Fact Sheet: Beyond Covid-19 – A Turnover Rent Resurgence?

Would-be commercial tenants no longer know whether to take on a new lease. Existing tenants are looking for ways to adjust arrangements with landlords in order to survive the impact of the recent lockdown. Could something reminiscent of the traditional turnover rent now be a way to pin rental levels to the performance of a tenant’s business, during a unique period of economic uncertainty?

Yes, but whereas historically, turnover structures would see a landlord share in the very good times with the tenant, we’ve now seen measures undertaken on a global scale which have had an unmatched negative effect on the performance of businesses with a necessary physical presence – cafes, bars, restaurants, and retail.

Whilst some sectors have thrived – data, hosting, and connectivity, as well as e-commerce and the tech industry – some others have seen their revenue decimated and through no fault of their own; not many businesses could have foreseen to protect themselves against the consequences of coronavirus.

Whilst we cautiously emerge from lockdown and do all that we can to avoid a second wave of the virus, the turnover rent approach could prove a useful tool, for both new and existing commercial tenants.

Traditionally, turnover structures would see a base level of rent paid (usually around 75-80% of the open market value), and a top-up element which would be a percentage of the tenant’s net turnover over a given time period – usually between 5-12%.

This would generally have to be in tandem with a landlord option to fall back on a full open market rent if turnover fell below a certain threshold, and in some specific cases, keep-open covenants by the tenant such that turnover could be optimised – obviously for the purposes of making life easier in the current circumstances, an ability for the landlord to do either of these things would defeat the object somewhat.

If we assume a period of zero turnover (no longer unthinkable), a base rent would at least provide the landlord with some degree of certainty of continued rental income, and some capacity to satisfy any related loan obligations and covenants. At the same time, the tenant might be cushioned from the very worst of any ongoing or renewed impact on its business.

But many businesses occupying commercial premises are no longer holding back in requesting full turnover rents across entire existing portfolios i.e. no base rent, solely a rent linked to turnover.

On the face of it, this will be hugely unpalatable to commercial landlords, but faced with the dual prospect of tenants that simply won’t survive if they must pay rent over and above a level linked in some way to their income, and a potentially pretty tough lettings market, turnover only structures might begin to look more feasible, perhaps even as a temporary measure.

A deferred rent structure in place alongside a wholesale turnover rent might soften the blow i.e. allow the tenant to pay a turnover-only rent, with a structure to claw back a perceived “shortfall” once certain conditions are met, or at a certain point in the term. These structures carry some risk in that there’s no guarantee the tenant will ever be able to pay the shortfall in the future, and if used, they should be carefully documented as to exactly how the shortfall will be calculated and with reference to which income figures, and when and how it is expected that any shortfall will be paid to the landlord.

And what else is there to look out for?

Turnover rent provisions in leases are reasonably complex, and the gathering and provision of evidence of turnover, as well as the potential professional verification or audit of calculations can be burdensome and costly. These calculations also have great potential to lead to dispute. Any party considering a turnover structure must take expert advice, and ensure that there is appropriate provision in the lease for dispute resolution.

The parties will also need to be clear on what is and is not regarded as turnover.

Traditionally, items such as VAT on goods, refunds or credits for returned or faulty goods, or allowances for exchanged or traded in goods, or customary discounts given by a tenant, would all be discounted for the purposes of calculating a net turnover. Tenants will be keen to carve out income from online sales too i.e. that not generated on the premises in question.

Implementation of a turnover rent would also be the time to consider re-tightening returns policies for goods sold – many retailers relaxed and extended these during the height of the lockdown, but when it comes to turnover rent estimates and calculations, good turnover visibility is important.

Whether agreeing new terms or amending existing ones (whether as temporary concessionary arrangements or via more permanent variations to leases), rent review and alienation provisions are also matters to consider.

How is any turnover rent, whether a temporary or permanent arrangement, to be treated on rent review? Will “usual” assignment and subletting provisions apply? Or, did the landlord envisage a turnover rent with one specific tenant in mind? If an assignee or subtenant coming into occupation on any basis remains a possibility, will the turnover rent provisions be suspended for all or part of the remainder of the term, and if so, what will the substitute rent be?

Lastly, the following should always be kept in mind if changes are being made to existing arrangements, whether they manifest as concessions or variations:

  • the circumstance in which, and for how long any temporary arrangements apply;
  • whether the operation of any break option could be frustrated by reason of payment of a reduced rent, however temporary;
  • whether the parties’ successors in title are bound by any new arrangements;
  • whether any guarantor needs to be a party to new documentation;
  • whether any third-party consents are required, from lenders or superior landlords or the like;
  • rent deposit arrangements, and whether they can be drawn upon if a turnover rent produces a perceived shortfall as against the usual full rent; and
  • where changes to existing leases amount to a variation, always seek tax advice particularly that pertaining to Stamp Duty Land Tax.

Fact Sheet: Employment matters to consider as we prepare to emerge from lockdown

The government has set out plans to take the UK out of lockdown and allow the economy to restart safely while continuing to minimise the spread of the coronavirus. It has issued and continues to issue guidance and mandate actions that businesses and individuals must take to support this effort.

We have no reason to believe that restrictions on how businesses operate will be lifted in the near future, and employers should plan now to meet their obligations in this regard.

