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The future of turnover rent leases – Commercial property update June 2014

In this month’s Commercial Property update Max Marrison looks at the future of turnover rent leases.

Turnover rents are common in the retail sector and enable landlords and tenants to share the risk and reward of a tenant’s business. A turnover rent arrangement usually involves the tenant paying a base rent of 80% of open market value plus a turnover ‘top-up’ which is based upon a percentage of the tenant’s turnover and which is payable only to the extent that it exceeds the base rent. Sometimes, tenants pay a pure turnover rent (with no base rent being payable) but this is less common as it puts all the risk on the landlord.

Turnover rents have been popular in the retail sector over the last 6 years and have enabled risk and reward to be shared fairly between landlord and tenant during difficult economic conditions.

It will be interesting to see how turnover rent arrangements develop over the next few years given the significant changes to consumer spending habits and the online presence of retailers. A significant percentage of retailers’ sales are now made online with customers often allowed to collect their online purchases from the store. Items purchased online but collected in store are often not recorded as turnover. However, refunds for goods purchased online are often deducted to the disadvantage of landlords.

Inevitably Landlords will want to ensure that online turnover associated with the premises is included within the calculation of turnover rent. For example, where a customer orders from an internet terminal within the store, landlords will want this to be included as turnover. The position becomes blurred when physical stores are used as ‘showrooms’ where consumers view and try out goods before going home and ordering on the Internet. Here the physical store plays a part in generating the sale but there is no way of attributing the online sale to the store.

Will we see a decline in the number of turnover rent leases? Probably, although it is too early to sound the death knell for turnover rent arrangements. What is certain is that Landlords will have to scrutinise tenants accounts far more closely. Leases will have to be clearly worded so that there is no ambiguity as to what is and what is not included as turnover. A fair balance will need to be struck between the parties for turnover rent leases to survive and we suspect that there may be a move back towards market rents being the norm within the retail sector.

For more information about turnover rent leases and the services Taylor&Emmet can offer your retail business please contact Max.

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