Turnover rents: Issues for landlords and tenants to consider before signing up

Turnover rents: Issues for landlords and tenants to consider before signing up

Published:

Author: Alison Howarth

Applies to: England and Wales

In challenging and uncertain trading conditions, turnover rents have become a common method of reviewing rent in the retail sector.

Turnover rents allow a degree of risk to be shared between landlords and corporate tenants, offering both compromise to landlords by linking return with the success of the tenant's business, and flexibility to cautious tenants by avoiding fixed uplifts where their market is static or even receding.

Traditionally, base rents amount to around 75%-80% of the market value with an associated 'top up' payment which is usually a percentage of the tenant's gross turnover at the premises.

The impact of online sales

Gross turnover tends to include all sums earned from the tenant's business 'at the property'. But consumer shopping habits have changed following the squeeze on the high street retail market since 2008. What happens when sums earned from the business are carried out online rather than in-store?

Consumers often take a 'click and collect' approach, using the physical store only as a showroom, allowing them to try out products before they buy online.

As a result, landlords will want to ensure that gross turnover includes everything from physical products (including gift cards and vouchers), to online orders delivered to the store.

But where products are viewed in store, ordered online and then delivered to the customer's home, the role of the store in generating that turnover is less clear. Quantifying how many of the products sold online are attributable to the store is a challenge for institutional landlord when negotiating with national retail tenants. A tenant can argue uncertainty or unascertainability when asked by a landlord to include online sales in the turnover rent calculation.

Fraught with potential for negotiation, much will depend on the bargaining position of the parties. Anchor tenants in shopping centres, as in most cases, are much more likely to be in a position to sway the landlord than one-off high street retailers.

Given the online presence of most retailers and significant changes in consumer spending habits, it will be interesting to see how linking rent to turnover develops in an improving economy and it may be that we see a move back towards open market rentals.

The impact of online sales on turnover rents is only one issue for landlords and tenants. Other issues to consider are:

Landlord

Tenant

  • resist sums only 'actually received' being included in the calculation of turnover. Avoid losing rental income due to the tenant's own bad debts or instalment payments that have not yet been made by its customers, which is out of the landlord's hands
  • restrict turnover to sums 'actually received' (rather than those that are receivable)
  • ensure payments made in cash and by credit card or through a credit or hire purchase company are included in calculating turnover
  • any provision for variation of the percentage on change of use should be mutual, to avoid difficulties in disposing of the premises
  • reserve rights of access needed to lay cables and equipment in order to connect to the tenant's tills
  • ensure refunds for goods purchased online are not deducted from gross turnover
  • if the rent is to switch to open market rent if the Tenant ceases to trade then negotiate periods which will not trigger the switch e.g. de minimis periods or periods for refitting / refurbishment or repairs, to market the premises for assignment or underletting or where the premises have been damaged by an insured risk
  • seek a minimum rent below which the annual rent cannot fall (not less than passing or open market rent)
  • seek a cap above which the annual rent cannot rise
  • maintain close scrutiny of the tenant's accounts with electronic daily sales data which feed into the landlord's data system (easier to administrate in a shopping centre setting than a high street shop)
  • negotiate fixed intervals (e.g. monthly or quarterly) on which accounts are submitted, having been audited

Disclaimer

This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.