20 July 2020 #Real Estate
This week, it was reported that the Crown Estate has written to some of its tenants, offering them the option of paying a turnover rent.
In addition, a recent nationwide survey conducted by Savills into the impact of Covid-19 on the leisure and retail sector found that 82% of the retailers surveyed are considering a re-gear of their existing lease to include turnover rent provisions.
Both news stories suggest that we may be about to see an upsurge in re-gear negotiations, particularly amongst those tenants who signed up to new leases 12-24 months ago when the property market (and the world in general) looked very different.
What is a re-gear?
The term “re-gear” is used to describe the renegotiation of a lease during the current term. Often, these renegotiations take place in the run up to a key lease event (for example a rent review or a break clause), or when the landlord and tenant decide to negotiate a lease renewal in advance of the contractual expiry date.
In legal terms, a re-gear of an existing lease will either be documented in a deed of variation, or by a surrender of the existing lease and immediate re-grant of a new lease on the renegotiated terms.
The lease re-gear will require the co-operation and agreement of both landlord and tenant, and consequently must offer some benefit to both parties. The benefit will need to be significant enough to merit the time and expense of renegotiating the original deal and in the case of the tenant, the potential cost of re-registering the new lease and potentially incurring further SDLT if the re-gear takes place during the first five years of the original lease term.
What is a turnover rent, and is it a good option?
A turnover rent is based on the tenant's turnover at the premises. Often, the rent will be expressed as a percentage of the turnover.
Turnover rents are quite common in the retail sector, airports and petrol stations, as they allow a degree of risk to be shared between the landlord and the tenant.
Where a turnover rent is negotiated, the landlord will often prefer the tenant to pay a basic rent in addition to the turnover rent to ensure they are not exposed to the risk of receiving little or no rent, if the tenant is making no income from the property.
As to whether turnover rent represents a good option, that will depend on several factors, including the respective bargaining strength of the parties and the drafting of the rental obligations.
If a landlord and tenant are considering a re-gear of a lease to incorporate turnover rent provisions, here are a few points to consider:
The Government’s Code of Practice for commercial property relationships contains advice and guidance on how landlords and tenants should work together to “ensure the continuation of viable businesses”. However, the code also recognises that “Every landlord and tenant relationship is different, and we respect the rights of parties to settle on an arrangement that reflect this”.
Turnover rents will not suit everyone, and they can be complicated and time-consuming to negotiate as there are many factors to consider.
In the current climate, turnover rents are likely to be more attractive to tenants rather than landlord’s for obvious reasons. A tenant paying a rent linked to their income will have greater control over their overheads, while for landlords, the usual benefit of receiving an immediate uplift in rents during periods of increased trading are unlikely to be on offer for some time.
Consequently, a tenant seeking a more attractive turnover rent arrangement may find that they must give up something in return (e.g. a break option, an increase in term length, or some additional security) in order to persuade a reluctant landlord.
If you would like any advice about any of the issues raised in this article, please contact our Real Estate team.