Well before the current and added complications of COVID-19, retailers were suffering from changes to the high street, shopping trends, on-line alternatives and other challenges. As a result, retail tenants and their landlords are coming under pressure to carefully consider the structure of commercial leases, particularly as tenants seek out ways to gain support from their landlords, with a realisation that COVID has in many cases become the straw that has broken the camel’s back.
“Market rents are an institutional norm in the UK across all sectors, but of late we are experiencing increasing demand from sizeable retailers to move towards a turnover rent alternative, at the point when lease renewals permit negotiations on the subject.” comments Carl Grint, Director and Head of Portfolio Management at Aitchison Raffety.
The implementation of turnover rents, even those that are in themselves expressed in simple contractual terms, can be complex and implications run deep within many aspects of landlord and tenant covenants such as user clause, alienation provisions, rent reviews, break options as well as valuation considerations.
In addition, there are practical problems with operating a turnover rent. Property Managers who take responsibility for ensuring rents are received in a timely manner from tenants and properly accounted for to their clients need to be switched on and set up for these special conditions.
Turnover rents are typically calculated as a fixed, sometimes variable percentage of the tenant’s revenue. Therefore, the challenges start with the tenant themselves having to certify turnover and present to the landlord or their managing agent conformation of trade activity in a tight timeframe periodically.
Payment of the ‘volunteered’ rent would then accompany the presentation of the certificate and on receipt of both, the landlord can then simultaneously create the charge to the tenant and settle it. More lease provisioning is required to handle late presentation of turnover certificates and payments.
The process relies rather heavily on the tenant accounting accurately and in a timely manner, although lease clauses do allow for this to be challenged by landlords who can trigger an audit if they feel the need. However, costs for the audit may not normally be recoverable from the tenant if the result finds the tenant was accurate on their accounting.
Landlords and tenants also need to ensure the lease clearly describes what constitutes turnover, for example the need to capture internet trade associated with the property.
Setting aside the practicalities, above all else, there remains a degree of uncertainty in what the annual rent will amount to and while this may work particularly well for tenants, this can cause further problems with landlords who have high gearing or other significant commitments that need to be met from property or portfolio rental revenues.
The key to establishing a successful turnover rent is to have an awareness of all the factors, the implications and create an equitable situation for both parties.
For further information, contact Carl Grint, Director – Head of Portfolio Management, Aitchison Raffety via email to firstname.lastname@example.org.