For those entering into a lease for commercial premises, paying turnover rent may be an option. Turnover rent is calculated, wholly or in part, based on the turnover of the business that is leasing the property.
It is commonly used by retailers and can be useful for start-up businesses who are unable to afford full commercial rent.
How does turnover rent work?
The details of a turnover rent agreement will be negotiated in each individual case. It is advisable to work with a commercial property expert to ensure that your interests are properly represented and that the lease is in your best interests.
The agreement will often require the tenant to pay a base rent. Where this is the case, a cap can also usually be agreed upon so that even if turnover exceeds a set limit, there will not be any further increase in the rent. Alternatively, the whole rent can be based on turnover.
The actual rent paid each month or each quarter can be a fixed amount, with an annual reconciliation where any extra rent due under the turnover agreement will be settled.
This type of commercial lease can give tenants some flexibility during difficult market conditions and help prevent them from defaulting on a lease. This can be advantageous to a landlord as well, who might find it hard to find a new tenant.
Negotiating turnover rent
A lease including turnover rent can be complex and there are several key points to negotiate. These include how the rent will be calculated, whether the rent will be capped and how the tenant’s financial information will be verified.
The landlord may want to include online sales in the figures, while the tenant will want to exclude these. A compromise might be to only include online sales that are dealt with at the premises. The landlord will generally have the right to ask for the tenant’s books to be audited. This could be a considerable expense.
The fixed part of the rent will often account for around 75-80%. The percentage of the turnover paid might range from 5-12%.
The smaller the fixed rent, the higher percentage of turnover the landlord will want.
Where the goods being sold have a low profit margin but are sold in a large quantity, the tenant will only want to pay a low percentage of their turnover. Conversely, where goods have a large profit margin but a lower volume of sales, the landlord will want a higher percentage of the turnover paid.
It is always advisable to use an expert in commercial property to deal with the negotiations and the drafting of the agreement to ensure that the deal that is agreed is favourable and fair.
Implications of turnover rent
The tenant will need to keep their books very accurately and ensure that figures are up to date. The calculations can be complex when issues such as VAT, bad debts and returns are factored in.
The agreement should deal with confidentiality issues, as the landlord will be privy to sensitive information about the business.
Turnover rent can help a business cope with a downturn in sales and give a landlord the potential to benefit in the event of an increase in profits in return. But the agreement will work best when the relationship between the parties is good.
Contact our Isle of Man commercial property team
Thinking of leasing a commercial property on the Isle of Man? Speak to one of our expert commercial property advocates, ring us on 01624 665522 or email us: firstname.lastname@example.org. We will be happy to hear from you.
Kathryn is the Head of Property at Quinn Legal
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