In our article UK: Alternative retail rental models - the rise of turnover rent, we examined the rental model shift from the traditional open market rack rent to a turnover-based calculation, and focused on the current market, negotiation and drafting challenges in the UK.

For this second article in our series on alternative rental models, we have surveyed our colleagues across EMEA, and consider the position in relation to turnover rents in this region.

Key takeaways

  • Turnover rents are not a new concept in EMEA, though it seems that they have enjoyed a resurgence and renewed interest during the COVID-19 market disruption.

  • Turnover-based rent arrangements were already common in jurisdictions such as the Czech Republic, France, Germany, Italy, Spain, and Sweden. Their turnover rents have traditionally been more evident in leases of larger retail premises such as in a retail mall, and in leases of stores on sites such as outlet villages and airports.

  • In some jurisdictions, turnover rents are market standard. For example in Turkey, retail mall leases are usually held on a turnover rent arrangement, regardless of store size, and turnover rents are also common for high street shops in areas with high footfall. In Russia, turnover rents are also very frequently used, again regardless of the area of the shop. In the UK, turnover-only deals are also becoming more standard in the market.

In more detail

Our COVID-19 Global Real Estate Guide and client alert on The position for landlords and tenants across EMEA at the start of 2021 highlight a strong tendency by governments across EMEA to support commercial tenants during the COVID-19 crisis. In some jurisdictions, tenants have benefited from express financial support such as rent-free periods, rent reductions or rent reliefs, hardship loans or business rates relief. In other jurisdictions, the government has not intervened in the amount of rent payable by tenants, but has restricted landlords' ability to take action for unpaid rent.

These measures meant that, during 2020, many tenants were protected from the worst financial impacts of reduced footfall and store revenues. Despite such interventions, many tenants continued to struggle.

As we begin 2021, nearly all EMEA jurisdictions have lifted restrictions on enforcement action by landlords (with the notable exception of the United Kingdom). Many programmes of governmental financial support are now also drawing to a close.

The current period of market disruption is not expected to ease significantly in the short term. Forecasted growth post-2021 is good (assuming continued significant progress with mass vaccination), but overall recovery for commercial real estate is predicted to lag behind general economic recovery by at least six months. Additionally, only limited resilience is predicted in retail real estate, with no recovery to pre-pandemic levels.

Therefore tenants are now being forced to focus even more sharply on how they can (re-)structure their lease arrangements in a more sustainable way to weather the continued market disruption.

In our updated COVID-19 Global Real Estate Guide we asked our teams in 39 jurisdictions about new market trends, and many reported a rise in turnover rents.

Many tenants are requesting that their open market rents are replaced with turnover rent arrangements. This has been observed in many EMEA jurisdictions such as France, Germany and the United Kingdom.

There is also renewed appetite for turnover rent arrangements in new leases, in jurisdictions such as Belgium, England and Wales, and the UAE.

Conversely, our colleagues in Germany feel that it is too early to determine whether there is a new trend towards turnover rents. Our Italian colleagues have not witnessed any trend towards turnover rents in a wider range of retail leases, perhaps due to the generous scheme of government support that was available to commercial tenants, who from March to December 2020 enjoyed a tax credit for a percentage of rents actually paid to their landlords.

Urban geography also plays a part: in countries where most retail is mall-based, there is a clearer dominance of turnover-based rental arrangements. Outside of EMEA, our Asia-Pacific based colleagues report turnover rents as market-standard and indeed almost ubiquitous in some jurisdictions. Within EMEA, high-street-based retail with independent stores and smaller-scale landlords does not necessarily lend itself to turnover-based rental arrangements in the same way. Complex lease drafting and onerous reporting structures in these circumstances may suit neither landlord nor tenant - here, trends point towards shorter-term leases or all-inclusive rents.

Conclusions

For multi-national companies facing the challenges of diverse legal responses across multiple jurisdictions, it is useful to compare what is market standard across these jurisdictions. A tenant wishing to move to turnover rents across its portfolio, in the interest of better sharing market risk and reward with its landlords, may find varying levels of acceptance between countries. Equally, a landlord with a bespoke turnover rent clause that it wishes to impose on tenants may find that those with operations in other jurisdictions have differing views on what provisions are acceptable to them.

For further information, or to discuss any of the points raised in this article or the COVID-19 Global Real Estate Guide, please get in touch with your usual Baker McKenzie contact.

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