Will turnover rents affect your online business?

Turnover rents are an increasingly common feature of commercial property leases, particularly in the retail sector, and they can feel confusing if you have never come across them before so allow us to explain.

A turnover rent is simply a way of linking the rent you pay to the amount of sales you generate.

So, how does it work? Instead of paying a fixed rent that has no connection to how well your shop performs, you pay a base rent. What seems attractive to the tenant is that this can be lower than expected. Then, if your turnover exceeds a certain figure, you pay a percentage of the additional sales as extra rent.

Simply put, if your base rent is £50,000 a year and your lease specifies that you pay 10% on turnover above £500,000, then in a year where you turn over £600,000 you would pay £60,000 in total rent. In a weaker year where you only turn over £300,000, you would just pay the £50,000 base rent.

The idea is to create more of a partnership between landlord and tenant, in good years of trade the landlord shares in your success, while in years that may have dips in turnover you don’t have to worry about being overburdened by a rent you cannot afford.

On the surface this seems fair, but the detail of how turnover is defined, particularly for businesses that also sell online, is where things get tricky. Turnover rent is based on sales, not profit. That means it doesn’t matter what margin you are making, it only matters how much money has passed through the till. If you sell an item for £100, even if your cost of supply was £90, the full £100 is treated as turnover.

Where online sales come into play is in deciding which parts of your digital business are connected to the shop unit you are renting. If you run a pure e-commerce business with no physical store, turnover rent is unlikely to apply.

However, if you have a shop that also operates as a click-and-collect point, or if orders are placed online but processed or fulfilled via that store, landlords will often want to count those figures as part of the turnover linked to the premises. For example, if a customer places an order online but chooses to pick it up in-store, most landlords will argue that the sale should count towards the store’s turnover.

This is where careful drafting of the lease becomes essential and an experienced solicitor is required to do just that. The turnover rent provisions should make clear what does and does not count as turnover, ultimately, tenants will want to limit it to in-store sales, while landlords may push for a broader definition that includes online sales connected to the store in any way.

This can include click-and-collect orders, goods ordered in one branch but collected at another, or even cases where the store operates as a showroom for online purchases.

For businesses with online sales, it is vital to understand these definitions before signing.

Otherwise you could end up paying significantly more rent than you expect if a large portion of your e-commerce trade is swept into the turnover calculation.

Turnover rents can be fair and flexible, but only when you know exactly what is being measured and how it ties into your operations. That is why most tenants need legal advice before committing to a lease with turnover rent provisions.

There really is no straight answer, as it is at the discretion of the contract holder and the short answer is: sometimes they do, and sometimes they don’t.

It all comes down to how the turnover rent clause in your lease is drafted, and this is where misunderstandings can easily arise and where skilled solicitors come in.

Traditionally, turnover rent was about in-store sales only, and ultimately this is due to the fact that a landlord could easily verify these figures from the till systems and audited accounts, and both sides could agree that the rent reflected the physical shop’s performance.

But as online sales have grown, and as shops are increasingly used for click-and-collect and showrooming, landlords are more inclined to argue that these digital transactions are part of the shop’s turnover too.

If an order is placed in one store but fulfilled from another location, questions arise as to which store’s turnover it should be counted against, this is why legal clarity is crucial on the contract.

Some landlords will go even further, suggesting that if your store acts as a showroom where customers view items before ordering online, those online orders should also be treated as part of turnover.

From a tenant’s perspective, this can be worrying because the wider the definition of turnover, the more rent you may end up paying. Including online sales can inflate your turnover figures significantly, without necessarily reflecting the costs or logistics behind fulfilling those orders.

For example, online sales might be fulfilled from a central warehouse with very different overheads, but if they are counted towards your store turnover, your rent liability could jump disproportionately.

This is why it is so important to scrutinise the lease terms carefully. Landlords want to maximise what counts as turnover, tenants want to minimise it, and the final position depends entirely on what is agreed in writing.

Ultimately, there really is no single rule across the board, what is clear though is that landlords are increasingly pushing for online orders to be included in some form, especially when the store is used in any part of the transaction.

If you are negotiating a lease with turnover rent provisions, you should assume that online sales could be an area of contention, and make sure it is clear in the contract. Having clear definitions that exclude certain types of e-commerce or that only include specific scenarios like click-and-collect, will help you avoid surprises later.

In practice, most landlords will expect at least some online sales to be included, but tenants can and should negotiate where those boundaries are drawn.

For a retail business that also sells online, turnover rent clauses can have a major impact, both positive and negative so it is crucial that they’re in the contract and that you understand them and how they can impact your business or your property.

On the positive side, a turnover rent arrangement means that your base rent should be lower than what you see on the market. So, there is the safety net of being aware of your rental outgoings during difficult trading years.

This flexibility can make it easier to take on premises and grow your business without being overexposed in the early years.

However, the real challenge comes from how turnover is defined in the lease.

For a business with both physical and online sales, the line between what counts as in-store turnover and what does not is often blurred, solicitors can help to un-blur that. If click-and-collect sales, online orders placed in-store, or showroom-driven sales are all included in your turnover figures, your rent liability may be far higher than you expect.

For instance, a shop that is used more as a collection point than a traditional store could see its rent climb substantially if every online transaction connected to that shop is swept into the calculation.

Another consideration is the administrative burden. Turnover rent clauses usually require tenants to provide detailed and verified turnover figures, often with professional auditing at least once a year.

For a retailer with significant e-commerce operations, splitting out which sales should be allocated to which store can be complicated and time-consuming, you need to set time aside and make sure it is accurate. If the definitions in the lease are vague, you may find yourself in disputes with your landlord over what should or should not be counted.

There is also the potential impact on how you run your business, it is something to think about especially if you expect turnover rent to be heavily tied to in-store and click-and-collect sales. This is due to the fact that you may be less inclined to promote online services connected to that shop, because higher turnover directly translates into higher rent.

In other words, the rent model could influence your business decisions in ways you had not anticipated, so it is important to think about whether this kind of rental aligns with your business plan.

On the other hand, landlords see turnover rents as a fairer system that creates a win–win relationship. If your business does well, they share in that success; if your business struggles, they still have an expected income.

For many tenants, this partnership approach is attractive. The key is to ensure that the terms are fair and that you have a clear understanding of what counts as turnover. If your lease is carefully drafted, turnover rent can give you flexibility and support as you grow.

If it is not, you could end up paying more than you bargained for, especially if your online sales are swept in.

The impact of turnover rent clauses on a retail business with online sales really depends on negotiation and clarity. With the right advice, you can structure the lease so that it supports your growth without penalising your digital success.