Commercial Property Turnover Rents

The full economic impact of COVID-19 will be felt for years to come.

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Commercial Property Turnover Rents

As recent headlines have suggested sectors such as the hospitality sector and airlines have suffered due to the consequences of the global pandemic.  Another area of the economy that has been particularly affected by the social and economic impacts of COVID-19 has been the retail industry.  As recent economic indicators have shown traditional retail outlets are suffering due to in part the changes to customer behaviours for example the increased use of online retailing.  Retailers have been forced to adjust their business models to reflect the new economic reality and in particular retail outlets have had to assess how best to use their properties which are typically owned under a leasehold arrangement with the landlord.

Such economic realities have far reaching implications for landlords and tenants.  As retail outlets suffer then there is the risk that the landlord will not receive rent for its premises.  This has a wider impact in relation to the commercial property market as many large funds for example pension funds hold commercial properties as investments. Tenants are under pressure from online retailing which has increased its market share over the years and so the traditional models of the landlord and tenant relationship are changing.

A possible solution in lease negotiations between the landlord and tenant is for a different form of rent being agreed which relates to turnover rent rather than for an open market rent being agreed between landlord and tenant. Turnover rent leases may be seen as an alternative way forward for both parties.

Under a turnover rent the tenant’s rent is linked to the turnover of it’s business.  This has advantages to the tenant in that the success of the tenant’s business is linked to how much rent is required to be paid under the lease rather than a fixed open market rent which it may find difficult to pay if it’s business is suffering.

For landlords, turnover rent can also be viewed in a positive light.  An example of this is that if the turnover rent is correctly drafted and it links to the success of the tenant’s business then this can mean increased rent for the landlord.  For example if the tenant’s retail business also has an online element and this is doing well with its customer base this can, if properly drafted, mean the landlord shares in the success of the tenant’s business.  This is particularly relevant given the recent decline in footfall for many retail businesses and given that any turnover rent could be linked to the growth in online business for the tenant then this could have a positive impact for the landlord.

The operation of a properly linked turnover rent clause can mean that the landlord and tenant have a mutually beneficial relationship in that the tenant’s rent is linked to the financial performance of the retailers busines and also the landlord has a chance to ascertain whether or not the tenant business is viable as the success of the tenant’s busines would be linked to the turnover rent.

This may be beneficial to the landlords rather than having what may appear not to be suitable open market rent clauses.  Clearly the landlord does not benefit if a tenant’s business does not succeed and the tenant is forced to leave the premises as the landlord would be responsible for other costs involving maintenance of the property and payment ofcosts for the building when the tenant is not in occupation.  For tenants there is the advantage of the turnover rent in it being linked to the success of its business.

For any further information as to advice on turnover rent please contact Tom Milner Associate Solicitor Keebles.

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