Turnover Rent is a form of Rent in Commercial Leases which may benefit both a Landlord and a Tenant.
Turnover Rent is a form of Rent which is dependent on a Tenant’s trading turnover. This form of Rent can therefore only be used where turnover is generated at the premises, such as a retail property, however serviced offices may also be able to benefit from Turnover Rent provisions.
Turnover Rent can be calculated in various ways:
- A Tenant pays a ‘Base Rent’ plus a ‘Turnover Rent’. The Base Rent will be a fixed figure, or a percentage of the open market rental value and the Turnover Rent may be a flat or stepped percentage of the Tenant’s trading turnover.
- A Tenant pays the Open Market Rent and pays an additional Turnover Rent should their turnover exceed a pre-determined cap.
- A Tenant pays a ‘pure’ Turnover Rent. The Rent payable will be entirely dependent on the Tenant’s turnover.
Benefits of Turnover Rent:
The use of Turnover Rent ultimately means that both parties to the Lease have an interest in ensuring the success of the business operated from the premises. Where a Tenant’s business produces a higher turnover, the Landlord will receive a higher Rent. Conversely, where a Tenant’s business is struggling, the Tenant is not required to pay an unsustainable rent to the Landlord. Turnover Rent provisions could be said to create more of a business relationship between a Landlord and Tenant, as both parties will benefit from the success of the Tenant.
Due to the lack of certainty of income for both Landlords (Rent) and Tenants (Turnover) during the coronavirus pandemic, we are starting to see more Turnover Rent provisions in commercial property leases. Tenants are wanting to ensure their businesses survive the unpredictable market conditions and Landlords are seeking to keep their properties tenanted. Although a Landlord may receive less rent than previously received for a period of time, they may trust that the Tenant’s turnover will improve again in the future and therefore are more willing to use a Turnover Rent to keep the Tenant in the property.
- Turnover Rent may increase the amount of administration for both Landlords and Tenants due to the reporting nature of the provision.
- A Landlord must consider whether they are able to afford or permitted by their lender to agree a fluctuating rent for their property.
- A Landlord must also carefully consider the identity, nature and reputation of the Tenant and their business.