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Articles Retail 24th Nov 2016

The end of turnover rent leases?

Whilst store presence is still key to a retailer’s brand, rapid advances in technology over recent years and changes to consumer spending habits has resulted in more sales being made on-line. The rapid rise in multichannel and online retailing has resulted in landlords becoming increasingly concerned about in-store turnover figures and the effect on rental income.

Turnover rents have been popular in the retail sector as they enable risk and reward to be shared fairly between a landlord and tenant during difficult market conditions. A typical turnover arrangement provides for the tenant to pay a base rent (usually 80% of the market rent) plus a turnover ‘top up’ which is based upon an agreed percentage of the tenant’s turnover and which is payable only to the extent that it exceeds the base rent.

Today store and online sales are often co-dependent. The consumer purchasing process derives from the physical store, the internet or a combination of them. Accordingly, for the purposes of calculating a tenant’s turnover and the turnover rent payable how should the following be treated:

  • Sales made from terminals or a smart phone application while a customer is physically located in store but where the goods are collected by the customer in store at a later date or delivered to a customer’s home
  • ‘Click and collect’ purchases where a customer orders goods online but collects the goods from in-store
  • Refunds where purchases are made online but the customer later returns goods to the store.

Stores are also used as ‘showrooms’ where consumers view and try out goods before going home and ordering online. In this situation the physical store plays a part in generating the sale but there is no way of attributing the online sale to the store.

We may see a decline in the number of turnover rent leases brought about by issues caused by multichannel retailing and how sales are to be treated. However, it is too early to predict the end of turnover rent leases in the UK which will no doubt evolve and keen interest will no doubt be paid as to how turnover rent leases develop in other countries such as Australia, where some supermarket retailers are subject to separate turnover rent calculations for in-store sales and online sales.

The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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