Building owners that lease their property using a turnover rent
(or "percentage rent") structure to retailers are facing
an important challenge relative to capturing revenue from online
Turnover rent lease arrangements entail a base rent payment to
which is added a percentage of a tenant's sales, or the higher
amount between a base rent and a sales percentage. This structure
allows landlords and tenants to share in a business' risks and
rewards. In Canada, there is no legislation or formal guidelines
regarding the calculation or inclusion of online sales with regards
to the computation of a turnover rent structure.
Issues can arise with turnover rent from the ominchannel
environment. For example, tenants' clients and customers may
browse stores and peruse inventory, only to leave the physical
store with a list of items to purchase online from that store's
website. There may be price differences between online and
in-store purchases, some stores' discount coupons apply only to
online sales or only to in-store sales, and many stores
conveniently deliver inventory directly to customers' doors
free of shipping costs.
The issues experienced by landlords with turnover rent lease
clauses in the context of online sales can be twofold. First,
online sales often do not count towards the sales percentage
according to standard turnover rent lease provisions. As a result,
landlords can lose the percentage of rent that they would have
otherwise received had the purchase been made in the store. The
second issue manifests itself when a customer returns merchandise
purchased online to a physical store for a refund. In such
instances, the landlord is not only deprived of the corresponding
percentage of profit, but in fact loses profit, as the returned
product counts as a debit (which reduces the turnover rent amount)
despite having never received the credit for an in-store sale.
With e-commerce on the rise, this issue will become increasingly
relevant for both landlords and tenants. As such, parties to retail
leases should examine the turnover rent provisions in their leases.
Some ways to avoid the potential problems associated with online
sales include adapting the language of turnover rent lease
provisions accordingly, for example to include provisions that
allocate income from online purchases to physical stores, and to
draft the definitions of "turnover" and "sales"
to clarify whether online sales are included as turnover for the
purposes of the lease.
Particular attention should also be paid to tenants'
disclosure obligations relative to online sales data and the
related accounting information. Landlords should consider
disclosure sufficient to verify the accuracy of the turnover
generated online, and retailers should ensure they are able to
provide this disclosure.
As online sales become increasingly relevant, prudent landlords
and retailers should examine the impact of turnover rent structures
to understand how to best negotiate and structure them to respond
to a changing retail landscape.
Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).