The (continuing) emergence of turnover rents

Turnover rent is a long-established concept in the UK, having been used since at least the 1980s. It became a hot topic throughout the pandemic; the number of turnover rent structures began to increase and many wrote that it was the future of retail. This had been fuelled by the uncertainty which surrounded (and arguably still surrounds) the UK retail sector and concerns from both landlords and tenants about the sustainability of retail businesses, following the impact of the pandemic.

So, what is turnover rent? In its simplest form, turnover rent is when a landlord is paid a fixed percentage of its tenant's turnover rather than a fixed rent. Traditionally, the standard method involved a discount to the headline market rent with a top-up turnover rent payment. The tenant would pay the higher of 75 - 85% of the standard market rent plus 4 - 12% of its turnover, the percentage being dependent upon the type of business. This can be advantageous as it shares risk and reward evenly between the landlord and tenant; if the tenant's business is performing well and they are producing a higher turnover, then the landlord receives a higher rent, but if the tenant's business is struggling then they are only required to pay a lower amount.

Difficulties with turnover rents

Various difficulties can arise when a landlord and tenant try to agree on what the tenant's turnover includes and excludes. For instance, should gift cards be included in the amount when they are sold, or when they are redeemed? Should purchases made via click and collect online be included if the customers choose to collect from the tenant's property? To help avoid such problems and to minimise costs, the parties are well-advised to agree on key turnover points at the Heads of Terms stage but there are also checklists that solicitors can use to assist them and their clients during the legal negotiation process.

The rise of 'pure turnover rent'

Pure turnover rent emerged victorious as a result of the current challenges facing the retail world. This structure differs from traditional turnover rent, as there is no market rent and the tenant only pays rent based on its turnover. Although it has been around for more than three decades, it seems only to be favoured in times of economic hardship. The use of this structure is highly beneficial to tenants who might be struggling to make a profit or are trialling a new concept store or whose rent payments have become unaffordable, whilst ensuring that landlords are not completely losing out.

There are further issues that must be considered when using a pure turnover rent structure, including (but not limited to) the following:

• How frequently should the tenant pay rent, as there is likely to be significant fluctuation in their profits throughout the year - without annual reconciliations, a tenant could be penalised in turnover rent in its busiest trading months whilst potentially making a loss in other months;

• What happens if a tenant ceases trading;

• Without the involvement of a market rent there is no rent review;

• Should provisions be included to allow the lease to revert back to a market rent - particularly if assignment of the Lease is permitted.

Conclusion

Although there are a number of hurdles to jump when negotiating turnover rent, it is likely to continue to flourish in the retail market as the economy emerges from the pandemic. For help navigating turnover rents and the possible benefits this could have for your business, please contact Helen Marsh in our Commercial Property team.