July 7, 2020

Turnover rents underpin AllSaints CVA, say their real estate solicitors RWK Goodman

RWK Goodman acts for AllSaints on real estate matters in the UK, including its move to turnover rents.

Vicky Hernandez, a Partner in the Real Estate team at RWK Goodman comments:

"Turnover rents are not new but have been slow to take off across the wider retail sector because they create very real challenges around where gain and pain are shared. The agreement announced today between AllSaints and its landlords marks a major milestone in the wider adoption of turnover rents and a true partnership between retailer and landlord.

"Turnover rents typically see a landlord accepting a base rent of around 80% of open market rental value with the remaining 20% based on turnover. But that is changing.

"Whilst the agreement AllSaints has reached with individual landlords remains confidential, we have recently seen examples of turnover rents across the retail sector where there is now no base rent, with the amount of rent receivable by a landlord based entirely on the tenant's turnover.

"Typically, a tenant might agree to pay between 10 and 15% of its net sales as rent to a landlord, but turnover rent percentages can vary depending on the projected performance of a particular store and how key it is to a retailer's store portfolio.

"The way in which landlords and retailers agree to define 'net sales' can present challenges since it is so important in calculating the amount of rent that will be payable. As an example, the way in which online sales are treated can be difficult to agree.

"Retailers might understandably be reluctant for online sales to be used in determining rents when shoppers have no interaction with a store. Landlords, on the other hand, might feel put out if net sales do not include click and collect sales from a particular store. Gift vouchers are another area of discussion; should a gift voucher be included within net sales at the point of purchase or the point of redemption?

"There are so many more examples of similar issues to be determined and, whilst solicitors can predict and address such issues in the drafting of a lease, the true answer rests in a much more open and honest relationship where retailers provide landlords access to detailed financial and footfall information.

"Turnover rents will increasingly look attractive but will continue to be challenging for both landlords and retailers."

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