26 August 2026
1954 Act Consultation – turnover rent
In the seventh instalment of our deep dive into the Law Commission’s second consultation on the Landlord and Tenant Act 1954 (the “1954 Act”) we consider the Commission’s proposals on turnover rent.
The 1954 Act currently has limited application to turnover rents. As part of its consultation, the Commission explores whether and how the Act can be updated to cater for the increased use of turnover rents in the retail and hospitality sectors.
A turnover rent is one that, in whole or part, takes into account a percentage of a tenant’s takings when calculating the annual rent. Historically they are peculiar to certain trades, such as cattle markets and hospitality. However, since Covid they have become popular in the retail sector. They are a useful tool for insolvency practitioners to vary rental obligations, especially for unsuccessful retail units.
The most familiar model is a base rent with a turnover top-up based on paying a percentage of income above a turnover threshold.
In 1954, turnover rents were unusual and unlikely to have been in legislators’ minds when they drafted section 34 of the 1954 Act. There have been a sparse number of cases over the years about renewals with turnover rents. However, it has been generally accepted that County Courts have jurisdiction to determine turnover rents, although these decisions are fact-specific and not binding. What has not been considered judicially is whether the court has power to change the rental model in a lease on renewal, and how consequential changes will be dealt with. How can the Act overcome the fact that turnover requires a valuer to have regard to the particular facts of the occupational tenant when this is wholly at odds with section 34 which requires the court to disregard the existence of that tenant?
Clearly these challenges would have to be met if the 1954 Act were to include rental models other than rack rent. The Law Commission therefore invites comments on 5 questions:
Can an existing turnover rental model be carried forward on renewal?
As previous non-binding decisions have confirmed that the County Court has jurisdiction to order this, the Commission provisionally reaches the same view.
Should the court have power to change the rental model, for example from a rack rent to a turnover rent or vice versa?
The risk profile of each model is different, with the tenant bearing all of the risk of a rack rent whereas it is shared for turnover rent. The Commission identifies that there are arguments both ways: why should a landlord have to subsidise a tenant’s business or incur monitoring costs, both of which apply with a turnover rent? Alternatively, a tenant may be against a turnover rent if it might overcompensate the landlord where the underlying business is very successful.
How should the court decide the rental model if the parties cannot agree on it?
The Commission has considered and rejected two tests for such determination. The first of these is that a change should only be made if it is fair to do so, as per the O’May test (which Tom Mills discusses here), which is used for other terms of the lease (other than rent and length of term). Due to the change in risk profile, the Law Commission feels that a court would always consider the change unfair. The second is to look at the current market conditions, in the same way that open market rent is assessed. Therefore, the court would ignore the circumstance of the actual parties.
Instead the Commission favours a bespoke test comprising aspects of each of these tests. What rental model would be agreed in the open market on a renewal, and what detriment (if any) would that cause to either party? A balancing exercise would be required.
If the rental model changes to a turnover basis, how should the court decide the bespoke and other linked provisions required?
The Law Commission’s view is that the bespoke provisions would not be problematic: new provisions would be added in and redundant ones removed. As regards the linked consequential terms, some more restrictive terms might be required to balance out the inclusion of a turnover rent, or more relaxed terms where the tenancy changes to a rack rent.
The Law Commission concludes that these changes will be more difficult to decide and that, again, the O’May test alone would be inappropriate. Instead, they recommend (but also invite comments on) looking at what is typically agreed in the open market and then tailor the terms to the particular premises and parties. They acknowledge that this test would be an exception to the general principle and could prove more costly for the parties, as expert evidence may be required.
How should the court determine turnover components: base rent, turnover percentage and turnover threshold?
The view expressed is that these should be determined by reference to what would be agreed in the open market. However, because the actual tenant may also be the hypothetical tenant, it is also necessary to consider the circumstances of the actual tenant. Even so, the Law Commission thinks it remains important to disregard the tenant’s occupation, improvements and goodwill. Changing other assumptions and disregards might also be necessary but may lead to a more complex valuation. The tenant may also lose the financial benefits it enjoys from being able to renew its tenancy. For these reasons, the Law Commission invites views on whether it is possible to come up with a workable test and what that might be.
Finally, while the Law Commission has concentrated on turnover rents, it has invited views on similar issues in relation to other rental models. One such model could be rent review provisions other than to open market rent, such as indexation. The same considerations would apply: should indexation in a rack rent lease continue into a renewal lease? Can the review provisions change on renewal from open market to indexation and vice versa? The Law Commission therefore invites comments on potential alternative models and reasons why the Act should be extended to them.
Comment
The Commission’s proposals are sensible and a welcome attempt to ensure that the 1954 Act remains relevant to modern commercial leases. They are not without their challenges, however, and it will be fascinating to see whether all stakeholders will find them acceptable in any event.
In our next article, we will be exploring the Commission’s proposals for the redevelopment ground of opposition (ground f).
Consultees are invited to respond by 16 September 2026.
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Dellah Gilbert
Partner, Real Estate Disputes
