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’?
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:
There are a number of considerations to bear in mind when it comes to turnover rents. These include:
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.
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.