But when the business struggles, and turnover falls, the landlord will receive less rent. As a result, turnover rents are particularly attractive to tenants in difficult trading circumstances, such as those currently facing many high street retailers. Many in the industry are forecasting that turnover rents will become more common as tenants try to find ways of reducing overheads and surviving the economic impacts of the pandemic. Whilst there has been a temporary ban on commercial tenant evictions and winding-up orders, and other business support mechanisms put in place by the government, trading has been exceptionally tough.
The high street has been hit hard by the pandemic, an area of the economy that was already being squeezed by online retailers. As a result, many commercial tenants have had to either break their leases or transfer them to another tenant if they are able to find one. This leaves many commercial landlords with a decision to make: Either have units sat vacant or negotiate on rent.
Many have opted for the latter option, deciding that some income is better than none in the circumstances. Plus the obligations to maintain the premises and keep them secure. If premises are empty, the landlord loses the above and is also liable for the rates after 3 months for some types of commercial property and 6 months for others.
Need to review their mortgage terms. It is a commercial decision for a landlord to make, but it is crucial that any turnover rent agreement is well-negotiated and drafted. This figure was based on analysis of their rent negotiations in the UK, and pointed out that almost all details are in some way unique.
Rent can also be calculated as margin-based. This is worth considering, as two retailers with the same turnover could have very different profit margins.
In most circumstances, in a Turnover Rent agreement, the agreed base rent ensures the rent received by the landlord does not fall below a certain minimum amount. In a Turnover Rent arrangement, the tenant usually pays the base rent either weekly, monthly, or quarterly, in accordance with their agreement with the landlord. Following each subsequent turnover period, the tenant then pays the base level of rent plus the additional percentage of the turnover.
This is based on the tenant believing that his business turnover will improve in the future. Some would deem a Turnover Rent calculation a fairer and more dynamic approach. Considering how the commercial property market and businesses may operate after the COVID pandemic and once lockdown ends, landlords and property owners will no doubt seek to keep their properties tenanted. Therefore, landlords may have to consider other ways to work with tenants to keep properties occupied and income generated.
This could include Turnover Rent arrangements. It is important to note that some landlords may not be able to afford to receive potentially fluctuating rent.
Turnover Rents require a great deal of honesty from the tenant as their turnover must be shared with the landlord for the rent calculation to be done. If a Turnover Rent is agreed but ultimately does not work for the parties, the use of a break clause linked, for example, to a minimum turnover, could give the landlord and indeed their lender, some control and certainty.
This may potentially require the tenant to give up some of its landlord and tenant rights to allow this to be achieved. It will be interesting to see how, if at all, the commercial property market moves towards alternatives including Turnover Rent. Whether or not these new arrangements work between a landlord and tenant ultimately depends on the parties involved in the transaction and their respective bargaining positions.
This includes receiving guidance from their legal advisors, banks, accountants and property agents. Your email address will not be published. Notify me of follow up comments via e-mail.
You can also subscribe without commenting. Please Note: Blog comments will be public on submission. How much a landlord is prepared to be relaxed on one or more of the above points will depend on the overall transaction. Going forward it will be interesting to see whether turnover rents enter the mainstream and whether the traditional role of the landlord — more or less as a passive recipient of rent — will evolve to something more dynamic.
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Essentially, a turnover rent is exactly what it sounds like. A tenant pays a percentage of their turnover rather than a fixed monthly or annual fee to their landlord. A turnover rent is also commonly referred to as a turnover-based rent. I will use both terms in this article.
A turnover lease, or turnover-based lease, is a lease agreement that includes the terms and conditions of a turnover rent.
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