Can I trust a high st tenant who wants a turnover rent using EPOS records?

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    Can I trust a high st tenant who wants a turnover rent using EPOS records?

    I would be grateful if anyone could advise me on the following matter. My tenant (a bar company) wants to re-gear the commercial lease on a high st property so that there is a basic base rent and then a turnover rent on top. The tenant states they use an EPOS system at the business and they will create a turnover certificate with EPOS records created by an accountant. Can I trust this? Thank you.

    #2
    Get a couple of people to drop in, pay by cash & see if it goes through till. (Probably will).

    All electronic systems can be fiddled. All paper systems can be also.

    Do their business projections show you ending up with more rent or less?

    Does company run just that bar or other properties as well?
    I am legally unqualified: If you need to rely on advice check it with a suitable authority - eg a solicitor specialising in landlord/tenant law...

    Comment


      #3
      Thanks a lot. I will get down there to buy a few drinks with cash and see if they put it through the till. The company runs a handful of bars and other businesses, mostly restaurants. It's big enough to be listed on the AIM stock exchange. Would that kind of company risk doing anything sneaky or find a way to lawfully under report? Presumably, if it goes through the till, there would be a paper trail, so they wouldn't risk it? If anyone else has any experience of dealing with this it would be good to hear your thoughts. Thanks.

      Comment


        #4
        I think if the base rent is ok ie at least 50 or 60% of Open market Rental Value its not a bad idea however it would have possibly less appeal to investors who buy commercial for what they hope would be certainty of income. I'd be fascinated to know what sort of a deal there is on the table. What proportion of sales are they offering as a turn over rent? I would suggest your solicitor drafts the lease very carefully so that at some point in the future perhaps at the tenth annual anniversary the rent is reviewed to full open market rental value with the turnover rent dropping away, so that you are not saddled with this arrangement eternally.

        Comment


          #5
          Presumably this has been brough about by the recent lockdowns.

          Many bars/pubs/cafes/etc. have been paying a set rent but not making any money because they were closed.

          So yours are simply looking to cover the possibility of that happening again, and if they can't open then only having to pay the basic rent because there will be no turnover.

          Whether that suits you or not is going to be down to just what is being offered.

          I'd at least want to see what their turnover was before the lockdowns, and what it's been since.

          You can then use those figures to try and judge whether with what they are proposing they would end up paying less rent overall (if they are quiet) or more rent overall (if they are busy) than they would with the current fixed rent arrangement.

          If you are not happy with those figures then negotiate for what you would be happy with.

          If their business takes off then it could mean more rent for you, if it goes quiet (or we do lockdowns again) less rent for you.

          You would be tying part of your rent into how they perform as a business.

          The one thing that does puzzle me a bit is why link it to turnover and not to profits?
          You can have a high turnover but make very little profit, or vice-versa.
          But presumably they know what their general turnover to profit ration is and are going off that.

          I wouldn't be too worried about any kind of 'not through the till/accounts' scams, bigger fish than you will be keeping a watch on things like that - HMRC.
          And if HMRC decide that they haven't been declaring enough and want more tax, then you could use that to sue for underpayment of rent on the same basis.

          Comment


            #6
            Turnover rent is popular amongst retailers because it enables risk and reward to be shared between a landlord and tenant for the duration of the contractual term.

            The two most common turnover rents are (1) a pre-agreed percentage of turnover with no minimum and (2) a pre-agree percentage of turnover subject to a minimum base rent up to 80% of the market rent. With (2) the percentage of turnover is payable only to the extent that it exceeds the base rent.

            Nowadays physical bricks-and-mortar store and online sales are often intertwined. The consumer buying process derives from the physical store, the website or a combination of them. For calculating a tenant’s turnover and the turnover rent payable how should the following be treated:-

            - Sales made from terminals or a smart phone app while a customer is physically located in store but where the goods are collected by the customer in store at a later date or delivered to a customer’s home

            - Click and collect’ purchases where a customer orders goods online but collects the goods from in-store

            - Refunds where purchases are made online but the customer later returns goods to the store.

            Physical shops are also used as ‘showrooms’ where customers view and try out goods before going home and ordering online. In this situation the physical store plays a part in generating the sale but there is no way of attributing the online sale to the store.

            EPOS systems are either computerised for transmission to head office or confined to the till itself. the latter likely in a. single shop. At the end of the day, a z1 report can be generated by the retailer to show the total sales and other figure. The only way (apart from hacking) an EPOS system for revenue can be fiddled is if the till operator after serving the customer removes cash (notes and notes) from the till drawer before manually closing the drawer. Payments by credit and debit card go through a separate terminal linked to the card provider.

            In factory outlet malls and such like, the lease is normally outside LTA54 and has a landlord break in the event the tenant's turnover does not meet a pre-agreed target. Rent review to market rent (subject perhaps to a minimum percentage uplift) is for the base rent either at the start of the lease or the revised base rent at the previous rent review. Other variations include that the rent payable cannot fall below the amount payable in the preceding year or cannot exceed a pre-agreed maximum level. Cap and collar percentages are also used; as are stepped percentages for different levels of turnover. For the op's example, turnover for drinks and turnover for food; another variation is for busy and quiet trading periods.

            The turnover should be net of VAT. It is unlikely the tenant would agree otherwise. (Debenhams Retail Plc v Sun Alliance and London Assurance Co Ltd (2005) and Manchester Associated Mills Ltd v Mitchells & Butler Retail Ltd (2013) and

            Retailers are likely to prefer the turnover calculation to be at the end of their financial year but that might not tally with the lease dates so careful drafting is required.

            To quote from an article in my law library:

            "There inevitably ensues a tough negotiation as to these proportions of base rent to turnover element, and then further issues ensure: access to accounts and fraud prevention, what about sales returns, often quite high especially with online clothes sales, are online sales even included, staff sales at cost, what about unpaid accounts and bad debts on credit sales, length of the agreement, the list goes on.

            Disputes on turnover figures become time consuming and expensive. Landlords will want more access inside the business if trust is to be maintained. Full audits may need to be undertaken periodically, inspecting and querying all business records which needs up-to-date and organised accounting systems, cash receipts, online sales data, VAT returns etc. All this adds costs and accountants will love it!"


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