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A guide to turnover rents and turnover leases

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Tristan Wark, senior associate in our real estate team, explained the fundamentals of turnover rents and turnover leases and provided top tips for retailers considering agreeing a turnover based rent in the July edition of CWB Magazine.

Since the start of the Covid-19 crisis and the country going into various states of lockdown, there has been growing demands from retailers for turnover based rents. New Look, Pret a Manger and Frasers Group (formerly Sports Direct International) have all publicly made the case for turnover rent based leasing arrangements, and join earlier advocates of turnover leases, such as the H&M group. We are potentiality on the verge a widespread movement towards turnover based leases that would bring the UK in line with the United States and Italy, where rents being linked to turnover and visitor traffic are more common. Retailers who agree with their landlord to move onto a turnover rent based lease must be aware of how such leases differ from standard fixed rent leases, and the key issues they should consider.

There are effectively two types of turnover lease:

  1. A “pure turnover” lease where the only rent that the tenant pays is based on their turnover
  2. A “turnover top up” lease, where the tenant pays a reduced fixed base rent at a certain percentage of the open market value with a turnover top up paid in addition to the base rent where turnover exceeds the base rent.

A critical consideration of a retail tenant seeking to agree a turnover lease is what constitutes turnover. A number of issues are not straightforward and should be properly explored between landlord and retailers, for example, the treatment of “click and collect” operations.

Payment mechanics also need careful thought, the following can be important:

Turnover leases typically involve paying an on account turnover rent estimate, which is then reconciled against actual turnover.

Consider the effect of seasonal turnover variations – most retailers prefer to pay a more even turnover rent throughout the year rather than receive one large turnover rent bill in the Christmas quarter.

Consider tying the annual turnover reconciliation date with your financial year end so that certificates of turnover can be more easily produced.

A turnover lease will almost certainly mean a more pro-active landlord and tenant relationship than you may be used to. Your landlord will become interested in your trading success, seeking to maximise their rent with a high turnover occupier. This may result in very restrictive provisions to prevent you underletting or assigning the lease. The closer relationship also means your landlord will have more information about your business - you will need to ensure that there are suitable confidentiality obligations in place.

Turnover leases often include a keep open covenant where if the shop doesn’t open a turnover is assumed. Check carefully how this works and that an artificial turnover won’t be assumed where it would be unreasonable to do so – for example if you can’t open as to do so would be unlawful, or if you close the shop in order to undertake refurbishment and decorating works.

Stamp Duty Land Tax in respect of the grant of the lease is also more complex for turnover leases and involves estimating what the turnover rent will be during the term of the lease and potentially making multiple SDLT returns.

Turnover rents can be beneficial and are undoubtedly growing in popularity with retailers, they are not without their difficulties both in terms of drafting and management. Failing to consider the detail of your new turnover lease could result in you paying more in the way of rent than you would otherwise have, or struggling under the administrative burden of calculating and auditing turnover rent levels too frequently.

To do checklist
  • Appoint a specialist solicitor and surveyor to support and advise you on negotiating and agreeing the terms of the  turnover lease
  • Examine the definition of what the lease treats as turnover line by line.
  • It is likely you will be asked to provide turnover certificates and detailed records. Ask yourself if you are happy with your new obligations, and be honest about the time that will be needed.
  • Timing is crucial. When must you pay the rent and any top-ups. Do the new terms work with your typical cashflow?

Relevant Links

Goodman Derrick Real Estate

Tristan Wark

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 0207 404 0606 and ask to speak to your usual Goodman Derrick contact.