More commercial landlords moving towards turnover rents

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Covid-19, is just the latest crisis to hit retailers battling on against reduced foot-fall in many regional towns. The effects of Covid have hit the sector hard, particularly with many high streets and shopping centres turning into ghost towns.

While some of the more adaptable retailers are making ends meet using online channels, the majority are still burdened by crippling rents and overhead costs on closed shops and empty outlets.

It’s a perfect storm of one problem after another to hit the retail sector which has raised the prospect of a major change in the way the commercial landlord / tenant relationship works in the UK. One issue that has been discussed many times and now comes to the fore is the idea of turnover rents.

Turnover rents would mean that commercial landlords are asked to share some of the burden, take on some of the risk associated with running a retail operation. Traditionally, once the lease is signed, commercial landlords share none of the tenant’s business risk, and with a full repairing and insuring lease they have a guaranteed clear return on their investment, come what may.

The idea of a turnover rent therefore introduces a whole new dimension to investing in commercial property, and remember, many of the big investors in field are insurance and pension companies who very much rely on the security of their investment return.

Will turnover rents become the ‘the new normal’ for both the high street and shopping centres alike after Covid? If so landlords will need to learn to grapple with the added complexity and risk of such an arrangement. New leases along these lines may be helpful to retailers but they are not without their problems for both landlords and tenants.

Having both parties share in the good and bad times means dividing the payment into a fixed term base rent, determined by current market conditions, and a turnover element, determined by the tenant’s sales performance. Typically, a base rent will be around 75-80 percent of the total.

There inevitably ensues a tough negotiation as to these proportions of base rent to turnover element, and then further issues ensure: access to accounts and fraud prevention, what about sales returns, often quite high especially with online clothes sales, are online sales even included, staff sales at cost, what about unpaid accounts and bad debts on credit sales, length of the agreement, the list goes on.

Disputes on turnover figures become time consuming and expensive. Landlords will want more access inside the business if trust is to be maintained. Full audits may need to be undertaken periodically, inspecting and querying all business records which needs up-to-date and organised accounting systems, cash receipts, online sales data, VAT returns etc. All this ads costs and accountants will love it!

One Bolton-based landlord, Millfield Estates, as reported by thebusinessdesk.com, is “biting the bullet” on turnover-rents, announcing plans to offer a new ‘turnover rent’ policy at two of the largest properties in its portfolio

The company is “applying a more flexible approach to its property lettings post-lockdown.” Its new ‘turnover rent’ offer will come into force at its Nottingham and London retail properties with immediate effect.

“With the COVID-19 pandemic exacerbating a situation in which there is now an imbalance in risk between landlord and tenant, leaving many locations no longer viable from a trading perspective, Millfield Estates’ fresh approach to rent at two of its largest properties is one that will give prospective tenants more confidence in an uncertain future,” the company says.

Millfield says its new policy offers rent as a percentage of the turnover of the occupying tenant, and is aimed at bringing life back to the high street, with a real emphasis on flexibility for its tenants, and “with no fixed parameters put in place when entering into negotiations.”

Paul Dobson, property director for Millfield Estates, had said:

“We are living in unprecedented times and it is crucial that, as a company, we remain fleet of foot to evolve and implement initiatives that will instil confidence in our properties and show tenants, both new and existing, that we have their best interests at heart in this fast-changing world.

“Our flexible and bespoke approach to our letting offers at Lister Gate (Nottingham) and South Molton Street (London) demonstrates our commitment to a closer landlord and tenant relationship, which in times of crisis such as now, can only help both sides.

“We believe our rent policies go some way in mitigating risk for our retail tenants, promotes a fairer way of doing things, and provides a welcome boost to the sector during this difficult trading period.”

Located in one of London’s most fashionable and well-established retail districts, 49 and 50 South Molton Street in Mayfair comprises two late-19th century period buildings of 4,954 sq ft in total, offering an A1 retail unit on the ground floor and three upper floors dedicated to B1 office space.

Enjoying a prime location just 500-yards away from the Intu Broadmarsh Shopping Centre, 28-30 Lister Gate offers 4,871 sq ft of A1 retail and ancillary accommodation, with the property benefiting from a catchment population in excess of one million.

Millfield Estates is represented by letting agents GCW (Lister Gate) and JLL (South Molton Street) who played an active role in setting up this new rent policy.

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