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4th December 2023
Steve Jackson, a partner in the Commercial Property Department, discusses the increasing popularity of Turnover Rent in modern leases, emphasizing its collaborative nature between landlords and tenants while acknowledging challenges in drafting and defining crucial terms such as “Gross Sales.”
Most modern leases reserve an open market rent. Turnover Rent is an alternative method of reserving a rent which has become increasing more popular recently – largely driven by an increase in the number of CVA’s which have normalised pure turnover terms on the high street.
Essentially this is rent based which is derived from the income that a Tenant makes from its use of the Property. It can be dealt with in two ways in a lease, either by:
It is most common to see Turnover Rents used in retail scenario. The look of the traditional high street and the way that people buy items has changed dramatically in recent years and so the need for those within the retail sector to reduce overheads, and risk, has become more predominant. Turnover Rents allow them to achieve this.
Often the fact that a Landlord will have a very real interest in ensuring that their Tenant succeeds in business will be considered to be a big advantage. It will naturally encourage a collaborative relationship to be formed between Landlord and Tenant.
Traditional, open market rent payments are made in advance – by either monthly or more usually quarterly payments. This is clearly an advantageous position for the Landlord. By definition, Turnover Rent cannot be paid in advance as the sales required to produce the relevant turnover need to take place before the rent can be calculated (albeit that where there is a base rent this part of the rent will often be paid in advance).
The drafting of turnover rent provisions can be complicated. It is important that, in particular, the drafting of what constitutes “Gross Sales” is very carefully considered. This will differ depending on the nature of the business of the Tenant and a “one size fits all” approach will not work here.
There will be a requirement for the Tenant to report their financial performance to the Landlord regularly (often monthly, quarterly and annually) in order that the amount of Turnover Rent payable can be calculated. A Tenant will need to be comfortable that they are able to comply with these obligations prior to committing to the lease.
It is essential that the advice of an experienced solicitor is sought when either drafting or approving the terms of a commercial lease containing Turnover Rent provisions. Kuits commercial property team can provide this specialist advice and can be contacted on 0161 832 3434 or steve.jackson@kuits.com .