Turnover rent arrangements in Ireland: legal and practical considerations

Turnover rents have become an increasingly important feature of Irish retail leasing.

Driven by changing consumer behaviour, digital sales channels and cost pressures, they are reshaping how many retail leases are structured.

In this article, our Real Estate experts consider the principal issues that landlords and tenants should address when agreeing and drafting turnover rent provisions, including the structure of the rent, the definition of turnover, reporting obligations, payment mechanics and dispute resolution.

What are turnover rents and how do they work?

Rather than fixing the tenant’s rent solely by reference to an open market figure, a turnover rent structure allows part, or in some cases all, of the rent to move in line with the tenant’s trading performance. This can offer flexibility for tenants and potential upside for landlords, but only where the arrangement is carefully documented.

The most common structure in the Irish market is a base rent plus turnover rent model. The tenant pays a fixed base rent, with additional rent payable where turnover exceeds an agreed threshold, usually calculated as a percentage of turnover. This gives the landlord a minimum income while preserving the opportunity to share in stronger trading performance.

A turnover-only model is typically more tenant-friendly, as rent is calculated solely by reference to turnover. It may be acceptable to a landlord where the tenant has a strong covenant, an established trading record, or the premises are expected to generate significant sales.

Defining turnover for turnover rent purposes

In the context of turnover rent, turnover is the agreed measure of the tenant’s trading income from the premises by reference to which the variable element of rent is calculated. It is critical that the lease defines turnover clearly, setting out not only the sales, services and other receipts to be included, but also the deductions and exclusions that may properly be applied. A well-drafted definition should reflect the tenant’s actual business model, including modern retail channels, while giving both landlord and tenant certainty as to how the rent will be assessed.

Potential inclusions

The definition of turnover should clearly state which receipts are included. Landlords will usually seek to capture income properly attributable to trade at, from or in connection with the premises, including orders originating, received or accepted there, even if delivery, performance or payment occurs elsewhere.

Non-traditional sales channels: the treatment of internet, catalogue, mail order and telephone sales should be addressed expressly. These sales may be included where they are received or fulfilled at or from the premises, or generated by staff operating from or reporting to the premises

Click and collect arrangements: these should also be considered clearly. The lease should make clear whether turnover is attributed to the collection store, the location from which goods are supplied, or the place where the order was placed or accepted

Ancillary income streams: turnover definitions may extend beyond vending devices, sales or services ordinarily attributed to the premises, and revenue-type grants, subsidies or fees connected with goods or services supplied at or from the premises

Gift vouchers and returns: specific provisions are often required to avoid double counting or unintended deductions. For example, vouchers sold from the premises may be included in turnover, with their subsequent redemption excluded. Similarly, turnover definitions should distinguish between refunds relating to sales previously included in turnover and returns of goods purchased elsewhere, which should not reduce turnover attributed to the premises.

Potential exclusions

The definition of turnover should identify permitted exclusions so that turnover rent is based on true trading receipts, rather than sums collected for third parties, reversed transactions, or amounts not properly attributable to completed sales.

Taxes and employee discounts: common exclusions include VAT, sales tax or similar taxes, to the extent paid over to the Revenue Commissioners. Customary employee discounts on goods or services supplied to employees may also be excluded from turnover calculations.

Refunds, credits and exchanges: refunds, credits and exchanges are typically excluded only where the original sale was included in turnover and the deduction does not exceed the amount previously included. Any replacement sale should generally be included where applicable.

Stock transfers: stock movements should be distinguished from sales. Transfers of stock to other premises may be excluded where they do not complete or divert a transaction attributable to the premises, while goods returned to suppliers may also fall outside the turnover calculation.

Promotional and ancillary charges: other exclusions may include promotional items, finance or service charges, routine alteration charges, permitted trade-in values, tips and gratuities that are incidental to, or separate from, the main sale.

Credit, instalment and hire purchase arrangements: The lease should clearly specify when turnover is recognised, commonly when the full cash price is recorded or payment is completed. Hire arrangements with an option to purchase should be addressed separately, including whether the transaction is treated as a sale for the full cash price and whether separate hire charges are excluded. Clear drafting is required to avoid double counting or unintended deductions.

