Will turnover rents affect your online business?
Historically commercial leases have been based purely on open market rents, 2 tenants next to each other with the same sized units would generally pay the same rent as each other.
One tenant could be doing significantly better than the neighbour but they would pay the same rent. Things have been changing in the last two decades and turnover rents are now becoming more common.
What is a Turnover Rent?
A Turnover Rent is where your rent as a tenant is measured against your turnover for that store or shop. The more money you turn over the more rent you pay.
It is important to note that this is not a profit rent, the rent is not measured on your profit, just on your turnover.
So if you sell water bottles for £10 and you sell 10 bottles your turnover is £100. It makes no difference if you bought the bottles for £2 or £5 – your turnover is still £100.
Turnover Rent is usually a percentage of your turnover, it could be 10% of your turnover. So in our example you would pay 100 x 10% = £10 rent.
What Is a Base Rent?
The problem with a straight turnover rent as detailed above is if the tenant doesn’t turn up for the day the landlord doesn’t get paid rent (no turnover, no rent). To solve this problem the landlord normally wants a minimum rent.
That is called the base rent.
How does it work in practice?
For Example…
Base rent: £50,000 per annum.
Turnover Rent: 10% of turnover over £500,000
If in year 1 you make sales of £300,000 you will pay the minimum base rent, £50,000.
In year 2 you make sales of £600,000. Now you will pay 10% of £100,000 (as that is the amount above £500,000). That is £10,000 additional rent so you pay £60,000 rent in total that year.
Let’s say in year 3 you make sales of £450,000. This year you will pay the base rent again without a top up – £50,000. (It makes sense to check this point with your lawyer as landlords sometimes like to peg a minimum rent based on the previous year – or at the very least collect “on account” rent based on the previous year.)
You’ll pay a minimum rent every year but your “turnover top-up” will be different each year.
Will I Get a Better Deal on a Turnover Rent?
It is subjective, but in theory yes, you should. If the landlord is going to benefit in the good years it should share the pain in the bad years, it leads to more of a partnership in retail where the landlord wants to help the tenant get a larger turnover.
Your base rent should be set lower than the average rent for it to make sense. It is common to hear that base rent should be set at 80% of the open market rent.
What Actually Amounts to Turnover?
This is your sales figure, but it should not include VAT. VAT is a tax which the tenant has no control over and it is not the tenant’s property, it is the government’s property.
If you get an order on the internet but someone collects it from your store, that needs to be included in your turnover figures.
The landlord will clearly want more things to be counted as turnover, while the tenant may want fewer things. Some hurdles to overcome include…
Gift cards: They are indeed included because the tenant has received the money so that counts as turnover.
Sales and discounts: Usually only the price paid is counted but “family and friends” discounts are frowned upon because an item should have been paid at full price so the landlords want the full price to be included, even if it wasn’t paid.
Tenants should be careful to ensure that customer refunds are deducted from the turnover figures.
All in all tenants need to really understand and split up their turnover, some turnover heads should count and others should not be. For instance if a tenant doesn’t remove customer refunds from their turnover they will end up paying more rent.
How Do You Prove Turnover for a Turnover Rent?
You start with your till. That will show what your gross sales are, then your designated accountant checks everything that should be there and you pass a figure to the landlord for checking.
Tenants should be aware that they may need to employ professional auditors for these shops as landlords certainly want annual figures to be checked by a professional. Tenants should do what they can to make sure this is only a requirement once a year and that quarterly or monthly figures can be provided by someone other than a professional.
Can the Landlord Count My Online Orders in Turnover?
This is where you need a lawyer to look at the fine print, as there are various scenarios for businesses, such as:
An order is made online but collected at a store, “click and collect” scenario
An order is made in store but sent from your online delivery service
An order is made in one store but collected in another store
So which of these should count towards turnover in your store with turnover rents? It all depends on how the turnover rent provisions are drafted in your lease.
Sometimes your shop or store acts as a showroom, in this case landlords will really want to work out the special provisions of what counts as turnover.
Are Turnover Rents for all Commercial Property Leases?
You mainly find turnover rents in retail leases as it is much easier to work out what the turnover is, in this case till systems fully capture gross sales which gives the tenant’s gross turnover.
