What is Turnover Rent in UK Commercial Leases?

When you decide to enter a commercial lease, there are many points to consider and potentially negotiate with the other party. Some of the obvious ones are, for example, the lease term, repair obligations and rent terms. However, when considering the rental terms in a commercial lease, you may also consider the type of rent in the commercial lease, such as market-rate or turnover rent. In order to choose the kind of rent you want for a commercial lease, it is essential to understand their pros and cons. This article will explain turnover rent and its pros and cons in commercial leases. 

What is Turnover Rent? 

Turnover rent is a type of rent structure that differs from the standard market value rent. Instead of a commercial tenant paying the same rent periodically, turnover rent will usually change each time a commercial tenant pays it. This is because turnover rent usually consists of:

• base rent at a lower rate than average market rent; and 
• a further payment which is a percentage of the tenant’s business gross turnover. 

Importance of Negotiations

Before entering a lease agreement, the negotiation stage is critical for both parties. Whilst both the tenant and landlord will want the turnover rent to be advantageous, a landlord must understand their tenant’s and business model. This will help determine key features of the turnover rent, such as how often rent is due and the percentage of turnover. 

Negotiations will also need to cover what mechanism the parties wish to include to resolve lease disputes about the turnover rent. Unfortunately, rent is a primary reason for commercial lease disputes, so efficient methods to determine a rent dispute are crucial.

Calculating Turnover Rent

Understanding how a landlord may calculate turnover rent for a lease is vital. As the turnover part of the commercial rent will reflect a percentage rate of turnover, you must agree on this at the start of the lease. 

The percentage of turnover that the rent may reflect tends to vary from 1% to 15%, and the average turnover percentage is 7%. However, it is the discretion of both parties to agree to an amount they are content with. 

Proving Business Turnover

In a turnover lease, since a landlord will base rent on the tenant’s gross turnover, they need proof of this figure. However, turnover can be tricky to monitor. It is, therefore, essential to include a provision in your lease agreement to say how parties will prove turnover. Knowing how to calculate this figure is essential to reduce the potential for a lease dispute to arise. 

A typical way to prove turnover is for the commercial tenant to provide their previous accounting period financial details. Often, turnover in a commercial lease is in line with the accounting year for the tenant’s business. Alternatively, the tenant could provide their landlord with a turnover certificate to prove the latter.

Advantages

There are many pros for both the commercial landlord and the commercial tenant when a commercial lease has a turnover rent. 

1. Landlords Receive More Rent

The obvious pro is that if their commercial tenant’s business does well, they will receive more rent. As a result, landlords may provide more significant support to their tenant’s business in order to boost their commercial success. In other words, turnover rent can incentivise landlords to facilitate the tenant business’ success in order to receive more rent. Consequently, the business might flourish better than it may have done if it had chosen a commercial lease with standard market value rent.

2. Tenants Are Not Burdened By Rent 

A further pro is that where a commercial tenant’s business financially struggles, their rent declines alongside it. Therefore, a commercial tenant can focus on funding their business to try to make it progress again. 

Since the commercial tenant will still need to pay their base rent in a turnover arrangement, the commercial landlord still receives income from their commercial property for that month. 

3. Turnover Aligns With Seasonal Business

If you are a business owner with a seasonal business, a turnover lease may be suitable for you in a commercial lease. For example, say you are a restaurant in a summer holiday location or a retail store that relies on Christmas time to push up sales. In this instance, rent in a commercial lease is likely one of the most significant costs for most businesses, so where rent reflects the business’ turnover, it makes total sense. 

4. No Rent Reviews

A commercial landlord will financially benefit when their tenant’s business does well in a commercial lease with turnover rent. As a result, they may not need to include a rent review provision in the commercial lease agreement. A landlord carries out rent reviews to increase their rent. Since rent increases if it is tied to the tenant business’ gross turnover, there is no need for a rent review. This saves both parties to the lease time and money and avoids potential lease disputes over rent reviews.   

Disadvantages

Despite the potential advantages of a turnover lease, there are also cons for both the commercial tenant and the commercial landlord. We consider some of these. 

1. Tenant Does Not Reap the Full Benefits of Their Success

One of these is that if you are a commercial tenant and your business does well, you do not feel the full benefit as your rent will increase. Whereas if you are in a commercial lease with a standard market value rent, when your sales boom, you will feel the full reward. 

2. Burdensome Lease Terms

To ensure the tenant’s business runs profitably, the commercial landlord seeking turnover rent might include provisions in the lease agreement that require the tenant to trade at specific times actively. This may not coincide with how the tenant wishes to conduct their business.

3. Difficulties Calculating Rent

When calculating turnover rent, the landlord will likely require the tenant to share sensitive business information with them. In addition, it can be tricky to work out what the turnover figure is, such as if the tenant’s business carries out some sales off the business premises.

Cheat Sheet for Leasing Terms

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Key Takeaways

Turnover rent in a commercial lease comprises base rent plus a percentage of the tenant business’ gross turnover. Nevertheless, there are pros and cons of turnover leases for both commercial landlords and tenants. For example, a pro is that a commercial landlord may help a commercial tenant’s business do well, which benefits the landlord, who will receive higher rent. Alternatively, a con includes difficulties associated with the rent calculation. 

If you need help understanding your obligations under a commercial 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.