UK: Turnover Rent: An Attractive Option In An Uncertain Market

Last Updated: 15 June 2009
Article by Kate Sutton

Turnover rents are becoming increasingly common as the current economic climate sees a move to more flexible leasing arrangements which will in turn act as an incentive to tenants who are in a position to consider taking new leases. Further, they are also a concession that can be discussed between a landlord and tenant where the tenant's business is facing difficulties and the landlord wishes to assist in helping that business ride the tide of the credit crunch. The use of turnover rents is also in line with the provisions of the Code for Leasing Business Premises in England and Wales 2007 which many landlords seek to comply with.

Such rental arrangements are particularly useful in the retail sector and licensed trade sectors and also in instances where there are few or no comparables although these will also be potentially applicable to many different scenarios.

Types of Turnover Rent

There are a number of alternative types of turnover rent provisions which can be incorporated into a lease. In simple terms however they provide that the rent payable by the tenant is based on the volume of the tenant's turnover.

The principal types of turnover arrangements are as follows:

  • The tenant pays its rent in whole as a percentage of its turnover.
  • More commonly, the tenant pays the higher of a base rent, often in the region of 70% – 80% of the open market rental value, and turnover rent calculated by reference to an agreed percentage of the tenant's annual turnover. Commonly the agreed percentage is between 7% - 15%. In reality this is usually documented by the tenant paying the base rent quarterly, or where further concessions are made to the tenant, on a monthly basis in advance with the additional turnover rent payable at the end of the turnover year to the extent that the turnover rent exceeds the base rent paid. The turnover year is commonly linked to the tenant's financial year.
  • Alternatively, a much lower base rent may be negotiated and a top up turnover rent payable by reference to a higher percentage of the tenant's turnover.

Incentives and Considerations

  • Where a turnover rent is agreed both the landlord and the tenant have a common objective to maximise the turnover of the premises. For the tenant the motive is to maximise profit. For the landlord it will want to maximise its income by doing all it can to assist the tenant in maximising turnover e.g. the landlord of a shopping centre or retail or industrial scheme can take steps to increase customer footfall or make capital investment in the scheme in order to assist the businesses of its tenants.
  • Another incentive for the tenant is that when economic conditions impact upon its turnover, and inevitably profits, its rental liabilities will be reduced thus reducing the tenant's risk of insolvency. For landlords this however means that it shares in the tenant's pain in times of economic difficulty and has to manage fluctuations in its income, the causes of which are out of its control.
  • The provision of turnover rent to the landlord gives it a chance to assess the performance of the businesses of its tenants and to take an active role in the management of its estate. The landlord may be able to take steps to increase the performance of its estate as a whole or indeed intervene at an early stage where tenants are experiencing difficulties rather than waiting until a tenant fails to pay its rent or becomes insolvent.
  • Where turnover rents are agreed the landlord's position is commonly further protected by keep open obligations on the part of the tenant specifying minimum trading hours and usage. There may also be penalties on the tenant for periods when it is not trading in order that the landlord doesn't suffer a fall in turnover rent but these are often resisted by the tenant. Further, where the lease is for more than 5 years, a landlord may seek to incorporate a provision for the base rent to be reviewed on an open market basis after 5 years or indeed for the turnover element to fall away at the first review and rents to revert to 100% of open market rent. Further, where assignment or underletting is permitted by the lease further provisions will be incorporated to ensure the landlord's position is protected in the event the tenant assigns or underlets the lease.

In summary

Turnover rents are inevitably not without their difficulties both in terms of drafting and management. They are inevitably more complex to administer and agree than standard rent and rent review provisions. For instance, the definition of turnover needs to be carefully considered by both landlord and tenant in order to ensure that it is appropriate to the tenant's business. Further, the mechanism for calculation and payment of the turnover rent needs to be carefully considered by both parties to ensure that they are happy with the arrangements for the administration, collation and transmission of turnover information as well as the calculation and payment of the turnover rent. Confidentiality provisions also need to be considered carefully by both parties.

However, in these increasingly uncertain economic times turnover rents act as a useful buffer for tenants, and landlords can use them to stimulate tenant demand for premises on their estate in a falling market. Inevitably therefore the use of turnover rents appears to be here to stay for some considerable time!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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