What are turnover leases and are they right for you?

A turnover lease is a lease in which the tenant’s rent, usually a retail tenant’s, is determined in part or entirely by the turnover generated from the premises. Once treated as a short-term fix for landlords struggling to fill vacant units, turnover leases are now an established structure across retail and shopping centre lettings.

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 figure above which the tenant does not have to pay additional rent.

2. Base rent plus turnover top-up

The tenant pays an agreed base rent, with annual uplifts calculated against turnover. Any increase in turnover from the preceding accounting period is used to calculate the uplift.

When would a tenant choose a turnover lease?

A turnover lease is most suitable where flexibility is more valuable than complete rent certainty. The decision usually depends on four broad factors:

Trading profile: Tenants with stable, predictable sales may prefer a standard lease with a fixed rent, since the cost is easier to forecast. By contrast, volatile trading months can make a turnover lease more attractive, as rent falls when sales are weaker.
Growth expectations: Seasonal trade or expected high growth can make a turnover lease less attractive, because rent rises with turnover and month to month costs become harder to predict.
Location maturity: Opening a new store in an unproven location may suit a turnover lease well, as it avoids paying a high fixed rent before footfall and sales build.
Data sharing: A tenant that does not want to share detailed sales data with a landlord may prefer a standard lease.

Why are turnover leases attractive to landlords?

Turnover leases encourage a closer relationship between landlord and tenant. The landlord is typically more engaged than under a standard lease, because their rental income is tied directly to how well the tenant trades.

This works both ways over the life of a lease. For example, a new store in an untested location benefits from the flexibility of a turnover lease while footfall builds. Once a store is established in a prime location with strong, consistent sales, a landlord may prefer to move the tenant onto fixed rent terms, since the location risk that originally justified the turnover structure no longer applies.

Turnover leases also give start-ups that cannot meet the financial criteria of a standard lease a route into a longer-term tenancy. For landlords, reviewing a tenant’s turnover data also helps inform decisions when a lease comes up for renewal.

Turnover certification and disputes

Landlords typically require tenants to submit a certified turnover figure, giving them confidence that the reported turnover is accurate. Accountants are often asked to certify this via an agreed-upon procedures report, sometimes still referred to as a report of factual findings, or a turnover certificate.

Disputes over the headline rent figure are uncommon where a certificate has been independently signed off, as landlords generally accept a certified figure without challenge. Where disagreements do arise, they tend to centre on what counts within the turnover definition rather than the figure itself.

Click and collect sales are the most common source of disagreement, since it is not always clear whether a sale completed online but collected in store should count towards that store’s turnover. This is the root of a live dispute between Brent Cross shopping centre and John Lewis, the details of which can be read here.

Key considerations for landlords and tenants

It is vital that turnover lease agreements are drafted thoroughly by a professional, as terms and conditions vary widely between leases, in order to prevent complicated disputes further down the line. A poorly performing tenant can also affect the value of the underlying commercial property.

Both landlords and tenants should weigh up all factors before entering into a turnover lease. Landlords should consider whether the shared upside and downside of a turnover structure suits their investment strategy, while tenants should weigh the flexibility against the loss of rent predictability.

Frequently asked questions about turnover certificates

What period does a turnover certificate need to cover?

The certificate period should coincide with the lease year, not necessarily the tenant’s accounting or calendar year end. A tenant with a December year end, for example, does not automatically report on a January to December basis if the lease year runs differently.

What sales figure should be reported?

The certificate should report the tenant’s net sales figure, excluding VAT, refunds and returns.

How Price Bailey can help

The Price Bailey Audit and Assurance team supports landlords and retailers with turnover certification and agreed-upon procedures reports. If you would like support with a turnover certificate, or another matter relating to turnover leases, get in touch with our team or use the contact form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information on this page is intended as a general guide only. While we work to keep our content accurate and up to date, we cannot guarantee that it reflects the position at the time you are reading it. 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. For more information on our editorial process, click here.

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