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The rise of turnover rents – what commercial property landlords need to know

Although turnover rents have been around for some time, the effect of Covid-19 on the retail commercial property market means they are becoming increasingly common.

With more people than ever before now working from home, the demand for office space has plummeted.

At the same time, with online shopping sales soaring, the need for warehouse space to store goods awaiting shipment has increased exponentially.

These changes have put further pressure on the already struggling retail sector with landlords and tenants forced to find new ways to adapt to a changing and uncertain environment.

What is a turnover rent?

Traditionally, commercial leases are structured so that tenants pay a fixed amount of rent throughout the term, subject to periodic upward-only rent reviews.

In comparison, a turnover rent is where the rent payable under the lease is dependent on the tenant’s level of turnover at the premises with a percentage paid to the landlord as rent.

Designed to spread the risk between landlord and tenant, there are many variations and it is possible for rent to be entirely linked to a tenant’s turnover.

However, this can be risky for a landlord. One way to address this is to charge a lower basic rent plus a percentage of turnover to be paid additionally.

Why is the use of turnover rents increasing?

Once rare, turnover rents have become increasingly popular in 2020. In fact, a recent survey by property agents, Savills, found that 82% of retailers would look to include turnover rent provisions in future leases.

Not only are turnover rents being seen more widely in new leases, they are also more common as part of temporary concessions between landlord and tenant to specifically address the effects of the pandemic.

What are the benefits of turnover rents for commercial landlords?

The advantage is flexibility for both parties and a sharing of risk in turbulent times.

However, they are more complex than standard commercial rents. Turnover rents require detailed information to be kept by tenants and provided to landlords. The ongoing administration demands and costs are therefore higher for both sides.

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For further information or advice, including guidance on commercial leases and turnover rents, please contact one of Wards Solicitors’ highly experienced Commercial Property team.

 

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