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When you are part of a commercial lease, you may choose a turnover rent, which reflects the tenant’s turnover instead of a standard market rent. There are many advantages of turnover rent for both landlords and tenants. However, like at the start of any lease, there are factors to consider when you choose a turnover rent which relates to the tenant’s business. These include knowing how the turnover rent provisions will affect other commercial lease provisions. You must ensure you clarify this before you sign the lease agreement so that your lease can run smoothly. Where a commercial lease is unclear, it is likely to cause lease disputes. This article will discuss the effect of turnover rent on UK commercial lease provisions.
Turnover Rent
Turnover rent in a commercial lease is where the tenant’s rent amount relates to their gross business turnover. Therefore the rent is not at a specific amount each month but instead can vary each time the tenant pays it. Shop outlet centres traditionally use turnover rent, but they are increasing more widely in popularity.
A turnover rent will often have two parts to it. One is the base rate which is a specific amount each month that is a lower rate to a market value rent rate for the commercial process. It is often around 80% of the actual market value. The other is the turnover element of the rent. This is an agreed percentage level of the commercial tenant’s gross turnover. The level is often between 1 to 15% where 7% tends to be the average amount.
Effect
When you choose turnover rent for a commercial lease, you must consider the effect a turnover lease may have on the other commercial lease provisions. We explore this below.
Permitted Use
A commercial lease with a turnover rent can affect the permitted use of the commercial premises. This is because what the commercial tenant uses the property for is what creates the revenue, which then affects the gross turnover. A landlord may want more control over what the business premises are used for to ensure that it generates good revenue and so increases their rent.
Temporary Status
Sometimes a turnover rent will just be a temporary rent. If this is the case, the turnover rent provision will state this. However, this may affect other provisions and require changes to them.
Confidentiality Issues
When turnover rent is the choice of rent for a commercial lease, the lease agreement may need confidentiality clauses. These could be a requirement for both the commercial landlord and the commercial tenant. For example, the tenant may want to protect confidential information that they have to release to the landlord to assess the turnover proportion of their rent.
A landlord, however, may want to restrict the ability of the public to see the turnover provisions in the commercial lease at the land registry. If so, they may request a lease obligation on the tenant. This will obligate the tenant to apply to designate the lease with a document which exempts it. They will have to do this when they register their lease.
Keep Open Covenants
It is very common in a commercial lease with turnover rent for the landlord to insert a lease provision that requires the tenant to carry out business at specific times. A keep-open lease provision will increase the likelihood of the tenant’s company making money and therefore, increase the turnover and enhance the rent. Where the business premises are closed, the lease may specify that the tenant pays substitute turnover payments.
Rent
Some commercial leases include extra lease provisions about the rent, such as rent-free periods or rent suspension. If a turnover lease does this, both parties must consider how the turnover rate is affected. For example, whether the rent-free period is rent-free only for the base rent or if it includes the turnover rent element too.
Similarly, if the lease has rent review lease provisions, the parties must decide if this applies to the base rent only or for the turnover amount of rent too.
Lease Termination
Turnover rent can affect lease provisions that relate to lease termination. For example, if a commercial lease has a break clause, and the date of break differs from the turnover certificate date, they may need to factor in one of the following:
- an upfront payment of what the turnover rent not paid may be; or
- The tenant must show the turnover certificate in order to break the lease.
Also, a forfeiture clause in the lease must specify whether it applies to the tenant’s base rent, turnover rent or both.
This cheat sheet outlines what you should be aware of in your lease agreement.
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Key Takeaways
If you choose a turnover rent for your commercial lease, it will likely include base rent and a part of the rent that relates to turnover. Turnover rent can affect the lease provisions in ways a standard rent may not. You must consider this in your commercial lease. For example, it will affect other rent provisions such as a rent review and rent-free periods. Turnover rent can also affect confidentiality issues in a commercial lease. Therefore where you have a turnover rent, you may wish to include enter lease provisions to protect both parties’ confidentiality.
In addition, lease termination provisions such as the break clause and forfeiture clause will need to explain how they relate to the turnover rent. A break clause may require conditions to be met in terms of the turnover rent and a forfeiture clause should specify if the landlord can only use it if both elements of the rent are late. If you need help understanding the effect of turnover rent on UK commercial lease provisions, contact our experienced leasing lawyers 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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