John Lewis is being sued in the High Court by the current and past landlords of London’s Brent Cross Shopping centre (property company Hammerson and Standard Life Investments) over whether click-and-collect sales should be included in turnover rent calculations.
This case serves as a good example of how disputes can occur where leases pre-date the internet. It also shows the importance of careful drafting of the definition of “turnover” and “gross receipts”.
What is turnover rent?
Turnover rent is a commercial lease structure where rent is calculated, wholly or partly based on a percentage of the gross sales generated by a tenant’s business at that location.
It provides a fair-sharing approach for risks, reducing overheads for retailers in tough times while allowing landlords to participate in successful trading.
What is this case about?
The dispute centres on a 1979 lease agreement which pre-dated the internet and was agreed three decades before John Lewis offered click-and-collect services. John Lewis must pay a base rent of £30,000 a year, plus a cut of “gross receipts”. This works out that the retailer must pay the landlord 0.75% of the store’s gross receipts when annual turnover from the store exceeds £4 million. If annual turnover exceeds £10 million, the payment increases to 1% of turnover.
The lease specifies that “mail, telephone or similar orders received or filled at or from the demises premises or directed thereto” contributed to gross receipts. The claimants are seeking payment of backdated rents arguing that “gross receipts” as defined in the 1972 lease, should include online sales that are collected at the Brent Cross store, as well as online stores that are fulfilled from the store. Orders that are made in store, but which are fulfilled later from one of John Lewis’s delivery depots should also be included.
The defendants are arguing that online sales and related collection charges are exempt from turnover rent calculations because the transaction is completed when the product is dispatched from its main distribution centre to the relevant store, which means by the time the product has been collected by the customer, the product has already been sold. There are suggestions that they have also argued that the original lease could not possibly cover click-and-collect sales, since the internet had not been invented then.
Practical implications for landlords and tenants
- Expect disputes where leases pre-date e-commerce:
Older turnover-rent definitions sometimes try to capture non-in-store trading via wording such as “mail, telephone or similar orders received or filled at or from the premises”. This case shows that legacy wording may be argued to cover modern channels such as click-and-collect and ship-from-store, depending on the drafting.
- Advisable for landlord’s to review (and, where possible, tighten) the definition of “turnover”/“gross receipts”:
If turnover rent is material to value or funding, landlords will want explicit treatment of (i) online orders collected at the store; (ii) online orders fulfilled from the store; (iii) in-store orders later fulfilled from a depot; and (iv) collection/delivery/handling fees. Click-and-collect is often included in turnover-rent definitions, but clarity is key.
- Advisable for tenants to ring-fence digital revenue and avoid double counting:
Tenants typically push for clear exclusions (and accounting mechanics) so revenue is counted once, and so purely online sales are not treated as store turnover merely because the store is a collection point. Where the inclusion of click-and-collect and/or other omnichannel sales in turnover is accepted, tenants may seek a lower percentage or higher threshold to reflect the different economics.
- Data, reporting and audit rights become central:
Turnover-rent leases usually require periodic sales reports and allow landlord verification/audit. Both sides should ensure systems can produce the required splits (in-store vs online, collected vs delivered, fulfilled from store vs depot). Landlords often require transparency, which is sometimes driven by lender requirements, while tenants may have sensitivity/practicality concerns.
- Drafting takeaways for new leases or renewals:
It would be advisable to agree Heads of Terms that expressly address omnichannel issues i.e click-and-collect, ship-from-store, returns processed in-store, gift cards/vouchers, discounts, VAT treatment, refunds/cancellations, and the timing of when a sale is treated as “made” (order, dispatch or collection).
The Brent Cross v John Lewis dispute highlights how older turnover-rent drafting can struggle to accommodate modern retail models. For both landlords and tenants, the practical lesson is to define “turnover”/“gross receipts” clearly (including how click-and-collect and fulfilment are treated) and ensure the reporting and audit mechanics match the tenant’s sales systems.
For specialist advice on turnover rent drafting, disputes and retail lease strategy, please contact Lawrence Stephens.