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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.

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Is AI Generated Content Protected By Copyright Law?

At the time of writing, 100 million people around the world have used ChatGPT and more than  15 billion images  have been created using text-to-image algorithms since last year.

Worryingly, 68% of employees have not informed their boss that they are using artificial intelligence generated content (AIGC) when undertaking certain tasks such as writing emails and marketing/sales content, scheduling meetings, creating images, and analysing data.

The reason lack of employer oversight is concerning is that the law surrounding AIGC is, to put it generously, unfit for purpose, especially regarding intellectual property (IP). This article, part one in a two– part series, will provide a snapshot of the latest information around the issue of whether AIGC can be protected under copyright law.

Copyright Law In England and Wales

Copyright law is governed by the Copyright, Designs and Patents Act (CDPA) 1988. Copyright seeks to protect the form of creative ideas, not the ideas themselves (these can be protected via confidentiality). Copyright provides a vehicle for the authors of original work to protect their creativity and stop others from using it without permission for their own advantage.

The following categories of works are protected under UK copyright law:

• Original literary, dramatic, musical, or artistic works which, in the case of literary, dramatic, or musical works are recorded in some way.
• Sound recordings, films, or broadcasts.
• The typographical arrangements of published editions.

Copyright Protection For Primary And Secondary Works

Both primary and secondary works are protected under the CDPA 1988, though primary works receive stronger protection because they require more significant amounts of creativity and originality.

In the case of literary, dramatic, musical, or artistic works, the author or creator of the work is usually the first owner of any associated copyright. The exception to this is if any of the aforementioned works are created by an employee in their course of their employment. In this case, the employer is the copyright owner unless there is an agreement to the contrary. Where there are two or more authors who have created a work, they may have joint ownership of the copyright if their contributions are indivisible or co-authorship where separate contributions can be identified.

Under the CDPA 1988 computer-generated works are defined as “generated by computer in circumstances such that there is no human author of the work”. Therefore, the law suggests content generated by an artificial intelligence (AI) can be protected by copyright (more on this below).

Who Owns The Copyright of AIGC?

Let us imagine that one of your employee logs onto ChatGPT and inputs the following:

“1000 words on why triple glazing is better than double glazing”

ChatGPT provides the employee with a 1000-word output. They lightly edit the piece, for example, by adding a call to action, and then publish it on the organisation’s website as a blog.

Who owns the copyright? There are five possibilities:

• The employee
• The employer
• Open AI (the owner and creator of ChatGPT)
• ChatGPT itself
• The original authors of the content used to train ChatGPT

We can discount possibility one under the CDPA 1988 as the AIGC was made in the course of employment. Possibility four can also be dismissed because the CDPA 1988 does not recognise a non-human as the author or owner of a work. And given the Government’s response to the 2021 AI consultation, this stance is unlikely to change in the near future. Possibility three cannot apply because under Open AI’s terms and conditions, “Subject to your compliance with these Terms, OpenAI hereby assigns to you all its right, title and interest in and to Output.”

This leaves possibility two and five. The latter is currently being fought out in various lawsuits across both sides of the Atlantic.

Therefore, we are left with possibility two – the employer. The next challenge is to establish whether the AI created article can fulfil the CDPA 1988 requirements of originality, authorship, ownership, and duration of the copyright.

Challenges To Copyright Ownership In AI-Generated Content (AIGC)

It is arguable that the current level of sophistication of AICG does not allow for originality. Everything ‘created’ by AICG is already in existence. The developers simply scraped pre-existing content from the internet (without permission, hence the lawsuits) and trained their models on the enormous streams of pre-existing data. The employee cannot be the true ‘author’ of the article (thereby allowing them to pass on ownership to their employer) because they did not create it. We have already established that ChatGPT cannot be the author/owner of the work, and Open AI has assigned its rights to the person who inputs the request into ChatGPT. The issue of duration of the copyright also creates problems as in many cases, the length of the copyright protection is attached to the lifespan of the author. And as you may have guessed, machines cannot die.

The answer to the question – who owns the copyright of an AICG work is, under current copyright law…no one, because the current legislation does not cover AICG. The above paragraph is confusing and contradictory because that is the current state of the law.

At present, AIGC lacks protection under the provisions of the CDPA 1988. Interestingly, United States District Court Judge Beryl A. Howell recently ruled that AI generated artwork cannot be copyrighted under current US law. In her decision, Judge Howell wrote that copyright has never been granted to work that was “absent any guiding human hand,” adding that “human authorship is a bedrock requirement of copyright.”

