Today the Retail Industry in the UK reopens following lockdown and will shortly be followed by the food and beverage industry – but, as the UK starts over is it time to consider turnover rent?

The pandemic has clearly caused unimaginable economic damage to the retail, and the food and beverage industry. There have been several high profile Creditors Voluntary Arrangements (CVAs) with department store chain House of Fraser, the children’s retailer Mothercare and Italian restaurant chain Carluccio’s using CVAs to reduce rental liability.

During lockdown the government has taken some previously unimaginable measures to ensure the economy does not collapse as a result of the lockdown, however, such measures are short term. The current moratorium on the landlord’s right to forfeit has been extended by a further two months to the 23rd August 2020 but this cannot continue indefinitely. Likewise, the removal of a landlord’s ability to present a winding up petition will not last forever.  Would the collaborative approach of a turnover rent be more appropriate in these uncertain times?

With a turnover rent the Tenant will pay a rent calculated by reference to a fixed percentage of its gross turnover, with a minimum amount payable. The minimum amount is normally to a fixed percentage of the market rent (for example, 70%). Over and above that minimum amount, the Tenant pays, by way of Turnover Rent, the amount by which the fixed percentage of gross Turnover exceeds the minimum. The Landlord is then certain that it will always receive at least 70% of the market rent, and may receive more if the Gross Turnover is high.

The advantages of turnover rent include:

  • Flexibility which may tempt a cautious tenant to take a new unit or try out a new business;
  • Landlords monitor tenant’s performance more than they would with a normal lease. This may enable the landlord to take early action if turnover drops;
  • Where a tenant is successful, the landlord is able to take immediate benefit by way of turnover rent rather than waiting for a rent review.

The disadvantages are:

  • Lack of certainty of the amount of rent payable which could create funding and valuation issues;
  • More administrative burden to calculate and check turnover rent levels – may need to insist on electronic point of sales;
  • Trust – the landlord may have concerns over the level of turnover declared by the Tenant;
  • How to deal with closure periods when the units refitted;
  • Agreeing how online sales which are “click and collect” are accounted for.

Turnover rents are inevitably not without their difficulties both in terms of drafting and management.  However, in increasingly uncertain economic times, landlords can use turnover rents to stimulate tenant demand for premises in a falling market.

Whether you are considering a new lease or negotiating a renewal lease it is vital that you obtain legal advice, our team of specialist commercial property lawyers can assist with whatever your need.

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