How are turnover rents calculated?
Turnover rents are most commonly found in retail and hospitality leases and leases relating to other operating assets.
Many turnover-based leases will still retain an element of rack rent. Turnover-only leases remain rarer, though have been imposed under the terms of some recent CVAs (for instance, the All Saints CVA in June 2020).
A turnover-based lease that has been negotiated at arms' length will usually reserve a basic rent of somewhere between 70% and 90% of the open market rent, subject to review. These basic rent provisions will be similar to those in any FRI lease with five-yearly open market rent review.
The turnover portion of rent is calculated by reference to the turnover generated from the premises by the tenant. The typical percentage is usually between 4% and 10% of turnover, which may be fixed or staircased However, the definition of "turnover" can be subject to debate and will be a critical part of the negotiations depending on the exact nature of the underlying business. It is relatively standard to include store click-and-collect revenues, but complexities may arise for store internet returns, gift cards, and special offers, or other exceptional items for example.
Landlords will expect some level of transparency in relation to a tenant's turnover, usually requiring some level of verification of a tenant's turnover calculation. A landlord will usually also be compelled to require this oversight by its own debt lender. Tenants may have practical concerns about this, as they can only offer the level of data that their internal systems are equipped to provide. In a financing situation, landlords need to be mindful of not overpromising to their lenders in order to meet the lenders usual standards of information flow.
This analysis was first published on Lexis®PSL on 13 July 2021 and can be found here (subscription required).