More than a year on from the start of the pandemic, it is increasingly clear that the last 12 months have likely changed the way the world does business forever.
Commercial tenants and commercial landlords alike have suffered significantly over the last 12 months, with commercial landlords missing out on upwards of £5 billion in rent payments. The loss of profits suffered by commercial tenants due to forced closures is almost impossible to quantify at this stage (but it’s safe to assume it is upwards of £100 billion!). In an attempt to protect against these types of unprecedented losses occurring ever again, the market has seemingly started to turn towards turnover-based rents.
Turnover rents are nothing new, and were becoming increasingly popular before the onset of the pandemic – due to the impact of online retail which has reduced the profitability of traditional high street shops. Under a turnover rent lease, the rent payable is calculated by reference to the income generated by the business in occupation of the property; the better the business does the more rent it pays. There will likely be a ‘minimum rent’ payable, and the parties might also agree a ‘maximum rent’ – but beyond that, the rent payable is subject to the performance of the business. For tenants, the model provides a greater degree of comfort when times are bad – and it’s no surprise therefore that a number of established high street retailers such as Clarks and New Look have started to move towards this model. Landlords might consider the lack of certainty of income to be a negative, but a turnover based model affords them with a greater insight into the performance of their tenants and a prudent landlord might be able to predict which tenants are struggling long-before they start to default on their rent. They also then have the benefit of taking a ‘bigger piece of the pie’ when tenants are thriving.
There are a number of wider considerations that both parties ought to have regard to when agreeing turnover leases. As mentioned, the parties might agree to a ‘minimum rent’ being payable each year, and the landlord might wish to retain an ability to terminate the lease if the tenant fails to meet that minimum payment. From a tenants point of view, they will need to consider the fact that their rent will no longer be a ‘fixed’ liability insofar as it will vary year on year dependent on trading.
If current trends continue, then turnover rents may soon become the ‘new normal’. If you would like to discuss the possibility of adopting the model in your capacity as a commercial landlord or tenant, then speak to a member of our commercial team today.
Daniel Barrett- Commercial and Dispute Resolution Trainee Solicitor