Are you looking to reduce your liabilities - is turnover rent right for you?

Nearly all turnover leases are unique as turnover rent can be calculated in various ways. Typically, these include the tenant paying:

• a ‘Base Rent’ plus a ‘Turnover Rent’. The Base Rent will be an agreed figure (which may include periodic uplifts or reviews), and the Turnover Rent may be a flat or stepped percentage of the tenant’s business turnover;
• the open market rent, and an additional turnover rent should their turnover exceed a pre-approved cap; or
• a ‘pure’ turnover rent, wholly based on the tenant’s trade turnover.

There are various benefits to a turnover rent lease. Both the landlord and tenant will benefit from the success of the tenant’s business – where a tenant’s business is producing a higher turnover, the landlord will receive a higher rent and so there is an instant income for the landlord if the tenant’s business is going well, or the market picks up.  On the other hand, where a tenant’s business is struggling and their turnover is lower than expected, the tenant will not be required to pay an untenable rent to the landlord.

The use of turnover rent ultimately means that both parties to the lease have an interest in ensuring the success of the tenant’s business operated from the premises.

In addition, a turnover rent lease usually includes a lower base rent than that payable on the open market for similar premises, which reduces the level of the tenant’s financial liabilities under their lease.

Conversely, due to the nature of the turnover rent provisions and the requirement for the tenant to produce periodic business accounts and reports to the landlord, the level of administration for both parties increases.  Further, the reporting nature of the provisions gives a landlord a greater oversight over the tenant’s business than they otherwise would.

There are also significant Stamp Duty Land Tax (SDLT) consequences of a turnover rent and compliance can often become a burden with turnover leases. The level of SDLT payable on the grant of a lease is based on the tenant’s reasonable estimate of the rent payable in the first five years of the lease term which must be reassessed at the end of the first five years.  This could result in further tax being paid if the tenant’s estimate was not accurate.

Finally, where a lease benefits from security of tenure under the Landlord and Tenant Act 1954 (LTA 1954), giving the a tenant a legal right to a renewal lease at the end of their contractual term (except where specific exceptions apply), it is not clear what power the Court has to order the grant of a new turnover rent lease – the new rent must disregard the effect of goodwill generated by the tenant’s occupation of the demised premises. However, the Court is required to determine the rent for which the premises might reasonably be expected to be let in the open market and if evidence suggests a similar property would typically be let on a turnover rent basis, there may be scope for the Court to implement a turnover rent on renewal.

If you have a business which generates turnover, and are taking a new lease, or a landlord granting a lease to such a tenant, do consider whether a turnover rent will be right for you and discuss it with your agent and lawyers.