Wrapping up

Although AIGC does not benefit from copyright protection under the current CDPA 1988, this does not mean that the law cannot be amended to change the status quo. The Act is already contradictory, given that “the legal concept of originality is defined with reference to human authors and characteristics like personality, judgment, and skill” but originality can be applied to computer-generated work.

By amending the Act to extend authorship to non-human authors, not only could end-consumers rely on some form of IP protection, but it would also encourage investment in AI technology because innovators would be able to rely on IP law to protect their creative efforts.

In part two of this series on AIGC and copyright we will examine the risks of copyright infringement, both when training AI models and using the outputs of AI tools.

To discuss any of the points raised in this article, please contact Marcus Rebuck or fill in the form below.

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Making A Loan to Individuals – Is It A Regulated Mortgage Contract?

If you are considering lending money to a family member or a friend, you may believe you are acting prudently by obtaining security (for example, a mortgage) against the borrower’s home to ensure you get your money (and any agreed interest) back.

However, without getting professional legal advice, you could find yourself inadvertently straying into the realms of a regulated mortgage contract (RMC). If this occurs, the loan contract may be deemed unenforceable, and you could be in breach of the Financial Services and Markets Act 2000 (FSMA).

What Is A Regulated Mortgage Contract?

Under article 61(3)(a) of the FSMA (Regulated Activities) Order 2001 (RAO), a contract is a regulated mortgage contract if, at the time it is entered into, the following applied:

• The contract is one under which the lender provides credit to a person or to trustees;
• The lender takes security for the repayment of the loan in the form of a charge over land of which 40% is used for or is intended to be used, as or in connection with a home by the borrower or (in the case of credit provided to trustees) by a beneficiary of the trust or a related person.

Under the RAO, anyone who is not authorised to carry out a regulated activity is prohibited from doing so. The contract will be unenforceable and criminal charges may be laid.

Read The Case Study

An example of how someone can suddenly find themselves entering into an RMC without meaning to is illustrated in the case of Jackson v Ayles and another [2021] EWHC 995 (Ch).

Mr Pumphrey lent money to Mr and Mrs Ayles, the Defendants. The Borrowers were property developers. The loan was secured by a charge on their family home. The Ayles defaulted on their loan repayments and declared bankruptcy.

Mrs Jackson, the Claimant, was subsequently appointed Mr Ayles’ trustee-in-bankruptcy. She applied for a declaration that the security held by Mr Pumphrey was unenforceable under FSMA.

Mr Pumphrey contended that because the activity had not been carried on “by way of business”, it was not regulated and so did not infringe the general prohibition in section 19 of the FSMA. The High Court disagreed because:

• Mr Pumphrey’s association with the Defendants was “not built on trust”. Instead, it was a commercial relationship.
• Mr Pumphrey made several loans to the Defendants over many years.
• Mr Pumphrey had sought advice from a lecturer of law at Kingston University about “private lending”. He had also obtained a charge template for the purpose of securing his lending to ensure he got his money back.
• Mr Pumphrey’s ROI exceeded market rates.
• Since 2005, Mr Pumphrey lent more than £3.5 million (albeit not at the same time) to 14 different people and companies.

The Court ruled that Mr Pumphrey was not an authorised or exempt person for the purpose of the FSMA. He was therefore barred from carrying on a regulated activity but did so anyway. He was therefore in breach of the general prohibition in section 19 of the FSMA. Consequently, the loan was unenforceable under section 26(1).

What Are The Exemptions That Mean A Loan Is Not An RMC?

Article 61A(1) and (2) of the RAC provide that a contract is not a RMC if it falls into one of the below categories:

• An Islamic mortgage.
• A limited payment second charge bridging loan.
• A second charge business loan.
• An investment property loan (this also applied to commercial borrowers as long as certain conditions are met)
• An exempt consumer buy-to-let mortgage contract.
• An exempt equitable mortgage bridging loan.
• An exempt housing authority loan.
• A limited interest second charge credit union loan.

If one of the above exemptions applies, the loan agreement is defined as an unregulated mortgage contract.

Wrapping Up

Given that inadvertently creating an RMC can lead to expensive civil litigation and criminal prosecution and could potentially leave you with an unenforceable loan agreement, it is important to seek legal advice if you are considering providing a loan that will be secured over property.

Doing so will ensure you understand the consequences of the contract and that you are able to protect your best interests.

To discuss any of the points raised in this article, please contact Jason Greenberg or fill in the form below.

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