The Information Paper outlines various aspects of turnover rents and has cognisance of the established practice in Europe. Up to now almost all commercial lettings were carried out on an open market letting basis but there has been a growing trend in the market of turnover linked transactions. Whereas initially, these transactions were predominantly granted to large foreign retail multiples to encourage them into the Irish market and were limited to shopping centre type locations they have quickly become more widespread. Turnover type transactions align landlord and tenants interests more closely where the goal from both sides is to encourage and promote increased trade.
There are a number of ways in which rents with a turnover element can be structured. The most frequently used and best practice would be as follows:-
1) Pure Turnover Rent
This normally has a headline rent to allow for regular invoicing and an adjustment is made at year end accordingly.
2) OMV plus Turnover Rent
The agreed Open Market Rental Value is applied to the property/unit with an additional agreed percentage of the turnover to be charged quarterly or yearly in arrears should the turnover exceed a stated cap.
3) Base Rent plus Turnover Rent
A base rent is agreed on the premises. This rent is paid quarterly or monthly in advance and is topped up by an agreed percentage of the turnover quarterly or yearly in arrears. The base rent can either be a fixed figure or a percentage of the agreed Open Market Rent on the unit.
4) Base Rent plus Turnover Rent between varying thresholds
The Open Market Rental Value of the property/unit is established and reduced to a certain agreed percentage (usually not below 60% but this figure may vary)) once the turnover exceeds an agreed level. Parties are also free to agree turnover floors and ceilings before which and after which no turnover rent is paid or applies.
The SCSI Information Paper sets out the main advantages and disadvantages of turnover rents as follows:
• In a slow market it may help with the letting of a vacant property/unit
• Allows for pro-active management of the tenant mix in any scheme
• The tenant has the comfort of knowing that the rent payable is a component of the turnover achieved
• Ensures that a landlord is more pro-active in marketing/driving footfall – particularly relevant in a shopping centre.
• Any base rent is a fixed rent set at a lower rate than the Open Market Rent
• Alignment – brings the landlord and tenant working relationship closer. Both are dependent on strong/best results
• Fairness - in terms of risk it is more equitable; the risk sharing becomes more equal. Both are dependent on sales
• Responsive – rental growth is dependent on the return of the business and therefore more responsive
• Performance Orientation – business led approach, performance, metrics.
• Allows a landlord to assess both his tenant and his centres performance. Poor turnover figures might not necessarily be the failure of the tenant but may be a lack of demand or oversupply in that particular sector of the market.
• Uncertainty – funding and valuation issues
• Volatility – market conditions/linked to consumer spend
• How to deal with periods of closure – refit etc
• Cash-flow – frequency, timing on account
• Potentially management intensive – data collection, calculation, analysis and reporting
• Data Reliability – audits, penalties
• Accuracy of Information provided – audited /un-audited accounts
• Electronic Point of Sale (EPOS)
• Difficulty for first time / start up business
• Reporting Structures – weekly, daily, departmental basis etc
• What is actually captured by turnover/Internet/wholesale sales etc
• Cost – Audited accounts may be required on a quarterly basis as against an individual annual audit.
• Assignments – Is the turnover provision personal to the tenant or can they assign it? Is there a mechanism for a fixed rent upon assignment? Tenant cannot pass on benefit of the turnover.
• Trust – Landlord may have concerns over whether the tenant is declaring all turnover.