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Fixed Rent versus Turnover Rent

With turnover rents increasing in popularity, it’s worth considering whether a fixed or turnover rent is the best option for your property.

Fixed Rent: this is an annual rent for the property being let and has historically been very popular.  Fixed rents are most commonly used for leases of offices or industrial warehouses and gives both the landlord and tenant the security and stability of knowing what is due each year (up until any rent review).

Turnover Rent: due to increasing rental prices, well advised tenants are less likely to overpay on rent and are looking to share this risk with their landlord.  Turnover rents include a lower ‘base rent’ (usually around 80% of market value) which is payable annually, with a ‘top-up’ based on a percentage of the tenant’s gross turnover.  It’s worth noting that this type of rent can be time intensive for landlords as the tenant’s turnover needs to be audited to agree the top-up due.  Additionally, tenants may request a cap is included on the top-up amount payable.

Repairing Obligations

It is important that landlords outline repairing obligations clearly to avoid any issues with repairs and maintenance during the term.  These obligations can also ‘make or break’ dilapidations negotiations when the tenant returns the property at the end of the lease.

When a whole building (e.g. a warehouse) is being let, it is common for all repairing responsibilities to lie with the tenant. This includes all structural and external parts of the building.  If you are letting part of a property (e.g. within a shopping complex or part of an office building), the tenant is usually responsible for the non-structural and interior parts of the property.  In these situations, landlords can consider including a service charge on top of the rent to recover the costs of any repairs and maintenance of the building.

It is also important to consider the state of your property ahead of completion.  If it is a newer property or a white box fit out, it is usual to include requirements for the tenant to keep the property in ‘good and substantial repair and condition’.  If your property is older, you (or your tenant) may wish to limit the repairs to a schedule of condition.  This will show the state of the property at the start of the lease, and at the end of the term. the tenant will not be required return the property to you in any better state of repair than as evidenced by the schedule.

Rent Review

There are many different options when it comes to when agreeing the rent review provisions in leases.  Some common types of rent reviews are:

Open market: this is currently the most prevalent type of rent review in commercial leases.  At the time of the review your surveyor will assess the rent that could be obtained for the property if it was to be let on the open market.  This is usually an upwards only review, meaning that if the market value is ever less that the rent agreed at the start of the  lease, the rent will continue at the same rate.

Inflation linked: RPI rent reviews are the most common index linked review in commercial leases.  This type of review includes a calculation within the lease and is one of the easiest to implement.  It is also becoming increasingly popular to include minimum and maximum limits (usually a percentage) on the rent increases.

Fixed increases: these are by far the simplest and more common in leases with shorter terms.  The fixed increases are agreed during the negotiation process and the amounts for each review increment are included within the lease.

For commercial landlords, negotiating leases can be tricky and we recommend seeking legal advice with an experienced legal representative.  If you would like an informal discussion about your next commercial lease, please do not hesitate to contact our experienced and friendly team.