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“Turnover Rent” – A useful option for Commercial Landlords and Tenants in the Pandemic

Reasons to choose Wilson Browne

It is the unfortunate reality that many businesses are struggling to remain profitable as the coronavirus pandemic continues on into 2021.

One of the larger overheads for many businesses is the commercial rent it pays to occupy its premises. With traditional UK rent reviews operating on an ‘upward only’ basis, where the rent can only increase, it is useful to know that there is another realistic option that can be considered when negotiating a commercial lease.

The alternative option gathering popularity in the pandemic is known as ‘Turnover Rent’ and it may be advantageous for Tenants and Landlord’s alike to consider inserting a Turnover Rent clause into their leases.

Turnover Rent – what is it?

Turnover Rent explained simply is a clause linking a business’ rent to its turnover. When turnover is down, the amount of rent owed can decrease, and naturally when turnover picks up, so does the amount of rent owed.

There a few different ways in which a Turnover Rent clause can operate. The most popular three are as follows:-

1. Base Rent + Turnover Rent – This option sees a Tenant pay a fixed amount of rent as normal. Whether this is linked to the property’s open mark rental value, or if it is a simple figure subject to review – it is a certain amount.

Then on top of this, a part of that rent is linked to the Tenant’s business’ turnover. So the rent might be agreed to be £100,000 per year + 0.1% of the occupying company’s annual turnover.

2. Base Rent + Turnover Rent (above capped amount) – This option only differs from the first in that the amount of rent linked to turnover only becomes payable on the amount of a Tenant’s business’ turnover exceeding a pre-determined cap.

Here you might see rent of £100,000 per year + 1% of their annual turnover above £1,000,000.

3. Pure Turnover Rent – Opting for a Pure Turnover clause does away with any Base Rent and sets the amount of rent purely based on turnover alone.

What are the Risks and Benefits?

Landlord and Tenants alike can benefit from Turnover Clauses. They can keep Tenants in properties when the going is tough, easing their monthly costs. Whilst then rewarding Landlords for keeping a Tenant in occupation when their turnover begins to pick up again.

It goes without saying that there is an element of risk involved in using Turnover clauses, especially Pure Turnover clauses. Landlords will want to give careful consideration to their Tenant’s business’ future profitability and any changing market conditions. If they have their doubts, they may wish to consider negotiating some more Landlord-friendly provisions into the lease – such as a break clause if the Tenant’s turnover falls bellow a certain threshold.

On the other hand, Tenants run the risk of handing over a less than ideal amount of their future profits if their business grows at a higher rate than they perhaps predicted. One option to mitigate this for Tenants would be to include a ceiling limit to the monthly rent that they will be obliged to pay regardless of how high their Turnover rises.

Further Points to Consider

It is important to consider exactly how the Tenant’s turnover is to be reported to the Landlord. You will need to agree exactly how extensive the reporting requirements will be, and as part of that, Tenants need to consider how much of their financial information they are willing to disclose to their Landlord for this purpose.

If the property is charged to a lender, there may also be third party consents that need to be obtained before Turnover clauses can be included.

If you require any advice and assistance drafting commercial leases get in contact.