Since penning my recent article about the re-emergence of turnover rents in leases Turnover rents – it’s time to break a leg! – it seems you can’t move for similar articles on the subject! So, it’s either been a slow news time in the commercial property world of late and us commercial property lawyers have nothing else to write about – or I’m onto something!
Let’s go with the latter shall we!
To bolster my opinion, my colleagues and I have noted a marked increase in turnover provisions creeping into deals of late. Ranging from the fairly standard turnover percentage payment on top of a base rent to a much more complex beast that can leave the grey matter needing a spa day!
Once the turnover rent has made its way in – it can pose some other head scratching moments. I share my recent ponderings with you below.
1. Make it personal?
Should the turnover provisions that have been so carefully negotiated and tailored to fit the tenant be personal to them? Is it likely that on any assignment (if permitted) the same provisions would suit the incoming tenant? I’ll stick my head above the counter here and say probably not.
2. To assign or not to assign?
If the turnover isn’t personal, or actually even if it is, should assignment be permitted? It’s fine if the incoming tenant is also acquiring the business operating from the property – but what if it isn’t? If the incoming tenant is a completely different business then it could get really messy trying to align the turnover rent payments mid turnover period. A ‘substituted turnover rent’ provision could be included to cater for such a situation but as most current leases of this nature are for short term lets (3 to 5 years) assignment isn’t generally being permitted.
If landlords don’t want to have convoluted provisions for the ‘what if’s, perhaps they could insert a right of pre-emption on assignment to avoid any issues.
4. Not personal and assignment allowed
In this situation, any landlord should include some additional provisions to allow for the substituted rent scenario mentioned above, or at the very least include a requirement for the turnover percentage or mechanism to be re-negotiated.
Turnover rent definitely has a place in the ever increasing flexi fit world of commercial leases – just make sure it doesn’t leave you wishing it hadn’t!
By Kelly Peck, Property Partner