Turnover Rent in Commercial Lease: What It Is and How It Works

Commercial leases can be complex, and one of the most important aspects for tenants and landlords is understanding turnover rent in a commercial lease. Unlike traditional fixed rent, turnover rent links a tenant's rental payments to their gross turnover, offering flexibility for tenants and a performance-based income for landlords.

In this guide, we'll explain how turnover rent works, the different models, key considerations, and how it can impact both tenants and landlords.

Table of Contents

What is Turnover Rent in a Commercial Lease?

Turnover rent in a commercial lease is a flexible rental arrangement where the rent is linked to a tenant's gross turnover rather than being a fixed sum.

Unlike traditional commercial leases with fixed rent, turnover rent adapts to the tenant's business performance, making it a popular choice for retail and leisure sectors in the UK. This type of lease helps tenants manage costs while giving landlords a chance to benefit from successful businesses.

This model often includes a base rent plus a percentage of sales, or in some cases, rent is calculated entirely on turnover.

What Types of Commercial Properties Use Turnover Rent?

Turnover rent is most commonly found in:

• Retail units in shopping centres or high streets
• Restaurants, cafes, and leisure businesses in busy locations
• High-footfall commercial properties where revenue can fluctuate seasonally

This model is ideal where sales can vary, as it allows rent to adjust with business performance while keeping landlords and tenants aligned.

How Turnover Rent Works

Turnover rent can be structured in different ways, depending on the lease agreement. Understanding the models and calculations is key for both landlords and tenants.

Hybrid Model: Fixed Base Rent Plus Turnover

The most common type of turnover rent is the hybrid model. In this arrangement, tenants pay a reduced base rent, which is a guaranteed minimum for the landlord. On top of this, tenants pay a percentage of their turnover, often referred to as a turnover top-up rent.

Benefits of the hybrid model:

• Provides landlords with a secure minimum income.
• Allows tenants' rent to increase as sales grow, aligning rental costs with business performance.

Pure Turnover Model: Rent Based Entirely on Sales

Some commercial leases operate on a pure turnover model, where the rent is calculated entirely as a percentage of the tenant's annual gross turnover, without any fixed base rent.

Key points of the pure turnover model:

• Tenant rent is flexible, reducing financial pressure during slow trading periods.
• Landlords share directly in the business's financial success, creating a mutually beneficial arrangement.

How Is Turnover Rent Calculated?

Turnover rent is usually expressed as a percentage of annual gross turnover, such as 10%. The lease may specify a threshold, meaning the percentage only applies to revenue above a certain level.  The calculation method can vary depending on the lease structure:

• Higher of base rent or turnover percentage: The tenant pays whichever is greater, ensuring landlords have a guaranteed minimum.
• Threshold-based top-up: The tenant pays a fixed base rent plus a percentage of turnover exceeding a pre-agreed threshold.

Examples of Turnover Rent in Action

1. Hybrid Lease Example

A retail shop pays £2,500 base rent plus 8% of sales above £50,000. This ensures the landlord receives income while allowing rent to scale with business growth.

2. Pure Turnover Lease Example

A boutique restaurant pays 12% of annual turnover, with no fixed base rent. This aligns rent fully with business performance, reducing risk during quieter months.

Key Features and Considerations of Turnover Rent

Understanding the advantages and obligations of turnover rent is crucial for both landlords and tenants.

Tenant Flexibility

Turnover rent allows tenants to:

• Lower their fixed rental costs, especially during low-sales periods.
• Reduce financial risk, as rent decreases when business turnover falls.
• Focus on growing their business without being overburdened by high fixed rent.

Landlord Benefits

For landlords, turnover rent can provide:

• Increased income potential when the tenant's business performs well.
• A stronger relationship with tenants, since both parties benefit from business success.
• A lease structure aligned with market trends, particularly in retail and restaurant commercial property.

Commercial Property Applications

Turnover rent is commonly used in:

• Retail units in shopping centres or high street locations.
• Restaurants, cafes, and leisure businesses where customer footfall fluctuates seasonally.

Lease Terms to Consider

When entering a turnover rent agreement, several lease details are important:

• Base rent: The minimum guaranteed payment.
• Turnover percentage: How much of the tenant's revenue contributes to rent.
• Turnover thresholds: Levels of revenue triggering additional rent.
• "Keep-open" covenants: Rules requiring the tenant to operate during specific hours to maximise turnover.
• Confidentiality clauses: Protect sensitive turnover data and financial information.

What Are the Common Challenges of Turnover Rent?

While turnover rent offers flexibility, it comes with challenges:

• Tenants must provide accurate turnover reports to landlords.
• Landlords may face unpredictable income if sales fluctuate.
• Negotiating thresholds, percentages, and reporting requirements can be complex.

Despite these challenges, turnover rent in commercial lease agreements can create a mutually beneficial structure, especially in sectors where revenue varies.

Conclusion

Turnover rent in commercial leases offers a flexible, performance-based approach to rental payments, balancing tenant risk and landlord reward. Whether you are a retailer, restaurateur, or landlord, understanding how turnover rent works and negotiating clear terms can ensure a fair and mutually beneficial commercial lease.

Get Expert Guidance on Turnover Rent in Commercial Leases

Understanding turnover rent in commercial leases can be challenging, whether you are a landlord or a tenant. With so many factors to consider, base rent, turnover percentage, thresholds, and "keep-open" covenants, it's essential to have expert guidance to ensure your lease is fair and aligned with your business goals.

Our team of commercial lease specialists can help you navigate commercial lease turnover rent, calculate rent accurately, and negotiate lease terms that protect your interests.

Don't leave your rent to chance; get professional advice today and make informed decisions for your retail, restaurant, or leisure property.

Need clarity on turnover rent in commercial leases? Contact our commercial lease solicitors today at 0203 959 7755 for advice on turnover rent calculations and lease terms.