Will Turnover Leases be the future?

Turnover leases have always comprised a small section of retail and leisure leases. Previously, however, they have generally been combined with an element of a base rent; a traditional 10-year lease, say, with a five-year break clause. These leases were very much geared in the landlord’s favour, guaranteeing a rental payment even if a store was closed, for example.

The growth of online sales has been gradually disrupting this model, while raising questions about how to create a revenue-based lease in today’s retail environment.

“What is revenue?” Samuel asked. “How can online sales be captured where they are generated from a store? Some landlords and retailers are including sales from a postcode area to capture income derived from a store, while others are looking at charging on a footfall basis.”

The move to a revenue only lease involves a significant change in a landlord’s mindset, Samuel said. They need to move away from assessing a potential tenant’s covenant to assessing the actual business and whether it’s likely to hit revenue targets, however they are measured.

“Historically landlords have collected rent each quarter and haven’t had a deep relationship with their tenants,” DLA Piper partner Lorraine Reader said. “Now a landlord needs to view the relationship like a partnership and almost invest in the tenant’s business to make sure that each gets a share of the upside. They don’t have a lot of choice; it is difficult to pick up a newspaper in the current climate without seeing a story of a retailer in distress.”

To ensure a lease isn’t entirely in a tenant’s favour, landlords should build in flexibility, Reader said. Flexibility includes break rights if a business underperforms or the right to move the tenant to a different part of a shopping centre or street. Tenants are increasingly expecting that flexibility to be included, she added. New Look’s request for turnover leases included offering landlords the right to take back stores to re-let to other tenants.