Turnover lease rent is either entirely or partially based on the turnover produced by a commercial tenant. Rent may be decided purely on turnover itself or it may be that an additional turnover rent is charged over and above a guaranteed ‘base rent’ when the turnover reaches a certain level.
In comparison to fixed rent leases or leases with an open market rent review, turnover leases have historically been used relatively infrequently. They have most often been found in large retail premises such as shopping centres but even in these arenas popularity until recently has been limited. However, as a result of the coronavirus pandemic, the associated changes to the retail landscape and growth in online shopping, turnover leases are now being seen as a much more viable option for tenants and landlords alike.
Reasons for increasing popularity
Commercial tenants and landlords have both been forced to try and find a way to deal with the turbulent market conditions as a result of the pandemic. Tenants have struggled to meet the costs of rent, while landlords have fought to keep units from lying vacant.
Striving to ensure premises remain occupied, landlords have found themselves turning to turnover leases in an attempt to entice tenants with lower rent and an increased chance of survival.
The advantages of turnover leases
For tenants, turnover leases offer an appealing alternative to a standard fixed rent lease. This means the tenants will not find themselves struggling to pay higher rents during times of difficulty or economic uncertainty.
Turnover rents also allow landlords to closely observe a tenant’s retail performance and assess whether any interventions may be required, to help improve the tenant’s turnover, for example, by physically improving leased premises access or visibility, or more actively promoting a leased premises location within a shopping centre. It will also enable landlords to identify under-performing tenants who should be moved to smaller units or over-performing tenants to larger units.
One might wonder why this seemingly ‘win-win’ situation has not become more commonplace as of yet, particularly when facing the aftermath of a global pandemic. However, when considering the implementation or transition to a turnover lease, there are still some hurdles to be wary of.
The downside of turnover leases
For landlords, a reliance on turnover leases can lead to difficulties in terms of obtaining funding. Lenders will unsurprisingly favour the stability of fixed rent and will be fearful of a tenant’s fluctuating profits leading to fluctuating rents.
For tenants, the allure of saving money on rent could be swiftly extinguished when hit by hefty auditing costs, the increased risk of confidentiality breaches for disclosing information to another party and significant restrictions on assignation/subletting and user provisions.
All is not lost, however, as there are ways of overcoming these obstacles in order to reap the benefits for all parties involved.
Clauses for consideration
Advice can be sought in deciding how to construct the Turnover Lease which performs best for you.
For tenants, important clauses to consider may include deciding on a clear definition of ‘turnover’ with appropriate deductions from gross income; determining a minimum level of auditing required; and ensuring there are clear boundaries for sharing turnover information and the way in which that information may be used.
For landlords, agreeing on the inclusion of ‘keep open’ and performance clauses will be key. In short, keep open clauses require the tenant to open and trade from the premises during agreed hours. Performance clauses may provide landlords with an option to bring the lease to an end if a tenant’s turnover falls under a certain level. These clauses should be negotiated carefully to ensure some allowances are made for premises forced closure or for a tenant’s performance falling below target, in order to ensure that balance and fairness is retained.
Specialist Commercial Property Lawyers, Edinburgh
Murray Beith Murray Partner, Bill Meldrum, is Head of Commercial Property and has a wealth of expertise and experience in the area of commercial property leases. If this article has raised any questions, or if you require assistance with any Commercial Property matter, please complete our contact form or call 0131 225 1200 to speak to one of our commercial property specialist solicitors.
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