report their turnover to the landlord to determine the rent payable;
- Whether a lender (if there is one) will agree to a fluctuating rental income for the property;
- How to define ‘turnover rent’ and whether it includes online sales for the business (if so, how do you apportion them to different stores if the tenant has multiple stores) or just sales made at the store? It will also be necessary to consider how discounted items, returns and gift voucher sales impact on this;
- What percentage of the tenant’s turnover is to be paid for their occupation of the property?;
- Should the landlord have the right to bring the lease to an end if the rents are deemed too low?;
- Should the tenant be prevented from assigning the lease? The landlord may not want a turnover rent lease to be assigned to a third party or, if the lease is assigned, may want the rent to revert to a fixed or open market rent;
- How it impacts the valuation of the landlord’s property asset. Normally, the valuation for turnover rent leases is based on previous years’ sales data; and
- The limited availability of comparable evidence due to turnover rents being rare in the market.
The future outlook
The high street was already suffering, but the Covid-19 pandemic has compacted an already difficult market for retailers.
There have been a number of examples of retailers entering into CVAs and switching their rental payments to a turnover rent model. This is likely to continue in the future.
Tenants are likely to welcome turnover rents as it will mean a lower cost whilst they work to establish their business. If the business is not doing so well, the rent will reflect that position and prevent them from potentially being pushed into insolvency.
A landlord may be taking a risk when granting a lease to a tenant with a turnover rent and is likely to prefer a fixed rental income but, that said, they stand to benefit if the tenant’s business is successful.
If landlords are concerned about turnover rents becoming the norm, then they could try to include a provision in their conventional lease to prevent turnover rent from being introduced on an assignment of that lease to a third party.
It seems that turnover rents or a hybrid between turnover rents and traditional open market rent is likely to be seen more frequently in the future, not only in the retail sector but potentially for hotels and offices.
Here to help
If you have any more questions or would like more information regarding turnover rents, you can contact our Property Litigation Team on 0161 941 4000 or you can email the Commercial Property Team.