What is a Turnover Rent?

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A turnover rent is where the landlord takes a percentage of the tenant’s gross turnover instead of a more conventional rent. Turnover rent is usually combined with a fixed base rent that the tenant will be required to pay irrespective of turnover.

Given the recent upheaval in the retail market including a number of recent large administrations, independents considering whether they wish to continue and more and more vacant shops and restaurants appearing on the high street, it is likely we are going to see more turnover rents being negotiated. Tenants are asking landlords to share some of their pain and in turn, take more of the risk. Some tenants will offer to extend their lease or ask to carry out an internal refurbishment of their premises in return for a turnover rent. For those retailers in administration, the choice for the landlord might be more stark – accept a turnover rent (for the phoenix company) and most likely some other concessions as well, or alternatively face the prospect of a vacant unit.

So in light of this, what are the risks for the landlord in adopting a turnover rent and how might some of these risks be mitigated?

Transparency and trust – a landlord will need to take specialist advice on the definition of Gross Turnover and achieve an understanding of the tenant’s business in order to capture all appropriate income streams. They will need to measure clearly and audit that income and resolve any disputes. The landlord will want to see the tenant’s sales and other data on an open book basis but must then provide an undertaking that this data will be kept confidential.

Control – a landlord will want far more control in the lease. In a standard lease, the landlord is primarily concerned about the ability of the tenant to pay the rent and leave the property in good repair at the end of the term. In a turnover rent scenario, the landlord is additionally interested in the performance of the tenant’s business. Within the lease, the landlord will want a keep-open covenant, a strict user clause that encourages profitable income streams and which does not conflict with the landlord’s neighbouring tenants, tighter assignment provisions and a prohibition on underletting and ideally a right to terminate if the turnover returns are less than expected. The landlord’s desire for control is likely to increase in line with a reduction in the base rent and a greater reliance on a healthy Turnover Rent.

Temporary – if acceptance of a turnover rent is a defensive move for the landlord and more in the nature of a concession, then the landlord might want to introduce a turnover rent on a temporary basis only. The landlord will, however, want to balance this with the desire not to miss out on the upswing in the market as conditions improve.

Online sales – landlords will want to see if these can be captured. Click and Collect schemes may assist and other measures to make it clear when a sale is associated with the premises and should, therefore, be included in the Gross Turnover.

Deemed Turnover – if the premises close then the landlord will want a deemed turnover to kick in but clearly if the premises close for COVID-19 related purposes the tenant will very much not want a deemed turnover rent to apply.

Remedies for failure to provide a Turnover Certificate on time – a landlord could ask for the base rent to be topped up to market rent (or market rent plus) if the tenant does not provide its turnover certificate by a certain date. However, the landlord will not want to risk making this punitive.

All of the above are of course suggestions but in the present market, the landlord will not have it all its own way. How much a landlord is prepared to be relaxed on one or more of the above points will depend on the overall transaction.

Going forward it will be interesting to see whether turnover rents enter the mainstream and whether the traditional role of the landlord – more or less as a passive recipient of rent – will evolve to something more dynamic.

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