Rent is often the key consideration for both landlords and tenants when leasing commercial property. Both parties will want to reach a figure which is fair, and often both parties will commission a valuation to determine the market value. Sometimes the parties may want some form of flexibility rather than fixing the rent; turnover rent is one way of offering that flexibility.
Turnover rent is calculated based on the income which the tenant makes from its use of the property. The landlord and tenant will agree that a certain percentage of the tenant’s turnover will be payable to the landlord as rent, and so the rent is likely to vary – sometimes considerably – from year to year depending on the fortunes of the tenant. It is unlikely that the landlord will agree to a “pure” turnover lease, which is where the rent is solely based on turnover. It is far more common that the landlord will insist on a base figure which the tenant has to pay as a minimum, with a “top up” when the tenant’s turnover exceeds an agreed threshold.
Turnover rent is typically set at 1% and 15% of the tenant’s turnover, with a figure somewhere in the middle being most common. All point-of-sale transactions will be included, and specific, agreed exclusions or deductions will then apply, for example VAT, postage costs, employee discounts and refunds. The lease will usually provide that the tenant must supply accounts at the end of each financial year to prove its gross sales. Tenants may also want to counter a landlord’s minimum figure with their own maximum figure, to ensure that rent is capped during strong trading periods. Questions of percentage, maximums and minimums, calculations, deductions and exclusions must be carefully thought through and agreed between the parties in the heads of terms.
As well as flexibility, turnover rent has the advantage of creating a shared risk between the landlord and tenant. The risk of trading fluctuations is shared between both parties with the advantage of aligning their commercial interests. Tenants have the advantage of reduced costs when times are tough, and landlords will be rewarded with increased income from successful tenants. Also, during tough times turnover rent makes it more likely that tenants can stay in business and landlords can retain those tenants. This was especially apparent during the Covid-19 pandemic, which saw a huge increase in the number of new leases with turnover rent, or existing leases being varied to insert turnover rent provisions.
Turnover rent is not without its difficulties. Adding turnover rent provisions adds further complexity to a lease which means additional negotiation between the parties and their solicitors. The administrative burden is also higher: consistent effort is required to keep an eye on turnover, and regular audits can prove costly. Furthermore, greater flexibility brings inconsistency. A tenant will not necessarily know what it will need to pay in rent, and a landlord’s income will fluctuate, making budgeting exercises less certain for both parties. Finally, there is an increased risk of disputes regarding the calculation of turnover, particularly if sales are achieved via the internet.
Turnover rent therefore has its pros and cons, and whether or not such provisions are utilised will depend on the individual circumstances, and what the landlord and tenant decide is best for them. Negotiating the terms can be fraught with difficulty, and it is advisable for both sides to obtain legal advice early in the process.
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If you are a commercial landlord or a prospective tenant negotiating a new lease, we can help you to understand the key clauses in your lease, including those concerning rent, and provide advice tailored to your situation. Please contact Beth Margetson or Phil Hunt, or call us on 0845 55 55 321 for more information.
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