Can a landlord demand a tenant pay turnover rent at lease renewal?

Turnover rents are becoming more common as tenants seek to balance the risk in relation to rental liability and as landlords seek to benefit from successful tenants’ upturn in sales.

But can a landlord demand that a tenant pay a turnover rent when that tenant comes to renew its lease?

This question was considered in the case of W (No.3) GP (Nominee A) Ltd & W (No.3) GP (Nominee B) Ltd v JD Sports Fashion plc. The case concerned the renewal of JD Sports’ lease in the Derbion Centre in Derby. JD Sports was already paying a turnover rent of 8% on gross sales and an annual base rate of £205,723.

Interestingly, the parties effectively swapped positions on the question of whether the new rent should include a turnover element, with the landlord seeking a turnover rent and the tenant seeking an annual fixed rent of only £17,700.

The court took the view that it could not impose a turnover rent in the terms the landlord had proposed, as it would sit uneasily with the provisions in the act under which rent is calculated. It ordered an annual fixed rent of £104,300, considerably less than the previous rent paid and without the turnover element present in the earlier lease.

What does this mean for retail tenants? To some extent, it strengthens their hand should they wish to avoid the inclusion of a turnover rent in any lease renewal under the act. The case highlights the opportunity for tenants in the current market to seek a rent reduction. It also underlines the view that tenants are in a strong bargaining position, with opportunities to reduce their rental costs.

It remains to be seen whether this case will be appealed and how much weight courts will attach to the judgment in future. However, it provides a useful marker for tenants to use in their negotiations when they renew and in the steps they seek to take to reduce their rental liabilities.

Nick Martyn is a partner in the property disputes team at Royds Withy King