In an era of growing competition and shifting consumer behaviour, turnover rent is becoming a key tool for optimising the profitability of shopping centre owners while protecting tenants from excessive cost burdens. This article explores the most common legal and financial pitfalls associated with this rental model and presents proven control mechanisms to mitigate risk.
What is turnover rent? Fundamental structure and commercial rationale
Turnover rent is a lease-based remuneration model under which, in addition to a fixed base rent, the tenant is obliged to pay an additional rent dependent on the turnover achieved – typically calculated as a specified percentage. This structure is commonly used for retail tenants in shopping centres or malls. Its objective is to ensure risk-sharing and higher cost allocation associated with more frequently visited retail spaces between the property owner and the tenant.
Challenges in accurately accounting for turnover rent
Market experience and the reviews and audits conducted by our advisors show that turnover rent is an area with a high risk of errors – both unintentional and stemming from ambiguous contractual provisions or differing interpretations by the parties. Proper understanding and application of these clauses is crucial for both parties to the lease – in terms of securing the landlord’s revenues and minimising the risk of cost invoice corrections for the tenant.
Below are sample risk areas that can impact the proper settlement of turnover rent:
1. Lack of lease agreement standardisation
A lack of consistency in turnover rent provisions across different lease agreements (e.g. inherited through the acquisition of a property from previous owners) results in interpretational challenges and difficulties in verifying the accuracy of turnover data reported by individual tenants. Standardising and clarifying lease provisions should be considered a priority in lease portfolio management – both for owners of single units and for operators of large shopping centre portfolios.
2. Different approaches to product returns
Lease agreements often apply differing methodologies for recognising product returns in turnover calculations. Common approaches include:
- recognising only returns of goods originally purchased at the specific premises,
- recognising returns from the tenant’s entire retail network,
- excluding all returns from turnover, regardless of purchase location,
- unclear or incomplete contractual provisions concerning permitted turnover deductions,
- a complete absence of return-related provisions.
It is strongly recommended that the lease agreements clearly define which returns may reduce turnover and under what conditions. Otherwise, there is a risk of either deliberate underreporting or unintentional errors in tenants’ reported turnovers.
3. Handling of online sales and the ‘Click & Collect’ model
In the context of online sales – particularly within the “Click & Collect” model, where orders are placed online but collected in-store or via devices located on the premises – the absence of clear contractual provisions may result in such transactions being excluded from the turnover reported to the landlord. Market practices in this area vary widely, and the extent of these discrepancies can have a significant impact on the amount of turnover rent payable, depending on the nature of the tenant’s operations.
It is therefore essential to assess the extent to which a given tenant utilises online sales mechanisms with in-store collection. As previously noted, the fundamental purpose of turnover rent is to align the rent amount with the actual commercial performance of the specific retail unit. Where a substantial portion of customers make purchases online but complete the transaction in-store, such turnover should rightly be included in the rent calculation – as it represents revenue generated by that particular location.
4. Instalment and credit sales
Some tenants, when accounting for sales made on instalment plans or via consumer credit, recognise turnover only to the extent of actual cash received during the reporting period. However, most lease agreements require the entire transaction value to be recognised as turnover at the time of sale (i.e. when the credit is granted or the agreement is signed). Non-compliance with this principle results in understated turnover figures.
5. Handling of gift cards and vouchers
The sale of gift cards, membership cards or top-up vouchers raises the question of when the revenue should be recognised – for instance, at the point of sale or upon the final redemption by the customer. A lack of clear accounting policy may lead to:
- delayed revenue recognition (errors in the allocation of income between reporting periods),
- a failure to report revenue if the voucher or gift card expires unused.
6. Uncertainty regarding packaging deposit settlements (deposit schemes)
Particularly in cases involving tenants subject to statutory deposit-return systems (e.g. bottle deposit schemes), the question arises as to whether the amounts collected should be recognised as part of turnover. As a general rule, a deposit does not constitute revenue from sales but is a refundable amount temporarily charged to the customer. Therefore, determining whether it should increase turnover – and conversely, reduce turnover upon return – is crucial for the accurate accounting of the tenant’s turnover.
It is recommended that lease agreements explicitly define the treatment of deposit charges within the definition of turnover, thereby avoiding interpretative discrepancies.
