Rapid evolution of turnover rents has picked up pace during pandemic

Paul McNeive

Strong tenants like TK Maxx can force turnover rent deals from shopping centre owners

October 21 2021 02:30 AM

Many retailers have taken a hammering during the pandemic and the return to normality is seeing the acceleration of a shift to turnover rents.

Turnover rents, where the rent paid is based on a proportion of turnover, were first seen here 10 years ago, as the country emerged from recession.

Traditionally, landlords prefer the certainty of a fixed rent, and any move to turnover rents is largely driven by high vacancy rates, when tenants have greater negotiating power.

That said, the retailing market has been evolving into one of greater collaboration between tenants and landlords, with an acceptance that shorter and more flexible lease terms are more conducive to the dynamic management of shopping centres – for everyone’s benefit.

While turnover rents have become established on the UK’s high street, they are largely confined to shopping centres here, where landlords and tenants can work together in boosting trade, for example, through marketing the scheme.

Scores of turnover rent deals have been agreed in Irish shopping centres, but this early phase is raising questions for the market.

I spoke with Johanna Gill, director and deputy head of valuation and advisory at Cushman & Wakefield, and she is chairing a group set up by the Society of Chartered Surveyors Ireland to address these issues.

She told me that the original turnover rent deals saw tenants paying 4-8pc of gross turnover as rent. However the system is evolving, with tenants looking more carefully now at total operating costs, for example, service charges and rates.

Thus, some landlords are now offering a new structure where the tenant pays 10-12pc of gross turnover, and the landlord covers other costs.

Other questions that are arising include the definition of gross turnover. For example, does it include internet sales? If so, how are they treated? There are cost savings for the tenant, but how will the cost of returns be assessed? Also, how will click and collect sales be evaluated?

The increasing prevalence of turnover deals is posing conundrums for valuers.

For example, the market rent of a shop might be €100,000pa, but a turnover rent deal might produce €80,000 or €200,000.

As Johanna Gill says, this introduces considerable risk in valuing that property – and valuers tend to look more at negative risk than positive risk. However, she points out that as the market matures, and as valuers have sight of three years trading accounts, they can take a firmer position.

To counteract this risk factor, landlords are seeking to introduce base rents, plus a top-up based on turnover, and the likelihood of that depends on the negotiating strength of the shopping centre.

Gill told said there is no standard percentage of base rent established yet, and that it can be difficult to ascertain full information about deals.

This also presents problems for the Commercial Leases Register, which was established to provide full market information. Tenants are obliged to complete the register – but the examples of turnover rent deals I found on the register do not specify the proportion of turnover agreed.

Boosting the evolution is the impact of strong tenants like TK Maxx, who can force turnover rent deals where landlords see them adding footfall to a location.

As our main streets recover, it will be interesting to see if turnover rents become established there too, as they have in the UK.