Turnover rent in a digital age - a potential headache for landlords...
Faced with increased competition, and increasing market rents for food and beverage premises in central London, a number of landlords and restaurateurs are agreeing turnover rent provisions in their leases.
Turnover rents allow the parties to share an element of the risk on a new venture. The tenant will benefit from a lower market (or base) rent, which is typically set at 80% of the market value, with landlords receiving an additional rental payment if the tenant’s concept succeeds.
Turnover rent is usually calculated as a specific percentage of gross turnover which was historically defined as “all money (less VAT) received by the tenant from goods or services sold at the premises”. The advent of click and collect led to the definition of gross turnover being expanded to include “the cost of orders originating from or processed at the property” to bring income from online orders which are collected from the premises into the gross turnover calculation. This appears to have served landlords well up until now.
However, following the news that the Sethi Family (the siblings behind Gymkhana) are to open a “deliveroo only restaurant” the question of how to determine when a sale is not a sale is likely to become a pressing issue for many landlords.
To date, third party delivery companies such as Just Eat or Hungry House have provided a platform for restaurants to take orders through the company’s website. Often these will then have been processed at the restaurant thereby falling within the accepted definition of gross turnover. The income would then be included in the turnover rent calculation.
The problem now faced by landlords is that companies such as Deliveroo are setting up central processing kitchens, and letting space to restaurateurs such as the Sethis. It is therefore conceivable that a customer could walk past a restaurant on their way home, but place an order via a third-party website with the order then fulfilled from the central kitchen.
This scenario would seemingly remove the income from the turnover rent calculation as, at no point during the transaction, has the order been processed at the premises, even though the order might not have been placed if the restaurant had not had a physical presence in the area. The customer will be none the wiser but the landlord will be worse off.
Whether there is a way landlords can bring this income into the gross turnover definition, perhaps by linking income from third party central kitchens to deliveries within a certain radius of the premises, is debatable. But with a flurry of recent new entrants to the third-party delivery market this is likely to be a question that will bother landlords for some time.
Alex Hutchings is a partner in the property department at CBG Law and has a wealth of experience in acting for individual restaurants and multiple retailers. If you are a landlord looking to let space to a restaurant or a restaurateur looking to take new premises and would like a free initial meeting, please email ah@cbglaw.co.uk or call 0207 436 5151 to book an appointment.