They can be used for leisure leases in shopping centres too. There is no reason why turnover rents should not be applied more widely but they are unlikely to be suitable for offices, even retail offices.
Who Benefits from Turnover Rents?
Let’s break it down…
Are turnover rents good for tenants?
Yes they are. If there is no base rent then you only pay rent according to how well you perform that year.
Surely turnover rent in a turnover lease must be a good idea for a tenant.
If there is a base rent you must be sure it is at a level in your turnover lease that is lower than regular rent. If it is not lower only the landlord will benefit as he will do well when you do well and ok when you do not do well.
Tenants know their business best and they can use this to their advantage. They should be able to structure a deal that will mean they pay less rent for a few years whilst they get a foothold in the location.
After that they may pay more through their own success but they probably won’t mind.
Are turnover rents good for landlords?
Yes they are. Commercial Property is all about win win, if both sides win then you have a great working relationship. The more you work with your tenants, the more they sell and the more rent you receive. You don’t even need to worry about their expenses as turnover rent is based only on turnover, not profit.
How Turnover Rent Clauses Affect Other Lease Provisions
They don’t necessarily; there may be minor changes to other clauses but turnover rent in commercial property leases is more of an addition rather than a change to a lease.
Clearly the landlord will want the tenant to sell as much as possible so you may see clauses to that effect.
There is a “keep open” clause in virtually every shopping centre lease, landlords want all the shops in their shopping centre to remain open. No-one wants to go to a shopping centre where only half the shops are open. Shops rely on each other to create business.
On a turnover rent lease this clause often goes into overdrive as it is now crucial for the landlord that the shop remains open as much as possible, rather than just being a “nice to have”.
What SDLT (Stamp Duty Land Tax) Does a Tenant Pay?
This is a tricky question to answer, the tenant needs to give a rough estimate of how much rent they will pay in the first 5 years - from that, a tenant can work out their SDLT.
The reality is that a tenant should have good visibility on their turnover for the first 5 years in a store, they should give that estimate to their lawyer so that their lawyer can work out the SDLT they will owe.
Turnover rents can be complicated and you need a solicitor who understands things and can explain the complicated and make it simple.
Please do not hesitate to contact our Property Law team at Orwins for further clarity.
What People Want to Know…
What are turnover rents and how do they work for businesses with online sales?
Turnover rents are now common in commercial property leases, especially in retail. They can be confusing if you have not dealt with them before.
A turnover rent is simply a way of linking the rent you pay to the amount of sales you generate.
Instead of paying a fixed rent, you pay a base rent, this is often set lower than usual. If your turnover goes above a set figure, you pay a percentage of the extra sales as additional rent.
Simply put, if your base rent is £50,000 a year and your lease specifies that you pay 10% on turnover above £500,000, then in a year where you turn over £600,000 you would pay £60,000 in total rent. In a weaker year where you only turn over £300,000, you would just pay the £50,000 base rent.
This approach aims to create a partnership between landlord and tenant. In good years, the landlord shares in your success. In weaker years, you are not tied to a rent you cannot afford.
Turnover rent is based on sales, not profit, it does not matter what your margin is. If you sell an item for £100, the full £100 counts as turnover, even if your costs are £90. The detail of how turnover is defined is important, especially for businesses with online sales.
Where online sales come into play is in deciding which parts of your digital business are linked to the shop you are renting.
If you only operate online with no physical store, turnover rent usually does not apply. However if you have a collection point, or if orders are placed online but processed or fulfilled via that store, landlords will often want to count those figures as part of the turnover linked to the premises.
For example, if a customer places an order online but chooses to pick it up in-store, most landlords will argue that the sale should count towards the store’s turnover.
This is where careful drafting of the lease becomes essential and an experienced solicitor is required to do just that. The turnover rent provisions should make clear what does and does not count as turnover, ultimately, tenants will want to limit it to in-store sales, while landlords may push for a broader definition that includes online sales connected to the store in any way.
This may include click-and-collect orders, goods ordered in one branch but collected in another, or cases where the store is used as a showroom for online sales.
Businesses with online sales should make sure they understand these definitions before signing a lease. As if online sales are included in turnover, you may end up paying more rent than expected.
