In leases of commercial property, turnover rents require tenants to pay a rent calculated as a proportion of their turnover. Instead of being a fixed or market rent, they are based on the income of the particular tenant. Some leases provide for a base rent to be paid in addition to a turnover rent. This ensures a minimum level of rent is payable no matter how the tenant performs. Turnover rents have received increased attention during the pandemic, with discussion about their potential use to mitigate the effects of forced closures on retailers. In the case of W (No.3) GP (Nominee A) Ltd & W (No.3) GP (Nominee B) Ltd and J D Sports Fashion PLC the County Court has recently considered whether it is appropriate for the Court to impose a turnover rent within a renewal lease. The full judgment can be found here.
J D Sports Fashion Plc (“J D Sports”) was a tenant of a retail unit in the Derbion Centre in Derby. The lease provided that the rent payable was a base rent plus turnover rent.
The parties had agreed terms for the renewal lease, save for the rent which should be payable. The landlord applied to the Court seeking to include a turnover rent within the renewal lease. J D Sports, however, argued for the rent to be fixed with no element of turnover rent.
If the parties cannot agree, the rent payable under a renewal lease can be determined by the Court. The Court will consider the terms of the tenancy and what the property might reasonably be expected to be let at in the open market by taking into account the disregards dictated by the Landlord and Tenant Act 1954.
The disregards which were relevant in this case were:
a) Any effect on the rent due to the tenant having been in occupation of the property; and
b) Any goodwill attached to the property due to the tenant’s business.
The Court commented that ordering a turnover rent would sit uneasily with the disregards set out above. If a turnover rent was imposed, this would be taking into account the business and goodwill that J D Sports had built up under the previous lease and penalise them for the same.
The Court considered that the calculation of turnover rent is dependent on the identity of the tenant and their specific turnover and profit margin which conflicts with the concept of the willing hypothetical tenant and willing hypothetical landlord set out in statute.
Judge Fine said: “In the current lettings market for retail units in shopping centres, which is very favourable to tenants, a turnover rent may be inappropriate because it is unfair to a tenant to order a turnover rent which would produce a rental figure significantly above an open market rent valuation and comparable rents in the centre. Such a result does not accord with the purpose of the Act.”
The Court imposed a fixed rent in this renewal lease. The Court, however, emphasised the importance of considering the circumstances of each case when determining whether a turnover rent should be imposed. The Court gave an example that a turnover rent could be appropriate within a car parking lease, as turnover was more likely to be determined by the location and size of the car park, rather than the goodwill built up by the specific Tenant.
The Court noted that there was no case law to determine that they could not impose a turnover rent on a renewal lease although, in this case, the Court felt it was not appropriate to do so. We may therefore see the Courts imposing turnover rents in cases where turnover is dependent on the premises or location themselves as opposed to the particular tenant.
It is worth noting that initially the landlord had proposed a fixed rent, with the tenant proposing a base rent plus turnover rent. By the time the matter went to Court, market conditions had changed, as had the position of the parties. This is an important reminder that it is essential to consider the potential impact of changes in the market before agreeing a turnover rent. Whilst it may be appealing to tenants to agree a turnover rent when times are difficult (such as during the pandemic), in good times tenants could find themselves paying significantly more than market rent.