Articles

Together we Stand

The tough economic conditions of the past few years have inevitably led to the closure of many pubs, where tenants have remained liable to pay the annual rent at the same level as previously despite significant reduction in business. Some landlords have acknowledged difficulties faced by their tenants, and for example, have agreed rent concessions or agreed to payments being made monthly rather than quarterly in advance in an effort to assist the tenant through difficult times.  In relation to new leases, parties are more and more considering the concept of turnover rent as a safeguard in these uncertain times.

The concept of turnover rent is not new, but as a result of tenants seeking more flexible terms rather than the traditional form of lease with fixed open market rent review provisions, they are becoming more popular.  The Code of Leasing Practice, which is intended to promote efficiency and fairness in landlord and tenant relationships, encourages landlords to offer alternatives at rent review, and not simply insist upon upward only open market rent provisions.

The main benefit of turnover rent provisions is that it is in the interest of both parties that the tenant maximises the turnover generated from the premises.  In simple terms, where the tenant is doing well, the landlord benefits and during harder times, both parties share the burden. 

 

Structuring turnover rent provisions

Turnover rent can be described as rent calculated by reference to the tenant's trading accounts.  They can be structured in numerous ways, including the following:-

(i) Tenant pays a base rent (typically 70% to 90% of the open market rent) and a further amount calculated by reference to the Tenant's turnover;

(ii) Tenant pays the greater of the base rent and a specified percentage of the Tenant's turnover;

(iii) Tenant pays rent entirely by reference to turnover.

From a landlord's perspective, the first method is likely to be the most acceptable as it means that the landlord can expect to receive a minimum level of rent.

Points to consider

(a)   Calculation of Rent - The parties need to be clear as to the method that they will be adopting.  This will depend on the identity of the tenant, location of the premises, projected turnover and current market conditions.

(b)   Method of turnover calculation - Tenants will normally provide self-certified turnover certificates on a quarterly basis together with any supporting documents (e.g. receipts, vouchers etc) to enable the Landlord to verify the figures.  At year end, a Landlord may require the figures to be certified by an Independent Accountant.

(c)   Rent review - How is the rent to be reviewed?  For example, is it only the base rent that is to be reviewed, or are the turnover rent provisions to fall away on the review date and replaced with an open market rent?

(d)   Stamp Duty Land Tax - The tenant will need to submit it's return on the basis of a reasonable estimate by reference to its turnover projections;

(e)   Alienation - A turnover rent lease is likely to be more restrictive as it is essentially based upon the identity of the tenant and its turnover projections.  The lease could provide that on assignment the turnover provisions falls away and is replaced with an open market rent.

Summary

Turnover rent leases are by no means straightforward.  Inevitably they require more interaction between landlord and tenant than the traditional lease arrangements.  Tenants will be required to produce confidential trading information to the landlord.  In turn, the landlord will have to review the information to ensure that it is receiving the correct level of rent.  However, the protection that they provide to tenants during difficult economic times are likely to increase the popularity of turnover leases.  Particularly in the pub industry, where there tends to be a strong relationship between landlord and tenant through beer ties etc, turnover rent leases could be a good method of ensuring that the parties work closely together to ensure that the business has the best chance of succeeding.

 

For further advice on the above or any other property issue please contact us on 020 7354 3000 or see our property section for more information.

Author: Simon Tennant

Published:  Published as part of a monthly series of property law columns in the Publican Magazine written by Colman Coyle.

Date: October 2010