11 August 2022

Opinion from Adrian Leopard & Co

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Turnover based rents – could this be the way forward for the future in hospitality? Could it herald the difference between survival or insolvency?
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Turnover based rents – could this be the way forward for the future in hospitality? Could it herald the difference between survival or insolvency?

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Whatever else Covid-19 has done, it has taught us significant lessons in relation to business matters. We need to be ready in case it happens again in the future

As things stand, a lease is not an asset – it is a liability other than in very limited circumstances. This fact has never been better known than it has during the pandemic lockdown. Businesses have had to close by government order but their rents continue to accrue and become due. The only relief has been a relatively minor relief in terms of deferring eviction. Certainly in the hospitality industry, many operators are coming to the end of the furlough scheme and facing re-opening for trade – or not – with a big liability remaining due to the landlord.

However, a sea change in the retail sector is bringing about an increased acceptance of the idea of turnover-based rents, meaning that when the bad times come and revenue stops, down goes the rent, perhaps also to nil. By the same token, with a turnover-based rent a landlord is going to want to see a healthy return in the days of plenty. This form of contract is in effect the creation of a partnership of sorts between landlord and tenant. It has the advantage from the tenant’s point of view that if he ceases to trade for a period, the rent does not continue to accrue against him. Equally this form of return could impact seriously on a landlord who may still have mortgage liabilities to meet and who may have little influence in the creation of revenue for the business occupying his premises.

As things stand, this idea has not been adopted to a great extent yet in the case of pubs, restaurants and hotels but landlords are beginning to look at it, notably with the recent Travelodge CVA issue. Moves are afoot to introduce some new lease structures, one of which is a base rent and a share of turnover. It is early days at the moment for such an approach to become “a norm” but it could become accepted over a period once the difficulties have been addressed and suitable protective moves taken for both sides of the deal. Without a doubt, in times of lockdown and compulsory closure, such a deal could be a huge boon for a hotel or restaurant – knowing that the rent which is usually a hefty part of the overheads, is to be reduced or even eliminated could save a business from total closure and insolvency. It may mean that the rent in good times becomes even more hefty but this could be seen as a sort of insurance against the bad times.

What is important to note is that any tenant or lessee contemplating entering into a turnover-based rental agreement ought to take proper professional advice so that the effects of the deal can be clearly seen, depending on whether the business goes well or not. For landlords, it may be that provisions should be included to enable them to take action should their tenants not be operating the premises in the most financially effective manner. Imagine a tenant deciding suddenly to “close for the winter”, thereby eliminating the possibility of revenue and thereby paying no rent. This would obviously not be acceptable to a landlord so the lease or tenancy agreement would have to be carefully drafted for his protection too.

One of the schemes on the market today is where a hotel will “lease” a bedroom to a third party as an investment. This could be a long lease and therefore provide to the investor what may be considered to be a safe and secured investment. Unfortunately where the hotel in question becomes insolvent, the owners of the bedrooms will find that their revenue stops and that this is out of their control. Whilst it could be structured that the investment is secure, the problem could be that the value of the security reduces to very little. Similar issues have been seen with holiday-share arrangements – what might have been perceived as excellent investments end up not being worth the paper they are written on.

All this is fodder for future dealings but the fact remains that a lease is still a liability rather than an asset and care and professional advice should always be taken before entering into one.

Adrian Leopard 15-08-20

Photo Simone Natale

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Adrian Leopard & Company is the trading name of Alderney Offshore Ltd, a company registered in Alderney, Channel Islands number 1220.

Address P O Box 1027, Alderney GY9 3AS

Registered Office Seldomin, Longis Road, Alderney GY9 3YB.

Adrian Leopard & Co is represented in the UK by 3CL (UK) Ltd trading as Adrian Leopard Associates.

Telephone enquiries may be made on 05603-681921 or 01684-230360.

E Mail [email protected]

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