A guide to turnover rent from Dorset Chamber members Frettens.
Fiona Knight is an experienced associate in Frettens’ specialist Commercial Property team. In this article, she looks at a topic of increasing importance in commercial property: turnover rents.
Fiona explains how do they work, why they are in the news, and outlines their advantages and disadvantages.
What is a turnover rent?
Essentially, a turnover rent is exactly what it sounds like. A tenant pays a percentage of their turnover rather than a fixed monthly or annual fee to their landlord.
A turnover rent is also commonly referred to as a turnover-based rent. I will use both terms in this article.
What is a turnover lease?
A turnover lease, or turnover-based lease, is a lease agreement that includes the terms and conditions of a turnover rent.
How does a turnover rent work?
When the tenant’s business does well, and their turnover rises, the rent they pay will increase. But when the business struggles, and turnover falls, the landlord will receive less rent.
As a result, turnover rents are particularly attractive to tenants in difficult trading circumstances, such as those currently facing many high street retailers.
Many in the industry are forecasting that turnover rents will become more common as tenants try to find ways of reducing overheads and surviving the economic impacts of the pandemic.
Are turnover rents good for tenants?
Whilst there has been a temporary ban on commercial tenant evictions and winding-up orders, and other business support mechanisms put in place by the government, trading has been exceptionally tough.
Negotiating a turnover rent means a tenant’s rent decreases proportionally with their turnover in difficult times, so they are an attractive prospect for many tenants in current circumstances.
However, poorly-negotiated turnover leases could prove costly as turnover increases.
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