If you are a landlord or tenant with a commercial lease, are you familiar with your rent/rent review clause? Does your lease include a Turnover Rent mechanism?
Written by Yitong Guo, Senior Associate Solicitor
What is Turnover Rent?
It is a rental structure commonly used in commercial sectors, such as retail, and leisure. The rent payable is linked to the tenant’s trading performance at the premises.
Within this structure, in addition to a base rent, the tenant pays an additional percentage of turnover or gross receipts generated from the premises. In this way the interests of the landlords and the tenants are closer linked. So, in difficult times, tenants benefit from reduced rent, while landlords can maintain income stream despite reduced. And when businesses are more successful, landlords would benefit from increased rent. Often this is a mutually beneficial arrangement. However, disputes can arise where the relevant lease provisions are outdated or unclear.
The current commercial lease dispute between the landlords, Brent Cross Shopping Centre (Standard Life Investments Brent Cross LP) and the tenant, John Lewis Properties, is a demonstration of such. It involves the wording and interpretation of Turnover Rent provision, as the lease was drafted decades ago and it struggles to apply to modern business models.
The Brent Cross v John Lewis Dispute
The dispute concerns a lease originally made in 1979, long before online shopping, e-commerce and click-and-collect services came to our ordinary life as a common practice.
In short, the lease provides that John Lewis pays a base rent, and a percentage of ‘gross receipts’ generated from the store. The landlords argue that the lease wording should include online orders via click and collect service in the store, online orders fulfilled from the store, orders placed in-store but fulfilled from a distribution centre; and associated collection charges. The tenant disagrees: online transactions should not form part of turnover rent calculations. The sale is completed through its wider distribution network, and not through the store itself.
The case is still in court proceedings. And we are closely following the decision which will demonstrate the potential issues with historic lease wording vs modern retail operations, and it is interesting to see court’s interpretation on this.
Reminder to Landlords and Tenants
The case serves as a good reminder that commercial leases should evolve with the business they serve. As the retail environment continues to become increasingly digital, Turnover Rent provisions must be drafted with clarity and flexibility. They should also be able to accommodate evolving commercial and trading models for the said business. For landlords and tenants, getting the drafting right at the outset can significantly reduce the risk of expensive disputes later.
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