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The Benefits of Increasing use of Turnover Rents
In the ever-evolving world of commercial real estate, the content and form of leases are constantly adapting to meet the changing needs and challenges faced by both landlords and tenants. One such adaptation that has gained momentum in recent years is the increased use of turnover rents.
Turnover rent provisions which were traditionally limited to outlet centres such as Bicester Village are now appearing increasingly in general retail contexts, and, in particular, for retail and restaurant leases.
The increasing popularity of turnover rent arrangements is due to a number of factors, including the rise of online shopping and the impact of the COVID-19 pandemic which has caused a shift in consumer behaviour.
What Is Turnover Rent?
Turnover rent is an arrangement where the tenant pays usually pays a base rent along with a percentage of their gross revenue as rent to the landlord.
In traditional lease agreements, a tenant pays a fixed amount of rent, regardless of the success or failure of the tenant’s business.
However, turnover rents tie the rent amount directly to the performance of the tenant’s business. This makes for a more flexible and dynamic arrangement, with a tenant’s rent payments fluctuating in line with sales/turnover.
Benefits Of Turnover Rents For Tenants
There are a number of potential benefits to turnover rents for tenants, including:
- Reduced costs: turnover rents can help tenants to reduce their costs, particularly during times when sales are low.
- Increased flexibility: turnover rents can give tenants more flexibility, as a portion of the rent payable is directly linked to the tenant’s turnover.
- Shared risk: Turnover rents share the risk of business fluctuations between the tenant and the landlord.
Benefits Of Turnover Rents For Landlords
There are also a number of potential benefits to turnover rents for landlords, including:
- Increased income: Turnover rents can help landlords to increase their income, particularly if the tenant is successful.
- Alignment of interests: Turnover rents align the interests of the tenant and the landlord, as both parties benefit from the success of the business. Both parties are invested in the business’s success at the property; if the business of the Tenant does well, the tenant benefits from higher turnover, and the landlord benefits from higher rent receipts.
- Reduced risk of vacant properties: Turnover rents can help to reduce the risk of vacant properties, as landlords are more likely to retain tenants who are paying a rent that is linked to their turnover.
Challenges Of Turnover Rents
There are also a number of challenges associated with turnover rents, including:
- Complexity: Turnover rents are more complex to negotiate and administer than traditional leases with a fixed rental income. Some of the most challenging aspects of turnover rent leases involve the details. For example, how will online sales, click and collect, Deliveroo and UberEATS orders and showroom stores be handled? How will the tenant report store figures to the landlord? Will the tenant need to hire external auditors to prepare and submit an audited turnover certificate? It is important for both landlord and tenants to have a clear and unambiguous definition of turnover in the lease.
- Potential for disputes: There is always the potential for disputes between tenants and landlords over the calculation of turnover and the payment of rent, particularly in relation to what is included within the definition of turnover. In general, turnover refers to gross revenue, not profit. This includes all payments received at the premises, including from concessions, subtenants, and ancillary charges such as delivery and postage. The full sale value of items sold at a discount to staff or rewarded to customers is also included. VAT, other sales taxes, and customer refunds are typically deducted from turnover.
- Cooperation: making a turnover arrangement work will a landlord and tenant to liaise with each other in relation to the submission of turnover figures throughout the term of the lease
- Impact on property values: Turnover rents can make it more difficult to value commercial properties, as the rental income is not fixed.
- Other Lease Clauses: Turnover rent provisions are often seen as separate from the rest of the lease, but they can impact other clauses, such as keep open obligations, landlord termination rights, and reversions to a fixed rent if the lease is transferred to a new tenant.
Conclusion
Overall, turnover rents can be a beneficial option for both tenants and landlords. However, it is vital to be aware of the challenges involved before entering into a turnover rent lease and ensure that the turnover rent provisions within a lease are considered very carefully.
To discuss any of the points raised in this article, please contact Mark Cornelius or fill in the form below.
A Buyer’s Guide to Off-Plan Property
Whether you are investing in property or buying your first home, one option that has gained popularity in recent years is buying property off-plan.
Off-plan property refers to purchasing a property before it is fully constructed. This approach has significant differences from buying a finished ‘second hand’ property.
The key points are discussed in this article to help you make an informed decision when considering purchasing off plan property.
Longer Payment Period
Developers often offer flexible payment plans, allowing buyers to spread their payments over the construction period, although the full balance will have to be paid at the completion date.
Whilst you will need to ensure payments are made on time and that they are protected against the developer becoming insolvent it allows buyers to maintain and manage their cashflow up to the point of completion.
This can make it more manageable for purchasers and reduce the immediate financial burden. You must of course be comfortable that you will have funds available come the completion date.
Choice of Specification
Off-plan buyers may have the option to customise certain aspects of the property, such as finishes, and fixtures, according to their preferences.
You may be able to negotiate this with developers and allow the required specification to be added to the legal contract. Developers will also retain the right to make minor changes to the specification.
