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As a commercial landlord or tenant, you will be aware that a crucial part of a commercial lease agreement is the payment of rent by a tenant in return for the occupation of the commercial premises. Rent is paid by the tenant’s business as an agreed amount at regular intervals during the lease term. However, not all business owners will pay their commercial landlord a standard rent, particularly if they are a retail business or a restaurant business. They instead pay a turnover rent in addition to this. A landlord or commercial tenant should keep an open mind about the type of rent paid in a commercial lease.
Turnover rent concerning the tenant’s gross turnover may be more suitable for some commercial leases, particularly in the current economic climate and in light of the recent pandemic, where a tenant’s turnover may be low. This article will explain what you need to know about turnover rent in a commercial lease in the UK.
Turnover Rent
Turnover rent is a type of rent that a commercial landlord may charge a tenant who occupies their property as a retail or restaurant premises. You may hear others refer to it as turnover-based rent. It does not replace a standard rent, which is the base rent, but instead is usually in addition to this. Therefore, turnover rent is a top-up on the base rent, where the latter can still increase annually.
You may hear turnover rent expressed as either:
- a higher of the base rent;
- a specific percentage of gross turnover (this usually is 10%); or
- the amount by which particular percentage of turnover amounts to more than the base rent.
The concept behind turnover rent is that as the commercial landlord grants the tenant use of premises in their building which brings the tenant’s business success, they can profit from the success too. The building may be, for example:
- a shopping centre; or
- an arcade.
Where a commercial lease includes a base rent, the landlord is often more active than a commercial lease without it. Turnover rents can benefit tenants as they allow for less rent when trade is poor.
Points to Note
If you, as a commercial landlord, consider a turnover rent in your commercial lease, or as a commercial tenant, your landlord requests this, you should know some key points about it. Below we list some things you need to know about turnover rent.
Sharing Risk
To make a turnover rent fair on the commercial tenant, the landlord usually shares the risk that a tenant’s business may not perform well. After all, the commercial tenant is within their property, and business premises can naturally affect the performance of any business.
The risk is shared by the base rent generally set at a lower rate than the open-market rent rate for the property. This is usually 20% less, so a base rent of 80% of the open market rent rate. Remembering this when a commercial lease has a rent review clause is important. This is because if the base rent changes due to a rent review, it should only do so by the relevant percentage.
Turnover rent is a type of rent a commercial tenant may wish to negotiate with their landlord to include in the commercial lease. However, the landlord usually has no legal obligation to accept it. Where a landlord does take turnover rent, they may wish to include terms in the commercial lease which require the commercial tenant to trade actively.
Gross Turnover
As the gross turnover of the commercial landlord’s business affects the turnover rent, it is crucial to be clear in a commercial lease about what gross turnover means. Your retail lease turnover rent provisions should detail this, which will reduce potential disputes.
Turnover usually includes any turnover which comes from the business premises, whether it be from:
- business happening on the premises;
- business happening elsewhere but fulfilled on the commercial premises; or
- business which comes from those who report to the commercial premises.
However, a turnover rent should exclude specific things, such as:
- service charges where the commercial premise is a restaurant;
- internet sales; or
- gift voucher sales where the gross turnover already includes the original purchase of this gift voucher.
You should also note that where a sale is made at a discounted price, such as with a staff discount, the gross turnover includes the sale at that rate. A commercial lease must specifically state this in the lease rent provision.
Payment
A commercial landlord usually requires the turnover rent paid by their commercial tenant quarterly in arrears. Any balancing credit should be paid at the end of the year.
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However, you should note that it may cause problems for commercial tenants regarding their cash flow. This is because turnover can change throughout the year, such as with an increase during Christmas. Therefore, a tenant may prefer to pay annually in arrears payment to average out the changes in their turnover.
New Tenants
During a commercial lease term, a tenant may transfer the lease to a third party who becomes the new tenant. This lease provision usually states that the commercial landlord must grant permission before a transfer.
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Key Takeaways
A commercial tenant may pay a turnover rent and a reduced base rent in a commercial lease. This tends to be suitable for retail and restaurant businesses and is based on turnover percentage. There are many points to be aware of in terms of a turnover rent. For example, the lease should clarify what turnover rent includes in the business’s gross turnover and what it does not include. Also, if a tenant transfers the lease to a new tenant, the lease should clarify whether they take it on with the same percentage of turnover rent rate or if this is open to negotiation.
If you need help understanding turnover rent in the UK, LegalVision’s 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 for a low monthly fee. So call us today on 0808 196 8584 or visit our membership page.
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