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As a commercial landlord or tenant, when you enter a commercial lease, an important aspect to negotiate is rent. Commercial leases are legally binding contracts, so the rent provision in a lease agreement is very significant. Therefore, both parties must be content with what they agree on. However, when negotiating rent for commercial property, it is not solely about deciding the rental amount but also the type of rent for the commercial lease. This article will explain why a commercial tenant and landlord might choose a pure turnover rent in a UK commercial lease.
Pure Turnover Rent
Turnover rent is where a commercial tenant pays part or all of their rent in proportion to the gross turnover of their business. This means that rather than paying an agreed-upon specific amount of rent regularly, the rent may vary depending on the business turnover.
Turnover rent can include two parts to the rent. One part is the turnover part, and the other is the base rent. The base rent will be a regular agreed amount, usually at a reduced level from market rate rent. The second part will be a percentage of the turnover.
A pure turnover rent, however, is where the rent is all related to the turnover of the tenant’s business. Therefore, there is no base rent, and the whole rent continuously varies depending on the progress of the tenant’s business. A pure turnover rent is usually around 10% of the tenant’s annual turnover.
Why Utilise Pure Turnover Rent?
During the recent pandemic, leases with turnover rent became more common for commercial properties. Similarly, pure turnover rent also became more popular.
We will explore why a commercial tenant and landlord may choose a pure turnover rent for a lease below.
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1. Economic Hardship
The pure turnover lease has existed for over 30 years but seems a chosen form of rent when there is economic hardship. Therefore, a commercial tenant and landlord may select this type of rent due to potential hardship for the tenant. Pure turnover rent means that although the commercial tenant may face financial difficulties, the landlord still benefits from some rent rather than potentially their tenant not paying any rent. Also, the tenant does not have to worry about a large rent bill when business funds are low.
Reasons a commercial tenant may experience hardship leading them to choose a pure turnover rent, for example, are because they:
- are testing out a new shop;
- are not making much profit; or
- can no longer afford a commercial property with a standard market rent.
However, a commercial landlord may exercise caution when a tenant requests a turnover rent for such reasons. If the tenant’s business has no future high profitability, a pure turnover rent may mean the landlord suffers loss.
2. No Rent Review
A commercial tenant may choose a pure turnover rent because their lease will not contain a rent review clause. A rent review clause details that the commercial landlord will assess the rent level periodically to increase it. =A turnover rent with a base rent may have a rent review clause, as the base rent reflects the reduced market value as a specific amount each month.
3. Certainty
A pure turnover rent may be the choice of rent for a commercial landlord and tenant due to the degree of certainty it offers both parties. This is because, with a pure turnover lease, the tenant knows that their rent will only increase with increased levels of profit made by their business. Similarly, where their business makes less money, they can be confident that rent will decrease.
However, a commercial tenant may be cautious about choosing this type of rent as they may pay a high amount should they make large profits.
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Whilst this reason may not sound like a reason that a commercial landlord may choose a pure turnover rent, it may well be. This is because it provides certainty to the landlord that they will at least receive some rent, provided the tenant’s business is trading. If a landlord chooses a standard rent and their tenant’s business is not doing well, they may not pay the rent, and the landlord has nothing that month. Also, a company which looks profitable may add to the reason a landlord chooses a pure turnover rent.
Key Takeaways
Commercial landlords and tenants may choose a pure turnover rent when they enter a lease. This is likely to be one of the largest outgoing for the tenant’s business and is an essential source of income for the landlord, so it is crucial to get the type for rent right.
Reasons to choose this kind of lease include ensuring a source of rent during periods of economic hardship. Also, for example, to eliminate the need for a rent review process in the commercial lease.
If you need help deciding on pure turnover rent in a UK lease, 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. Call us today on 0808 196 8584 or visit our membership page.
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