Turnover Rents for Retail Tenants

Traditionally, institutional landlords have favoured long-term, market rent leases with frequent upwards-only rent reviews, but in the current economic climate, retail tenants are seeking more flexibility in their leases.

The combined effect of Brexit, the pandemic and the cost-of-living crisis has created a tough market for retailers, who now favour leases with shorter terms or break options and rent linked to turnover.

• The tenant pays a lower base rent, easing pressure on cash flow during difficult trading periods or while working to establish a new business. Any turnover rent payable over and above the base rent is directly linked to the store's performance.
• Turnover provisions can be beneficial to both the landlord and the tenant. Both parties are invested in the business's success at the property; if the business does well, the tenant benefits from higher turnover, and the landlord benefits from higher rent.
• Although landlords prefer leases with a fixed rental income if the alternative is an empty property, a turnover rent model will mean that the landlord will avoid paying business rates on an empty store, and the tenant will keep the property in repair and pay insurance rent/service charge.

The following key points will need to be considered before attempting to agree heads of terms with your landlord:

1. Will the rent be purely based on turnover, or will you pay a base rent plus a turnover top-up? The hybrid model can be preferable for a retailer compared to a fixed-rent lease but still provides the landlord with some income security.
2. What percentage of your turnover will form the base rent figure? Analysis of rent negotiations in the UK by Savills shows that turnover rents requested by retailers range from 1–15%, with an average of 7%. Will there be a cap which limits the amount of turnover rent you have to pay during successful trading periods?
3. Will you have a rolling break clause after a specified minimum term? Where no base rent is payable, will the landlord have a break option if the turnover rent is too low?
4. How will you report to the landlord on your store figures? How frequently will you be required to present this information, and will you be required to employ external auditors? Whatever you agree needs to work for your business.
5. Will the definition of turnover include online sales where the goods are collected in-store?
6. How will discounted items, returns and gift voucher sales impact turnover? Should the cost of processing returns be deducted where goods were ordered online but returned to the store?
7. How will the turnover of undertenants or concessionaires at the property be treated?
8. Will there be a separate service charge payable, or will you agree to pay a higher percentage of turnover that includes the service charge? The advantage of the latter is that it gives tenants a clear view on the affordability of the property.
9. Will assignment be permitted? The landlord may not want a turnover rent lease to be assigned to a third party or, if the lease is assigned, may want the rent to revert to open market rent.
10. Will the lease contain a 'keep open' covenant? If it does, you should ensure that there is a carve-out for legitimate closures, for example, during store refits or periods when the store is closed for essential repairs or staff training.