Lease heads of terms
Senior real estate associate, Andrew Stokes, provides guidance for landlords and tenants on the key terms to consider when negotiating lease head of terms.Read more
The various challenges of 2020 have put immense pressure on many businesses, particularly in the retail, leisure and hospitality sectors, which has seen many tenants struggling to manage regular cashflow.
For tenants also committed to a commercial lease agreement, seeking an alternative way of agreeing fixed rent payments during a time of such uncertainty may be helpful for both them and their landlord.
A turnover rent lease can help to mitigate the risks associated with fixed rents and ultimately lead to an element of risk-sharing between commercial landlords and tenants in a way that is seen to be fairer.
Whilst many commercial leases are typically structured around a tenant paying a landlord a fixed sum of rent over a set period, a turnover rent lease is an agreement where the landlord takes a percentage of the individual tenant’s gross business turnover generated from the rented premises.
By forming more of a business partnership, both parties have an interest in ensuring that the tenant’s business is profitable.
Turnover rent leases generally comprise of a base rent plus a turnover rent.
The base rent is the minimum amount that the tenant will be required to pay on a regular basis to the landlord, regardless of the turnover during that period.
The turnover rent is directly linked to the financial performance of the tenant’s business. The percentage of the turnover to be paid in addition to the base rent will be agreed between the landlord and tenant and periodically reviewed alongside the performance of sales.
The total amount payable will be calculated using turnover data (usually till receipt information) which must be regularly provided to the landlord.
From the tenant’s point of view, a turnover rent lease can be a way to reduce their rent when trading is difficult, as the market conditions, to a degree, will determine the amount of rent payable. This is on the understanding that the tenant will pay more rent to their landlord when trading picks up and their business turnover improves.
Tenants may also find that their landlords are more supportive and approachable under this agreement, as the success of the tenant’s business ultimately benefits the landlord.
In addition, sharing information about trading trends and challenges could also lead to shopping centres making changes to improve footfall to their occupiers’ offerings.
Apart from the obvious fluctuating level of income each month for the landlord, a turnover rent lease involves additional, sometimes more complicated issues compared to a traditional commercial lease.
The extra administration required to monitor the gross turnover, calculating the uplift percentage and being more heavily involved in the tenant’s business throughout the term of the lease, are all points that need to be carefully considered and negotiated.
However, by having the ability to keep a closer eye on a tenant’s performance, the landlord can take early action if trade slips. Likewise, if sales rise above expectations, the landlord can take immediate advantage of the increase in income rather than having to wait for a rent review.
Although turnover rent leases will not be an option for all landlords, for some, it may be a feasible alternative to having empty property and a way of guaranteeing a minimal income during what has been an unpredictable time.
Considering how businesses may be required to operate in the aftermath of the COVID-19 pandemic and once the second lockdown ends, it will be interesting to see the extent of the uptake of turnover rent leases within the quickly changing commercial property market.
Landlords and property owners will no doubt look to keep their properties tenanted wherever possible. Therefore, landlords may have to consider alternatives to the traditional ways of working with tenants to keep their properties occupied and generate income.
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