Turnover rent in commercial leases and how it works

Turnover rent is becoming an increasingly common feature in commercial leases, particularly in retail, hospitality, and leisure. Instead of paying a fixed rent, tenants agree to a structure where all or part of their rent is tied to their business’s revenue. This model can benefit both landlords and tenants—but it also brings legal and financial complexities that need careful handling.

Whether you’re a landlord considering turnover-based leasing or a tenant negotiating fair terms, understanding how turnover rent works and the key clauses involved is essential.

Our commercial property solicitors can help you structure agreements that work in your best interests—contact us to learn more.

What is turnover rent and how does it work

Unlike a traditional commercial lease, which charges a fixed rental sum, a turnover rent model links the rent payable to the tenant’s revenue. Some agreements include a fixed base rent plus a turnover-based element, while others rely entirely on turnover. 

Hybrid models are also common, where a tenant agrees to a minimum guaranteed rent alongside a turnover-based top-up. This provides landlords with greater income certainty while still allowing flexibility for the tenant.

The lease will set out:

• The percentage of revenue to be paid as rent.
   
• The turnover threshold at which rent applies.
   
• How turnover is calculated, including what revenue is included and excluded.
   
• The frequency of reporting and any audit requirements.

For landlords, turnover rent offers the opportunity to share in the success of a tenant’s business. This can generate higher rental income in thriving locations than a fixed lease. For tenants, the structure provides flexibility, ensuring they are not locked into high payments during quieter trading periods.

Turnover rent in action

Here’s how turnover rent might work in practice under a lease agreement. In this example, the tenant agrees to pay the higher of:

• a base rent of £110,000, or
   
• 10% of their gross turnover.

To give the tenant some protection in the early years, the lease also includes a cap of £135,000 on the total rent payable during the first five years. Here’s how that would work in practice:

• If the business turns over £1,300,000, 10% of that is £130,000. This is higher than the base rent but below the cap—so the tenant pays £130,000.
   
• If the turnover is £1,000,000, 10% is £100,000. Since this is less than the base rent, the tenant pays £110,000. That’s the minimum payable.
   
• If the turnover is £1,400,000, 10% is £140,000. But because the five year cap is still in place, the tenant only pays £135,000.
   
• If turnover reaches £1,600,000 after the five-year cap has expired, 10% is £160,000—and that full amount becomes payable.

Where is turnover rent commonly used

Turnover rent is most frequently found in sectors where income fluctuates. Shopping centres often use turnover-based leases to align rental payments with footfall and sales. Cinemas, gyms, and event spaces also benefit from a rent model that adjusts to attendance levels, ensuring rent payments reflect periods of higher and lower demand.

Hospitality businesses, such as restaurants and bars, rely on turnover rent to account for seasonal demand. For example, a seafront restaurant in Brighton or Eastbourne may experience a surge in summer trade but slower winter months, making turnover rent a practical option. 

In contrast, some businesses in high-demand locations, like a Michelin-starred restaurant in London’s Soho, may accept turnover rent as part of a high-value lease negotiation, where landlords look to maximise returns.

However, turnover rent is not suitable for all businesses. It is less common in sectors with low margins, such as supermarkets or logistics, where predictable overheads are essential. Some landlords may also be reluctant to offer turnover rent in properties that require long-term income stability, particularly where financing is involved.

For landlords, turnover rent can attract tenants who might otherwise be deterred by high fixed rents, making it an effective strategy for securing occupancy in prime locations. However, careful structuring is required to ensure that revenue reporting is accurate and enforceable.

Legal considerations and potential pitfalls

While turnover rent offers flexibility, it also presents challenges that require careful legal drafting. One of the key issues is how turnover is defined. Disputes often arise over whether revenue from online sales, refunds, or service charges should be included. A well-drafted lease will clearly set out these parameters to avoid ambiguity.

Auditing and verification clauses are also crucial. Landlords need mechanisms to verify reported turnover, ensuring transparency while respecting the tenant’s business operations. Some agreements include provisions for independent audits if figures appear inconsistent. Landlord’s may require this information within a specific period and in some cases, leases may contain penalty clauses if a tenant underreports turnover or fails to provide turnover figures on time. Tenants may also be required to maintain their accounts for a specific period as stated within the lease after the end of the term and make these available for the landlord to inspect at any reasonable time. 

Another consideration is minimum and maximum rent caps. Some leases include a base rent to guarantee a minimum income for the landlord, while others impose an upper limit to prevent excessive payments if a business performs exceptionally well. Striking the right balance is essential for both parties.

Lenders can also take a cautious approach to turnover-based commercial leases. Some banks prefer financing properties with traditional fixed leases, as they provide a more predictable income stream. Landlords considering turnover rent should assess whether it could impact their ability to secure or refinance a mortgage.

Key clauses to look out for in a turnover rent lease

For businesses considering a turnover rent lease, specific clauses deserve close attention:

• Turnover calculation – how revenue is defined and what is included.
   
• Reporting obligations – how and when turnover figures must be disclosed.
   
• Audit rights – ensuring transparency without undue disruption to the tenant.
   
• Rent review mechanisms – whether the turnover percentage or base rent can be adjusted over time.
   
• Break clauses – options for terminating the lease if the model proves unsustainable

What tenants should try to exclude from turnover calculations

Tenants should also aim to exclude the following items from the turnover rent provisions, to avoid inflating the rent payable.

• Taxes: Any VAT, exercise taxes, or sales taxes that the tenant pays for selling goods or services should be avoided.
   
• Refunds and credits: If customers return goods or receive refunds for unsatisfactory services, the refunded amount can be avoided. However, only up to the amount that was originally counted as part of the gross turnover.
   
• Tips and gratuities: Tips given to staff and kept by them, as well as any service charges kept by the tenant to pay employees, should be avoided. 
   
• Discounts: Any discounts given to employees or loyal customers, whether at the time of purchase or afterward, can be excluded from gross turnover.

Turnover rent leases can also have implications for lease renewals and rent reviews. Under the Landlord and Tenant Act 1954, a business tenant has the right to renew a lease on similar terms, which can complicate negotiations if the turnover-based structure has significantly impacted rent levels. Both landlords and tenants should factor this into long-term planning.

Why expert legal advice matters

Turnover rent can be a valuable tool for structuring commercial leases, but it requires careful negotiation and clear drafting. Whether you are a landlord looking to maximise rental income or a tenant seeking fair and sustainable terms, expert legal advice can help ensure your lease works in your best interests.

Our commercial property solicitors specialise in lease structuring and negotiation. If you need guidance on turnover rent or any other leasing matters, get in touch today.