Reporting, payment and verification of turnover rent

Turnover rent is usually payable in arrears, as it cannot be calculated until the relevant turnover figures are known. Where a lease provides for a base rent plus turnover rent structure, tenants should carefully consider interim turnover rent payments before the final position is established, as this may create cash-flow pressure. As a tenant, it is important to model a worst case scenario, taking into account VAT returns and other seasonal elements.

Payment reconciliation: where rent is calculated wholly by reference to turnover, monthly or quarterly payments on account are common, with reconciliation once certified figures are available. The lease should state when payments are due, how they are calculated, and how overpayments or underpayments are addressed.

Reporting and certification: landlords will commonly require regular turnover reports throughout the year, together with an end-of-period turnover certificate. The certificate may need to state gross and net turnover, trading days and be signed or audited by the tenant’s auditor or another qualified accountant. Tenants should ensure reporting obligations are practical, allow sufficient time for preparation and verification, and reflect what their finance team or auditor can properly certify.

Record-keeping and audit rights: the tenant should keep accurate accounting records throughout the term. Landlords may seek inspection or audit rights, with audit costs recoverable from the tenant if turnover has been materially understated.

Late reporting and dispute resolution: the lease should set out consequences for late or missing turnover information, including whether an independent accountant may determine the figures or whether the landlord may rely on a reasonable estimate pending certification. Where certified turnover rent exceeds the base rent already paid, the tenant will usually pay the balance as turnover top-up rent within the agreed period. The lease should address due dates, interest on late payment, and any shortfall identified by audit. Disputes may arise over turnover, deductions or top-up rent. The lease should include a clear dispute mechanism, commonly referral to an agreed chartered accountant, or one appointed by the President of the Institute of Chartered Accountants in Ireland, acting as expert or arbitrator.

Ultimately, a successful turnover rent structure depends on clear provisions governing reporting, verification, payment and dispute resolution. The drafting should give landlords sufficient transparency while ensuring the tenant’s obligations are practical and commercially realistic.

Wider lease considerations

While rent and turnover calculations are central to any turnover rent arrangement, landlords and tenants should also consider the wider implications for the lease as a whole. In particular, turnover-based leases can give rise to challenges in relation to assignment and underletting:

Assignment: a prospective assignee may be reluctant to take on a lease where the rent is linked to turnover, particularly where the financial performance of the business is uncertain. The parties may therefore wish to consider whether the lease should include a mechanism allowing the rent to revert to an open market basis on assignment or in other specified circumstances.

Underletting: turnover rent arrangements can also make underletting more difficult. Given the close financial relationship between the parties, landlords may be reluctant to rely on turnover information generated by a subtenant, while tenants may be unwilling or unable to provide the level of reporting and transparency required under the superior lease.

Five key takeaways

• Turnover rent can provide flexibility for tenants and upside for landlords, but the commercial structure should be agreed clearly at the outset. Make sure to consider knock-on impacts for the lease relationship over time, whether there are assignments or sub-lettings of the tenant's interest reasonably foreseeable

• The lease must define “turnover” precisely, including how modern sales channels such as online orders and click and collect are treated

• Permitted exclusions should be carefully drafted to avoid double counting, unintended deductions or disputes over what constitutes true trading receipts

• Payment, reporting and certification mechanics should be practical, transparent and capable of being verified by proper accounting records

• Clear audit rights and dispute resolution provisions are essential to ensure the turnover rent regime operates effectively throughout the term

When considering a turnover based arrangement it is important to take advice from experienced surveyors and legal advisors to make sure that what looks like a good deal on day one, does not become an unworkable and inflexible arrangement in the longer term.

How Ogier can help

Our Real Estate team in Ireland are highly experienced in all landlord and tenant matters, and work across a wide range of clients in the commercial property space. For more information on turnover rents or anything regarding Irish Real Estate law, contact the team via the details provided below.

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Disclaimer

This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.

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