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Coronavirus - Turnover Rent - Ireland

  • Ireland
  • General

23-04-2020

When might turnover rent be relevant?

Entering into a commercial lease has always been a significant financial commitment by a tenant for a fixed period with no guarantee of trade and/or profit. Over the last number of years landlords have had significant negotiation power, given the demand for retail premises, in the larger Irish cities. Recent commentary suggests a re-balancing of power will be required in order to re-start the retail sector, post the COVID-19 emergency. 

As we move out of lock-down, struggling tenants, particularly in the retail sector, may seek to vary the terms of their commercial leases to include turnover rent provisions.

What is turnover rent?

Turnover rent is rent determined in accordance with the turnover generated by the tenant at the leased premises. While the rent could be calculated solely on the basis of turnover, it is more common to see an agreed fixed base rent supplemented by a turnover rent. This base rent offers comfort to the landlord that regardless of the performance of the tenant the premises will generate rental income.

Why opt for turnover rent?

Turnover rents present opportunities and challenges for both the landlord and tenant:

Opportunities

(i) market conditions will determine the rent payable;

(ii) the landlord is incentivised to increase footfall to its retail parks/shopping centres;

(iii) shared rewards for landlord and tenant where the tenant’s business is successful; and

(iv) potential for online sales to increase turnover rents.

Challenges

(v) there is further accountability to the landlord, thereby increasing costs/workload by way of data collection, security, analysis and reporting;

(vi) rental income being linked with consumer spending creates an element of uncertainty in rental yields; and

(vii) difficulty setting parameters for the data the landlord has access to when auditing the gross turnover.

What does this mean for the landlord and tenant relationship?

This means that the landlord and the tenant have to work collaboratively. Effectively the success of the landlord’s investment becomes intrinsically linked with the performance of the tenant’s business. While there is the risk to the landlord of a lower yielding rent, there is also the possibility of receiving a higher rental income based on the success of the tenant’s business.

What happens to online revenue streams?

Traditional gross turnover rental models were very simple. A percentage of the proceeds received from purchasers at the premises was paid to the landlord as rent. Many leases now due for renewal were drafted at a time where online retail did not exist and all products were purchased in store.

A retail store’s revenue stream now has a number of channels, including in store purchases, click and collect and online delivery sales. Where an item is ordered and paid for outside of the premises, but then physically collected from the premises, does this come within the remit of turnover generated on the premises? As would be expected in the negotiation of such leases, landlords will seek to include a broad definition of turnover to maximise rent, including in store purchases, online orders and click and collect orders whereas tenants will endeavour to negotiate a narrow definition of turnover.

While some products may be delivered from a separate distribution centre, some retailers may also store and deliver products sold online from the leased premises. The differing business models indicate the importance of negotiating bespoke rent payment clauses, tailored to suit the tenant’s retail offering.

Is anything excluded from turnover when calculating turnover rent?

The turnover rent is usually calculated by reference to the proceeds received from transactions, rather than proceeds that are receivable at a future point. Therefore, until such time as the transaction is paid in full, the tenant will usually seek to exclude incomplete sales from the turnover rent.   However, the method of calculation and what can be excluded, in terms of costs, will depend on the turnover rent provisions in the underlying lease.

Where a tenant agrees to the inclusion of online sales in the calculation of turnover, it is important to ensure that returned items and the costs of processing returned items are considered when agreeing the matrix for calculation. This is a particularly significant point where it is reported that up to 50 per cent of online sales are being returned to retailers.

Can turnover accounts be disputed?

The turnover rent provisions in a lease generally require the tenant to furnish the landlord with monthly or quarterly turnover figures. Should the landlord disagree with the turnover figures furnished, the landlord will generally reserve the right to refer the disputed figures to an independent auditor for resolution.

How is turnover rent calculated?

At the end of a specified period, which will be the subject of agreement between the parties, the tenant needs to establish the costs involved in completing the relevant sales to ascertain the true turnover and ultimately the turnover rent payable.

Why now?

An indirect consequence of the on-going lock-down during the COVID-19 emergency is a re-direction of shoppers away from the main streets of our cities and into the world of e-commerce. Opinion suggests that these shoppers, having had a positive experience, will continue to purchase more frequently online, post emergency.

Turnover rent leases afford retailers, in difficult market conditions, an opportunity to strike a balance between risk and reward when negotiating with landlords. Given the evolving channels of sales and in particular e-commerce platforms, retailers need to place particular focus on the drafting of turnover rent provisions which are bespoke to their business needs.

For support on legal issues facing your business in light of the outbreak of Covid-19, please visit our Coronavirus hub to get our latest information and guidance. 

If you would like further information about turnover rents please contact

Seamus Long, Solicitor in our Real Estate department - seamuslong@eversheds-sutherland.ie

Terry O'Malley, Partner in our Real Estate department - terryomalley@eversheds-sutherland.ie

Disclaimer: This article does not constitute legal advice and no responsibility is accepted by Eversheds Sutherland for any action taken as a result of the contents of this article. 

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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