Turnover rents can be fair and flexible, but only when you know exactly what is being measured and how it ties into your operations. That is why most tenants need legal advice before committing to a lease with turnover rent provisions.
Do landlords include e-commerce or online sales when calculating turnover rent?
There really is no single answer. Sometimes landlords include online sales in turnover, and sometimes they do not, it depends on the lease drafted.
It all comes down to how the turnover rent clause in your lease is drafted, and this is where misunderstandings can easily arise and where skilled solicitors come in.
Traditionally, turnover rent was about in-store sales only, and ultimately this is due to the fact that a landlord could easily verify these figures from the till systems and audited accounts, and both sides could agree that the rent reflected the physical shop’s performance.
But as online sales have grown, and as shops are increasingly used for click-and-collect and showrooming, landlords are more inclined to argue that these digital transactions are part of the shop’s turnover too.
If an order is placed in one store but fulfilled from another, it is important to be clear which store’s turnover it counts towards, legal clarity in the contract is essential.
Some landlords may also want online orders to count as turnover if the store is used as a showroom for those sales.
From a tenant’s perspective, this can be worrying because the wider the definition of turnover, the more rent you may end up paying. Including online sales can inflate your turnover figures significantly, without necessarily reflecting the costs or logistics behind fulfilling those orders.
For example, online sales might be fulfilled from a central warehouse with very different overheads, but if they are counted towards your store turnover, your rent liability could jump disproportionately.
It is important to check the lease terms carefully. Landlords will want to include as much as possible in turnover, while tenants will want to limit it. The final position depends on what is agreed in writing.
There is no single rule. Landlords are increasingly seeking to include online orders in turnover, especially where the store is involved in the transaction.
If you are negotiating a lease with turnover rent provisions, you should assume that online sales could be an area of contention, and make sure it is clear in the contract. Having clear definitions that exclude certain types of e-commerce or that only include specific scenarios like click-and-collect, will help you avoid surprises later.
In practice, most landlords will expect at least some online sales to be included, but tenants can and should negotiate where those boundaries are drawn.
How could turnover rent clauses in a lease impact my retail business that also sells online?
For a retail business that also sells online, turnover rent clauses can have a major impact, both positive and negative so it is crucial that they’re in the contract and that you understand them and how they can impact your business or your property.
A turnover rent arrangement usually means your base rent is lower than the market rate, this gives you a safety net during difficult trading years. This flexibility can make it easier to take on premises and grow your business without being overexposed in the early years.
However, the real challenge comes from how turnover is defined in the lease.
For a business with both physical and online sales, the line between what counts as in-store turnover and what does not is often blurred, solicitors can help to un-blur that. If click-and-collect sales, online orders placed in-store, or showroom-driven sales are all included in your turnover figures, your rent liability may be far higher than you expect.
A shop used mainly as a collection point could see its rent increase if every online transaction linked to the shop is included in turnover.
Turnover rent clauses often require tenants to provide detailed and verified turnover figures, usually with professional auditing at least once a year, this can be an administrative burden.
For a retailer with significant e-commerce operations, splitting out which sales should be allocated to which store can be complicated and time-consuming, you need to set time aside and make sure it is accurate. If the definitions in the lease are vague, you may find yourself in disputes with your landlord over what should or should not be counted.
There is also the potential impact on how you run your business, it is something to think about especially if you expect turnover rent to be heavily tied to in-store and click-and-collect sales. This is due to the fact that you may be less inclined to promote online services connected to that shop, because higher turnover directly translates into higher rent.
The rent model can influence your business decisions. It is important to consider if this type of rental fits your business plan.
Landlords see turnover rents as a fairer system that creates a win-win relationship. If your business does well, they share in the success. If your business struggles, they still have a base income.
Many tenants find this partnership approach attractive. The key is to ensure the terms are fair and you understand what counts as turnover. A carefully drafted lease can give you flexibility and support as your business grows.
If the lease is not clear, you may end up paying more, especially if online sales are included.
The impact of turnover rent clauses on a retail business with online sales really depends on negotiation and clarity. With the right advice, you can structure the lease so that it supports your growth without penalising your digital success.
