26 August, 2020
As the economic implications of COVID-19 are taking effect, landlords and tenants across the country are seeking to alter the terms of their traditional Lease agreements, as a means of offering relief to both parties. Turnover Rent Leases, whilst seen as an alternative arrangement that predominantly benefits tenants, when negotiated well, can be just as beneficial for landlords.
Turnover Rent Leases mean that the tenant will pay a reduced base rent - normally between 60%-80% of the market value - and a proportion of their turnover (normally between 1%-10%). Tenants benefit under these arrangements as their rent fluctuates with the financial success of their business, meaning that during periods of financial downturn, their turnover rent decreases accordingly. Having a rent arrangement that assists the sustainability of the tenant's business reduces the risk of insolvency and can help maintain a positive relationship between landlord and tenant.
Such an arrangement may at first glance appear as a considerable concession by landlords, as most businesses will be seeing lower turnover than usual during this period of economic uncertainty. However, when drafted correctly, Turnover Rent Leases can be beneficial to the landlord.
Firstly, whilst the introduction of social distancing measures has seen a reduction in retail shopping, the e-commerce industry is booming, meaning that Turnover Rent Leases that appropriately define 'Turnover' to include, for example, click-and-collect sales, will allow landlords of retail businesses to benefit from the growth of the e-commerce market.
Furthermore, these arrangements should afford landlords the ability to closely observe the financial performance of their tenants, and they will be able to intervene if financial performance decreases, as opposed to waiting until the tenant defaults or files for insolvency, as would be the case ordinarily. As such, it is recommended that a landlord break option is incorporated into these agreements, so landlords can opt out of the Lease agreement if the tenant's turnover is not meeting a monetary threshold set in the Lease. On the flip side, if a tenant's turnover exceeds what was expected during the negotiation of the Lease, the landlord is able to promptly take full advantage, as opposed to having to wait for a rent review.
It is important to remember that assessing the tenant's business performance will involve landlords having access to data and information that tenants will want treated with the utmost confidentiality, so landlords must be willing to either enter into separate Confidentiality Agreements or strict confidentiality clauses in Turnover Rent Leases.
Ultimately, well-drafted Turnover Rent Leases are a potentially helpful alternative to landlords and tenants in these volatile and uncertain times.
For more information contact Matthew Jones in our Commercial Property department via email or phone on 01254 222316. Alternatively send any question through to Forbes Solicitors via our online Contact Form.
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