Newer and More Energy-Efficient Properties
Off-plan properties are usually built with the latest construction technologies and materials, making them more energy-efficient and potentially leading to lower utility costs.
Investors should be able to rest easy knowing that there will be minimal repairs to be carried out to the property and building the first few years, keeping expenditure down.
New Build Warranty
For most properties bought off-plan, the developer provides the buyer with a New Build Guarantee from a recognised new build guarantee provider.
There are different types of warranty, some covering every part of the property, others only covering the structure.
You will need an experienced solicitor to guide you as to the strength and validity of the warranty and how these compare to others on the market.
The Consumer Code For Home Builders
The Consumer Code for Home Builders is a set of guidelines and standards designed to protect the rights and interests of new homebuyers.
It promotes transparency, fairness, and high standards of construction and customer service in the homebuilding industry.
Only builders and developers that are registered with a home warranty provider that has elected to participate in the Code must comply with its requirements. It is important to check whether your developer adheres to the code.
The Property and Building
The Developer will agree to build the property in accordance with all necessary planning permissions, the government building regulations, the standards required by the new build warranty provider, in a good and workmanlike manner and in accordance with the specification.
This is significantly different to a second-hand purchase where the condition of the property is not guaranteed and the principle of ‘buyer beware’ applies, with purchasers undertaking full surveys.
It is still sensible to engage a surveyor to monitor the build quality, and to undertake a snagging inspection for you at completion.
Developer Reputation
The success of your off-plan investment will heavily depend on the developer fulfilling its contractual building obligations.
Your solicitor can negotiate the contractual clauses ensuring these are market standard, however, it is important to do your research and ensure that you are comfortable with the developer you are purchasing from, rather than having to fall back on court action It is prudent to research the developer’s past projects and financial stability to gauge their reliability.
Conclusion
Buying off-plan property can be a rewarding investment strategy. Before making a decision, carefully evaluate your financial situation, conduct thorough research on the developer, and consider your long-term investment goals.
By doing so, you can make an informed choice that aligns with your objectives and risk tolerance.
As always, there are risks when purchasing any type of property. At Quastels, we are open in our approach and help clearly explain and assess any risk to purchasing off plan, to negotiate the contract, as well as providing you with practical advice
To discuss any of the points raised in this article, please contact Meera Malde or fill in the form below.
Is Your Building Registered Under The Building Safety Act 2022?
This article intends to give a summary of the registration requirement of high-risk buildings under the Building Safety Act 2022 (the Act) as they apply to you if you are the owner, and/or landlord of a building.
I Own or Manage a Building, Why Am I Having to do This?
In the wake of the Grenfell Tower fire tragedy, the Act introduces a raft of new reforms for landlords and developers to improve fire safety in residential buildings.
One such reform is the introduction of a new government body, known as the Building Safety Regulator (or BSR).
The BSR will be in charge of overseeing the safety standards of your building, as well as setting out possible methods of improving those safety standards and ensuring any recommendations are complied with. Registration is required to ensure the BSR has the means to monitor the safety of your building.
Does My Building Apply?
There are 2 criteria for your building to fall into the definition under the Act that will require you to register –
- Your building has to be at least 18m in height or at least 7 storeys. And
- It must contain at least 2 residential units.
What Responsibilities Will I Have?
If your building applies, “accountable persons” must be designated for it. This will be any organisation or individual who owns, or is responsible for, repairing its common residential parts.
Examples of an “accountable person” can include a freeholder, landlord or management company.
Where there is more than 1 party, a Principal Accountable Person (or PAP) needs to be designated. This designation should rest with the party who either owns, or is primarily responsible for, looking after your building’s structure.
As a PAP, you will be responsible for the following duties, in summary –
- Managing building safety and ensuring compliance with legislation, most predominantly on fire safety and structural issues;
- Maintaining reports and assessments on any such issues, with action points for possible improvements; and
- Applying for a building safety assessment (essentially a “sign off”) from the BSR, to demonstrate compliance with the above 2 duties.
When you receive their sign off, it should be displayed in a noticeable position in your building.
How Can I Register?
To register with the BSR, you will need to complete the online registration.
You will need to pay £251 per building you register and registration must be done by your PAP or a person authorised by the PAP, such as a solicitor.
What Do I Need To Include With My Application?
Your application needs to have the following information about your building–
- The names of any “accountable persons” and the PAP (with a single person identified as its definitive point of contact)
- Number of storeys and residential units
- Year of completion of the build
- A copy of the building control certificate
- Any pertinent structural and safety information including-
- Any building work carried out since original build
- The building’s use
- The external wall material
- Evacuation routes
- Fire equipment, such as hoses, alarms and extinguishers
- Fire risk assessment recommendations
What Are The Consequences Of Not Registering?
Failure to register by 30 September 2023 will constitute a criminal offence, so it is crucial you submit the relevant information as soon as possible.
Sanction for non-registration can include an unlimited fine and up to two years’ imprisonment.
To discuss any of the points raised in this article, please contact Josh Fraser, or fill in the below form.