With tough trading conditions for fashion retailers, turnover rents are becoming more appealing for tenants and more acceptable for their landlords.
We look at the concept of turnover rents and provide five key suggestions for retailers considering moving to this model.
Turnover rents are calculated as a percentage of the gross turnover the tenant makes at the leased property. By their nature, turnover rents are therefore uncertain and subject to change, potentially upwards or downwards annually, depending on the terms agreed with the landlord.
A turnover rent is usually determined using one of two standard models:
Conceptually, turnover rent leases depart from the more rigid structure of the traditional market rent lease and allow the flexibility and creativity sought by tenants (and, less frequently, landlords) in a turbulent market.
Turnover rents can be beneficial to both landlords and tenants as they generally foster a more collaborative relationship – it being in both parties’ interests to make the store as profitable as possible.
If the alternative for the landlord is an empty premises, this model can help the landlord to avoid paying business rates on empty units, and, with an occupied store, there will likely be tenant obligations to keep it in repair and pay service charges at the very least.
The use of revenue-based rental models in outlet villages and shopping centres, such as Bicester Village and the London Designer Outlet has much to do with the landlord’s control over substantial common parts and amenities, and so some ability to drive footfall to the retail units. As a result the use of such models is quite commonplace.
But post-COVID, the frequency of tenants entering Company Voluntary Arrangements (CVAs) have forced landlords to accept this model where they might have previously resisted. New Look, AllSaints and Clarks are just some examples of this.
However, moving from a fixed market rent to a turnover rent has seen a fall in the rents received by some landlords. It is therefore unsurprising that many of them, including major landlords such as British Land, have challenged the attempts made by their tenants to pay rent based on the turnover model, with varying levels of success.
On the other hand, in an unusual case in 2022 involving JD Sports, the landlord argued that a turnover rent should be payable (presumably based on healthy figures at the subject store) but the court determined that it would not be appropriate to impose a turnover rent. The result was a much lower fixed market rent than what would have been payable had the turnover model been awarded!
If you are thinking of moving to a turnover rent lease, or are in current lease negotiations, tenants can consider the following:
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