As the government winds down the coronavirus job retention scheme, it is anticipated that a significant proportion of employers will face difficult economic choices regarding their workforce in the absence of government assistance. Employers should urgently consider what working arrangements, including working hours, shift patterns and rates of pay they will provide to their staff when flexible furlough is introduced on July 1st, and as government assistance under the job retention scheme is withdrawn.

This note provides some valuable, practical steps for businesses in relation to their employees and working practices as we cautiously resume ‘normal’ working patterns.

Digitalisation World talks to Conexus Law – Adjusting to life after lockdown

Digitalisation World talks to Marilyn Heward-Mills, an employment lawyer at Conexus Law – covering workplace advice for the data centre sector, as both employers and employees adjust to life after lockdown.

Fact Sheet: The Government Coronavirus Job Retention Scheme

The Coronavirus Job Retention Scheme, which is designed to support employers whose operations have been severely affected by coronavirus, will end on 31 October 2020.

Since 10 June 2020, no new employees may be placed on furlough other than parents returning from statutory maternity or paternity leave.

Until 31 July, employers can claim 80% of furloughed employees’ usual monthly wage costs, up to a cap of £2,500 a month, in addition to the associated Employer National Insurance Contributions and minimum automatic enrolment employer pension contributions.

From 1 August until the scheme ends, employers will begin to resume the burden of employee costs as set out below. HMRC launched an online portal on 20 April, where employers can make one claim per pay period.

Fact Sheet: Claiming interest and other costs

If you are owed money and are making a claim for it in a letter or email, do not forget to make a claim for interest and other costs that you may be entitled to…

Black Lives Matter: How employers can engage with the conversation, AMBA

Racism is an issue that lives within many organisations and employers should consider committing to making real and substantial change now, starting by engaging in the conversation with all employees, says legal expert Marilyn Heward-Mills

The shocking killing of George Floyd at the hands of law enforcement officers in the US, which has resulted in mass protests across the US and in the UK, has once again highlighted the disturbing reality of deep-rooted race discrimination within our society.

Although it might be tempting to confidently profess that racism does not exist within your workforce or business, that might not be the best conclusion to reach without further examination.

In the UK, the Equality Act 2010 prohibits direct and indirect discrimination and harassment in the workplace in respect of race (which includes colour, nationality, ethnic and national origin).

Nevertheless, racism is an issue that lives within many organisations, and employers should consider committing to making real and substantial change now, starting by engaging in the conversation with all employees, regardless of race or background.

Research shows that people from ethnic minority groups are often at a disadvantage in the labour market and are more likely to be unemployed and over-represented in poorly paid and unstable jobs. There is also a significant under-representation of ethnic diversity at the top of UK boards, as shown by the Government’s recent Parker Review.

Particularly, at this time, doing nothing might be damaging to your workforce morale and your reputation, and might not be the responsible business response.

Set out below are some practical steps that you, as a business leader, might consider:

  • Acknowledge that the death of George Floyd and the ensuing mass protests has an impact on your BAME (black, Asian and minority ethnic) employees.
  • Express your sadness and sympathy about the situation.
  • Clarify and communicate your organisation’s stance and values on the subject of racism.
  • Declare a commitment to begin or continue the process of open dialogue with your staff about how racism impacts them and your business.
  • Consider ways to engage meaningfully in the conversation around racism by creating a safe environment in which individuals can share their personal experiences and learn from each other.
  • Commit to listen to the concerns and needs of all of your workforce.
  • Commit to educate yourselves and your staff about the realities faced by BAME individuals in the work and social space, including those that you employ or transact with.
  • Ensure diversity and inclusion remain top of your agenda and commit to action that will ensure you achieve your goals.
  • Determine what other steps you must take to ensure racism is stamped out in your organisation and how you will build a diverse, supportive culture that is respectful and fair for all.
  • Commit to leadership and action and set targets for required change.

Marilyn Heward-Mills is an Employment Solicitor at Conexus Law.

Source: www.associationofmbas.com/black-lives-matter-how-employers-can-engage-with-the-conversation

Fact Sheet: Publishing a modern slavery statement during the pandemic

Under the Modern Slavery Act 2015, commercial organisations that meet the requirements below are required to publish an annual modern slavery statement setting out the steps they have taken to identify and address their modern slavery risks:

  • ‘body corporates’ or partnerships, wherever incorporated or formed
  • that carry on a business, or part of a business, in the UK
  • and supply goods or services
  • with an annual turnover of £36 million or more.

Fact Sheet: Update on Telecommunications Infrastructure (Leasehold Property) Bill 2019-21

The Johnson government plans to roll out UK-wide gigabit-capable broadband by 2025.

The Telecommunications Infrastructure (Leasehold Property) Bill 2019-21 is set to amend the 2017 Electronic Communications Code, so as to streamline the process by which network operators may gain access to multi-let residential properties.

It is hoped this will deal with the particular problem of the landlord who is unresponsive to requests to allow access.

Fact Sheet: Renegotiation – An art not a science

Chances are, that as a result of COVID-19, you are either going to have to seek to renegotiate your agreements with another party or deal with parties wishing to do so with you.

In respect of renegotiation, here are some points to consider…

Fact Sheet: Covid-19 – Should commercial tenants still pay the rent?

Yes they should, where possible, but less than 30% of commercial property rent was received by landlords for the March 2020 quarter.

There is an urban myth in circulation that tenants no longer need to pay their rent to landlords; that the government has instructed them not to; that they can shut up shop, cancel the rent payment, and with any luck, pick up where they left off when things are back to “normal”.