7. Hidden turnover – the risk of incomplete reporting from Point-of-Sale systems
One of the potential abuses leading to the underreporting of turnover rent is the deliberate omission of sales data from some of the point-of-sale systems located within the tenant’s premises. In practice, this may involve mobile tills, temporary devices, or terminals processing specific types of transactions and even typical cash registers. The absence of an explicit obligation to register and report all revenue-generating devices increases the risk of systematic underreporting of turnover to the landlord.
From a landlord’s perspective, it is therefore crucial to include contractual provisions requiring the tenant to disclose a complete inventory of all POS systems operating on the premises and to ensure the ability to verify the completeness and accuracy of reported turnover data.
OCR clause and currency mechanisms as key components of turnover rent structure
In commercial leasing practice – especially in larger shopping centers and retail malls – rents are typically invoiced in euro, regardless of the currency in which the tenant conducts sales. This approach is due to the fact that the owners of commercial properties are often funds or foreign entities that operate in euro. As a result, although tenants generate revenues in local currency (e.g. PLN), turnover reporting for rent calculation must be converted into EUR according to a specified rate.
In this context, exchange-rate protections and additional rent control mechanisms – such as the OCR (Occupancy Cost Ratio) clause – are becoming increasingly important.
OCR clause – A flexible rent control mechanism
The OCR clause is used to define the maximum share of total occupancy costs (including base rent, turnover rent, service charge fees, marketing fees, etc.) in the tenant’s turnover. For example, if the OCR is set at 15%, it means that the total costs borne by the tenant should not exceed 15% of their net sales.
From the landlord’s perspective, the OCR clause functions as a safeguard against excessive cost burdens on the tenant, which could result in cash flow problems or lease termination. For the tenant, it provides a buffer – in situations where sales decline and fixed costs remain high, the tenant may be exempt from paying turnover rent or it may be calculated on a reduced basis.
Due to the flexibility of the OCR clause, it is crucial to define clearly:
- which charges should be included in the OCR calculation,
- whether OCR is calculated monthly or on a cumulative basis,
- whether the calculation is based on gross or net values (excluding VAT).
Incorrect interpretation of these clauses can lead either to underreporting turnover rent or, conversely, to incorrect rent calculation, which may result in disputes during audit.
Importance of exchange rates and minimum-maximum conversion clauses
In commercial leasing, it is equally important to include clauses defining the minimum and maximum exchange rates for converting turnover for rent calculation purposes. Since tenant revenues are generated in PLN and rents are invoiced in EUR, currency fluctuations can significantly impact both the tenant’s financial burden and the landlord’s revenue.
For example, in recent years the EUR/PLN exchange rate has fluctuated significantly:
- over the past 3 years, the rate ranged from approximately 4.45 PLN to 4.99 PLN,
- over a 5-year period, it ranged from approximately 4.20 PLN to 4.99 PLN.
Such changes can result in a difference of several percent in converting the same turnover into euro – directly affecting turnover rent amounts. Introducing a clause setting minimum and maximum exchange rates (e.g. between 4.40 and 4.90) limits the risk for both the tenant and the landlord. This mechanism can also be supported by automatic currency indexation or a right to renegotiate if thresholds are exceeded.
Summary
Turnover rent remains one of the most complex and fallible financial aspects within commercial lease agreements. It requires not only precise contractual provisions but also ongoing monitoring of the accuracy of reported figures and the consistency of applied practices with contractual terms.
Evolving sales models and non-standard mechanisms mean that insufficient oversight can lead to significant irregularities.
From a landlord’s perspective, even seemingly minor errors can result in a systematic underestimation of due income. For tenants, such errors pose the risk of unexpected additional payments following adjustments or audits.
Therefore, we recommend:
- regular review and harmonization of turnover rent provisions,
- analysis of actual market practices,
- and implementation of precise, clear, and verifiable control mechanisms.
For larger portfolios or properties with a diverse tenant mix, an independent audit of lease provisions and settlements adds further value. Such audits not only identify gaps and risks but also enable optimization of rent models and improvement of property profitability.
Our support
If you want to ensure that your turnover rent structure operates effectively and in accordance with the lease agreement, it is worthwhile to invest in its verification. Our advisors have extensive experience analyzing and optimizing turnover rent settlements in some of Poland’s largest shopping centers. We would be pleased to assist your organization as well.
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