For those of us operating in the landlord and tenant sector, turnover rents have always made an appearance, but they’ve never really taken centre stage. They seem exclusive to the retail industry and so whilst we are acquainted with turnover rent mechanisms, we are perhaps not as familiar with them as we would like to be. Well, I have a sneaky suspicion that’s all about to change.

The mantra underpinning the landlord and tenant relationship since the pandemic has been collaboration and flexibility – this just so happens to be two of the core characteristics of a turnover rent, so with that in mind, it may just be time for turnover rents to be the headline act.

So, with the audition process over, what can we expect from a turnover rent performance?

1. Collaboration

A turnover provision links the tenant’s trading performance to its rent. Traditionally, the higher the turnover, the more the tenant pays. The lower the turnover, the less the tenant pays, but this is usually backed up by a base rent – a minimum payment so that he landlord still receives an income. In the current climate, landlords sharing the pain by receiving little or no rent in the bad times, allowing the tenant to focus on building up its trade and surviving, means a landlord can recoup some of that reduced income in the good times – perhaps because the tenant has been able to continue to trade without significant rental payments being due.

2. Flexibility

Following closely behind collaboration is the key to all fruitful contractual relationships – flexibility. The inclusion of a turnover rent needs to be able to flex for it to be effective. The levels agreed upon should be reviewed at timely intervals so that the rent reflects the market and the tenant’s performance. Another flex could be a re-evaluation whereby a balancing rent could be due if turnover rent through a certain period hasn’t reached a minimum level, giving an element of certainty to both the landlord and tenant. Other bends could be a landlord’s break option should the rents be too low and a stronger tenant is in the wings, or perhaps even a success payment for the landlord should turnover for a specified a period exceed expectations – a reward for a benevolent landlord!

3. Fairness

If a turnover rent clause is to deliver on the collaboration and flexibility front – it also has to tick the fairness box. Top of that box – what is included in the turnover calculation? 10 years ago, the inclusion of Internet sales could well have been a deal breaker. Now, it surely has to be a given. The same applies to click and collect sales. Many sales aren’t generated by visiting the premises but the sale wouldn’t happen without the premises being rented by the tenant. Some battle lines may well be drawn but if a reasonable percentage is agreed, the fairness approach to what is included in a turnover rent could well save the day.

4. Transparency

If the components of sales included in the turnover rent calculation is a fair one, then it follows that the tenant must be transparent in the information it provides. A clearly defined turnover rent clause will only work if all parties know what they are looking at and what information needs to be forthcoming. It also goes to the heart of turnover rent being a viable strategy as a platform for a genuine collaboration between landlord and tenants. A safety net here could be some worked out examples within the clause to demonstrate what is expected.
By no means will the inclusion of a turnover clause rescue a business that’s already had its final act but it could give a struggling tenant a well deserved encore.

Published by Kelly Peck on 12 January 2021

Since penning my recent article about the re-emergence of turnover rents in leases Turnover rents – it’s time to break a leg!, it seems you can’t move for similar articles on the subject! So, it’s either been a slow news time in the commercial property world of late and us commercial property lawyers have nothing else to write about – or I’m onto something!

Let’s go with the latter shall we!

To bolster my opinion, my colleagues and I have noted a marked increase in turnover provisions creeping into deals of late. Ranging from the fairly standard turnover percentage payment on top of a base rent to a much more complex beast that can leave the grey matter needing a spa day!

Once the turnover rent has made its way in – it can pose some other head scratching moments. I share my recent ponderings with you below.

1. Make it personal?

Should the turnover provisions that have been so carefully negotiated and tailored to fit the tenant be personal to them? Is it likely that on any assignment (if permitted) the same provisions would suit the incoming tenant? I’ll stick my head above the counter here and say probably not.

2. To assign or not to assign?

If the turnover isn’t personal, or actually even if it is, should assignment be permitted? It’s fine if the incoming tenant is also acquiring the business operating from the property – but what if it isn’t? If the incoming tenant is a completely different business then it could get really messy trying to align the turnover rent payments mid turnover period. A ‘substituted turnover rent’ provision could be included to cater for such a situation but as most current leases of this nature are for short term lets (3 to 5 years) assignment isn’t generally being permitted.

3. Pre-empt the messy situation

If landlords don’t want to have convoluted provisions for the ‘what if’s, perhaps they could insert a right of pre-emption on assignment to avoid any issues.

4. Not personal and assignment allowed

In this situation, any landlord should include some additional provisions to allow for the substituted rent scenario mentioned above, or at the very least include a requirement for the turnover percentage or mechanism to be re-negotiated.

Turnover rent definitely has a place in the ever increasing flexi fit world of commercial leases – just make sure it doesn’t leave you wishing it hadn’t!

Published by Kelly Peck on 1 April 2021