Turnover rental arrangements, where tenants pay their rent (or a proportion of it) by reference to the income they generate from the premises, are not new, but have become increasingly prevalent as the UK has emerged from lockdown.
With market instability and high pressures continuing to challenge the retail and hospitality sectors in particular, turnover rents give both landlords and tenants an interest in ensuring the success of a tenant’s business from the leased premises.
Here are some key points to consider when negotiating turnover rents:
- Base Rent - Turnover rent is usually (but not always) combined with a fixed base rent. The base rent is often a proportion of market value which gives the landlord a known base line of the rent it will receive and helps with cash flow.
- Basis of Turnover Calculation – On-account payments are usually made either monthly or quarterly and may be based on turnover or a fixed amount, with an annual calculation to reconcile the amounts due or overpaid. Annual calculations are often preferred in order to average out any seasonal variation, whilst the periodic instalments throughout the year help with cashflow and budgeting.
- Definition of Turnover – Most tenants seek to include sales only from the demised premises; however, with online sales often accounting for a high proportion of the tenant’s business, landlords will want a slice of the pie. One generally accepted compromise is to include online sales where orders are satisfied from stock at the premises or by staff at the premises, but how this is applied is often an area for negotiation. In restaurants and bars, landlords may expect to include tips and gratuities, as well as cover charges and service charges.
- Certificates and Accounts – Landlords will usually require the certificates and accounts to be independently audited. This is a reasonable request, simply to prevent a tenant from ‘marking their own homework’, but can mean added costs for tenants.
- Records – Landlords will look to oblige tenants to keep adequate records and allow the landlord access to these records for the purpose of ascertaining and verifying the tenant’s turnover. Records are likely to include storage systems, cash register tapes, bank statements, till roles and tax returns.
- Personal – Landlords will often seek to make turnover rents personal, so that they cease to apply on an assignment of the lease or an underletting. This is on the basis that they have carried out due diligence on the named tenant and are satisfied as to their likely turnover predictions, but a potential assignee or undertenant will be unknown.
For more information on the above please contact Amelia Newman.