Is a Turnover Lease Right for My Restaurant?

Most business owners will need commercial premises to run their businesses. Where you own a restaurant, this is essential due to the nature of your business. A common way businesses occupy property is through a commercial lease. A lease gives you sole occupation of the business premises in return for rent. However, some commercial leases differ, such as turnover leases. Turnover leases are becoming common for restaurant owners in the UK. This has mainly been the case since the effects of the covid-19 pandemic. As a restaurant owner, you may consider whether a turnover-based rent is right for your business. This article will explore why a turnover lease may be suitable for a restaurant owner in the UK. 

What is a Turnover Lease?

A turnover lease is a commercial lease where the turnover amount of the business tenant determines the rental amount they will pay. The landlord will agree with their tenant on a percentage of the turnover to base the rent on. This can vary between 1-15% and tends, on average, to be 7%.

There are two main types of turnover leases. These are the turnover-only model and the turnover and base model. 

There are also various pros and cons of a turnover lease.

Benefits of a Turnover Lease 

If your restaurant is new, a turnover rent may offer some security as you benefit from a rental amount that reflects how well your business is performing. It can also allow you to qualify for a commercial lease where you may not have otherwise met the required financial criteria.

Additionally, if your restaurant is seasonal, such as one where you have a predominantly outdoor eating area, there will be times of the year when trade is relatively quiet. As turnover during these periods will be low, you can rest assured that your rent will be low too.

Further, as there are different models for turnover leases, you may be able to negotiate one that fits your restaurant business model, such as a turnover-only model, which means you know the minimum and maximum turnover level, which will affect your rent amount.

Considerations Before Entering a Turnover Lease

As with most aspects of any commercial lease, a turnover lease will include provisions that are more beneficial to your landlord. You should consider these before entering into a lease. Notably, turnover leases will benefit your landlord where business is performing well and your rental amount increases. This higher amount is not only a more considerable business expense but also means other restaurants in the area pay less rent than you. As their business overheads may be lower than yours, they might have surplus funds to invest in their restaurant, increasing competition for you.

Additionally, turnover can, at times, be tricky to work out. Depending on your business, you might generate sales from:

• dining-in experiences;
• takeaway orders;
• Uber Eats or other delivery options; and
• tips.

You will need a way to calculate profits and further determine turnover amounts. Without a well-drafted lease agreement, disputes may arise between you and your commercial landlord over how much rent you need to pay.

Finally, turnover leases often contain keep-open provisions. These provisions stipulate the exact times when you must open your restaurant. Trading hours could include specific festive periods or religious celebrations, as these may be times when people are likely to eat out. However, this may conflict with your personal holiday plans and those of your staff.

Cheat Sheet for Leasing Terms

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Key Takeaways

If you are a restaurant owner looking for commercial premises, you might enter a turnover lease. A turnover lease is a lease where your business turnover determines the rent amount or part of it. This leasing model can be attractive if you are a new business and are unsure how your restaurant will perform in its first months of operation. Turnover leases can offer security as your rental amount is based on your business turnover. However, consider that turnover rent can be tricky to work out month-to-month and will require additional administration and communication with your landlord.  

If you need help understanding if a turnover lease is right for your restaurant, our experienced leasing lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.