What are turnover leases and are they right for you?
A turnover lease is a lease in which the tenant’s rent – usually retail tenants – is determined in part, or entirely by the actual turnover generated by the tenant’s business operating out of the premises.
How is rent calculated under a turnover lease?
Almost all turnover leases are unique, however they typically follow one of the two models below:
1. Pure turnover rent (with minimum and maximum thresholds)
The rent is determined by the tenant’s turnover, with the tenant committing to a minimum level of turnover. If this approach is utilised, then there is usually a maximum turnover, above which the tenant shall not have to pay additional rent.
2. Base rent plus turnover top-up
The rent is calculated on the tenant’s turnover, with the tenant paying an agreed-upon base rent with annual uplifts of the base rent payable. Any increase in turnover from the preceding accounting period will be used to calculate the uplifts.
Why are turnover leases attractive?
Turnover leases encourage a symbiotic relationship between both the tenant and the landlord, with the landlord likely to be more actively involved than in a standard lease as they are more interested in their tenant’s trading success to maximise the rent they receive.
What are the benefits to landlords and tenants of turnover leases?
Other than landlords becoming increasingly engaged and supportive of tenants, other benefits include, the ability for start-ups – where they couldn’t meet the financial criteria of a traditional standard lease – to potentially take advantage of turnover leases as they provide the ability to move from a temporary lease to a longer lasting tenure.
Additionally, turnover leases provide increasing flexibility for businesses to operate during difficult and uncertain times. When a tenant is operating successfully and generating higher turnover, the landlord receives a higher rent.
Accountants are often asked to certify the rent via a Report of Factual Findings/Turnover Certificates to give the landlord confidence that the correct turnover is being reported. For landlords, being able to review information relating to their tenant’s operations will help them make an informed decision when it comes to renewing their lease.
Are turnover leases a long-term solution?
Whilst turnover leases are disruptive in their own right, it is questionable as to whether they are a sustainable solution to a seemingly short-term problem i.e. is it better a property sits vacant or should landlords risk losing rent money.
The continuing trend of online shopping has left many retailers such as TopShop, Debenhams and Forever 21, closing their bricks and mortar stores and operating completely (or nearly completely) online, meaning that whilst turnover rents are disruptive in their own rights – the growth of online shopping is even more so.
Key considerations for landlords
For landlords, it is vital that turnover lease agreements are drafted thoroughly by a professional – as turnover leases often vary in their terms and conditions – in order to prevent any complicated disputes. Additionally, a poorly-performing tenant may affect the value of the commercial property.
It is important that both landlords and tenants take into consideration all factors relating to turnover leases before entering into a contract. Commercial property landlords may question if turnover leases provide them with the security they seek, and if the potential benefits outweigh the risks. For tenants, the shared pain and gain outlook may be what they are looking for.
Our Audit and Assurance team at Price Bailey provide specialist support to landlords/retailers relating to Turnover Certificates/Factual Finding reports. If you would like further support regarding this or another matter relating to turnover leases, then please contact our team using the form below…
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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