Turnover rents: Is it time for a comeback?

Turnover rents: Is it time for a comeback?

Retail is one of the sectors that COVID-19 has hit particularly hard. The UK High Street was already struggling, and with the restrictions implemented by the Government causing the majority of shops to close their doors, a positive change cannot come soon enough.

E-commerce has lightened the load for some retailers, but many are finding it difficult to keep up with rent and overhead costs on empty outlets. In order to survive, commercial landlords and tenants must change the way they operate. Could turnover rents be the answer?

What are turnover rents leases?

The aim of this form of lease is to allow both tenant and landlord to share in the good times and the bad. Generally, it works by dividing the payment into a fixed term base rent, which is determined by current market conditions, and a turnover element, which is determined by the financial performance of the tenant. The percentages of the base rent and the turnover element can be negotiated by both parties.

On the whole, this makes them a very helpful agreement for retailers, although their reputation does need to improve among landlords. This being said, what works for one does not work for all, and so retailers should first assess whether turnover rent will benefit them in the long-term.

With great power comes great responsibility

Although turnover rents can hand some power back to the tenant, retailers must consider whether they can cope with the level of responsibility they carry.

Compliance is key, with retailers required to keep careful and detailed records of all items sold and to provide their landlord with regular ‘turnover certificates’. Should the trust between landlord and tenant be broken, a full audit can be undertaken, including a right to inspect and query any business’ records.

Negotiate your agreement

To avoid time consuming and costly disputes, retailers should create an agreement with landlords prior to signing a lease. Conversations should include:

  • Whether online sales, VAT and bad debts can be excluded from the turnover calculation
  • Whether discounted goods should appear in the turnover figures at full price
  • Whether a tailored turnover calculation is needed for each brand a retailer sells

Agreements should also contain a disputes provision in case the turnover rent element cannot be agreed.

Expert advice is essential when negotiating agreements and turnover rent percentages. Addressing any issues at an early stage can help to mitigate against unnecessary cost and time delays.

Don’t be afraid to talk

As always, honest communication is vital to negotiating a solution that benefits both parties. The current unstable climate means landlords may be hesitant to sign a turnover rent agreement at this time. As such, retailers should assess what they can offer a landlord in return. For example, agreeing a slightly longer lease to give the landlord more security.

Flexibility is necessary if the retail sector is to come out of the other side of this pandemic fighting. Considerable change is needed, and conversations between landlords and tenants regarding the reintroduction of turnover rents could be a good place to start.

Contact us
For further information please contact Julian Joseph or another member of the real estate team.

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