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Important Considerations for Implementing Turnover Rent in a Commercial Lease

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As a commercial landlord, one of the critical parts of a commercial lease is the level of rent that your tenant needs to pay. As your property is an asset, it is in your best interest to receive reasonable rent from your commercial tenant’s business. One way that you can increase the amount of rent you are receiving is by varying the type of rent, such as by including turnover-based rent in the lease agreement. This varies rent depending on your tenant’s gross turnover. This article outlines three key considerations you should keep in mind when implementing a turnover rent clause in a commercial lease agreement. 

What is Turnover Rent?

Turnover rent is a form of rent where the amount a tenant pays depends on their business’ gross turnover. This will be paid in addition to the base rent. As such, the additional turnover rent will vary depending on how well their business is doing. Turnover rent tends to be popular for commercial premises with retail and leisure businesses.

Defining Turnover in the Lease 

It is crucial that, as a commercial landlord, you consider how to define gross turnover in your lease when you are implementing a clause relating to turnover rent. This will depend significantly on the type of business your tenant runs. Turnover typically includes the sums the tenant receives for certain items rather than the sums receivable. It also does not usually include VAT. 

Typical things to consider including in your definition of turnover are the:

  • income your tenant receives from goods or services;
  • income from any other businesses;
  • charges they have made, such as delivery costs, insurance and postage;
  • deposits from customers that they have not returned; and
  • if your tenant has sold their business goods or services on credit for another type of means to purchase, the total price, even if they have only partially been paid.
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Calculating Turnover  

If you are a commercial landlord considering the possibility of turnover rent, you may be considering how you could calculate the amount due. Correct calculations are essential for avoiding lease disputes and ensuring that you receive a beneficial rate. 

You will need to consider what percentage of your tenant’s gross turnover you will use to calculate the rental amounts, which can vary from 1% to 15%, where 7% is the average rate. When you negotiate the percentage rate, you may decide to protect yourself and your tenant. You may do this by capping the amount at a minimum. You will also need to state how you want them to prove their turnover to you, which may, for example, be through the production of a turnover certificate.

It is also essential to consider how often your tenant may pay the turnover rent. This will affect your calculations. Some tenants pay their turnover rent on an annual basis and in arrears. If you choose this option, you can still receive your base rent more often.

Affecting Other Clauses

It is crucial to consider how including a turnover rent clause in your commercial lease may affect other lease clauses. There are some typical areas of the commercial lease that may be affected by a turnover rent clause. For example, it is in your interest to ensure that your tenant’s business generates as much turnover as possible. Therefore, you may want to increase your control of the permitted use of the property. If so, you will need to add a clause to reflect this.

A typical clause accompanying a turnover rent clause is a keep-open covenant. Again, this protects your interest in terms of ensuring the business makes as much turnover as possible. It does this by restricting your tenant from not trading at particular times. 

Additionally, there is a typical clause that most leases include that you may need to change. It is the alienation clause, which you should amend to state that you do not permit your tenant to underlease.

Key Takeaways

Turnover rent is something you may want to consider as a commercial landlord with a lease. It is where you charge your tenant a rent level, which reflects their gross business turnover. You can also include a base rent in the lease in addition to the turnover rent. When implementing a turnover rent clause, you should consider how you are going to: 

  • define turnover rent; 
  • calculate turnover rent; and 
  • vary or amend your lease agreement in accordance with the turnover clause. 

If you need help understanding how you can collect turnover rent, 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. So call us today on 0808 196 8584 or visit our membership page.

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Clare Farmer

Clare Farmer

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