With the increased frequency of local and national lockdowns, the high street is at its biggest standstill to-date. To release the deadlock, landlords have begun to agree lease terms that are more favourable and flexible for the tenant with the novel turnover rent provisions leading the way in reimaging the leases and commercial property sector in the UK.
What is a ‘Turnover Rent’?
A rent, whether whole or partial, that is calculated by reference to the turnover generated by a business operating at the premises.
Old or New?
Turnover rents, although still uncommon in the UK, are becoming increasingly more popular due to COVID-19 with the experts predicting a gradual and steady shift from fixed-rate to turnover rent leases in the near future.
Solely relying on turnover rent may never become agreeable to many landlords who will prefer the security given to them by fixed-rent leases, having a lease that introduces a base rent with a turnover top-up seems like an attractive model to both parties and a necessary step forward to reboot the high street in the current times.
The way it operates is simple (at a glance at least). For the landlords, it provides an attractive way of securing base rent (i.e. the minimal rent they wish to achieve) whilst leaving the turnover top-up at variable rates (we are currently seeing the top-up percentage varying from 1% to 15% of the tenant’s turnover on a lease by lease basis).
This in turn makes this approach equally attractive for the tenants as they are less likely to be concerned with paying a higher top-up when their business is doing well, but with the security of paying less in monetary value when the business is hit by an unforeseeable event.
Is it the Perfect Model Then?
No, it is not - but neither is the fixed-rate rent option as proven by landlords and tenants struggling during the current pandemic. As turnover rent leases are a novelty in the UK property sector, they also bring their sheer amount of practical considerations and issues. To give a few:
- Turnover leases will not be available to everyone - New businesses will be at a disadvantage when trying to negotiate turnover rent provisions as they will not be able to provide sufficient evidence of cashflow which in turn makes such type of leases unavailable to entrepreneurs and generally limited in use.
- Online retailers joining the high street - Online retailers wanting to join the high street will have to provide satisfactory evidence that their high street sale strategy is as effective as their online sale strategy, which leads us to our next point…
- Turnover rent and online sales - Online retailers will face one major question when deciding whether to opt into a turnover rent scheme i.e. should online sales be considered when calculating turnover rent?
Landlords will undoubtedly support the idea with tenants strongly opposing to such approach as many businesses use two separate models when managing their online and high street sales strategies.
Although turnover rents will bring an unavoidable amount of uncertainty, one thing is certain – leases with such provisions are becoming increasingly more important in the UK property sector and are well worth considering for many established businesses seeking new leases.
Are You Considering a Change in Contract?
If you would like to discuss turnover rent or any commercial property matter, please do not hesitate to contact our commercial team on 02920 404027 or commercial@howellslegal.com.
