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Turnover rents are back…but only under certain circumstances
Turnover rents are a bit of a throwback but, since the arrival of COVID-19 and its impact on the economy, they have begun to gain popularity among commercial tenants once again.
Turnover rents, as the name suggests, are based on the landlord receiving a percentage of the tenant’s gross turnover, usually in conjunction with a fixed, lower base rent. They require landlords to take some of the risk, in contrast to the usual fixed rent where the landlord is just interested in the tenant’s ability to pay, and so landlords need to be far more engaged in the performance of a tenant’s business and build controls into the new lease. The lower the base rent, the more control a landlord is likely to require. Monitoring and agreeing turnover is much more difficult than it was before the introduction of online shopping.
In W (No 3) GP (Nominee A) Ltd and another v JD Sports Fashion Ltd , which concerned the renewal of a retail unit in the Derbion Shopping Centre in Derby, the Court considered whether it had jurisdiction to order a turnover rent to be applied to a commercial lease renewal under the Landlord and Tenant Act 1954 (the “Act”).
Unusually, the parties original lease contained a turnover rent. Initially the Landlord was arguing for a fixed rent and the tenant for a continuation of the turnover rent, but when they realised that the existing provisions were very disadvantageous to the tenant they swapped positions.
The tenant argued that the Court lacked the jurisdiction to order a turnover rent under s.34 of the Act, and also that this type of rent was not appropriate in their situation.
Whilst acknowledging that turnover rents “sit uneasily with the disregards in S34 (1) (a) and (b) of the Act”, the Court held that it did have jurisdiction to determine a turnover rent under s.34 of the Act. The Act requires the Court to consider a hypothetical tenant. Who knows what turnover a hypothetical tenant will achieve?
So, the Court indicated that it needed to take into account the actual tenant’s position and then consider whether a turnover rent would differ too far from a fixed rent before it could order such a rent. However, the Judge felt it would be wrong to prohibit turnover rents given that certain industries such as car parks prefer turnover rents, and she was satisfied that a turnover rent fell within the definition of rent in that Act.
Where the parties do not agree, she said “the Court must evaluate the identified concerns to ensure that the purpose of the Act, to protect both landlords and tenants and to arrive at an open market rental valuation, is met.” Any rent determined on a 1954 Act renewal must be consistent with an open market rent, so it seems unlikely that a turnover rent will be ordered unless there is little difference between such a rent and a fixed rent.
In this case, JD Sports were paying about £500,000 per annum under their existing turnover rent lease whereas the Court determined that, on comparables, the new rent should be fixed at £104,300 per annum.
This case is not binding on future cases as it was made by a County Court. However, with the continuing re-emergence of turnover rents, the judgment offers a guide to the likely judicial approach to their application in relation to any 1954 Act renewal. As such, they remain a theoretical possibility but in practice unlikely.