Turnover Rent Case Reversed

Debenhams has been left to count the cost of a recent Court of Appeal decision, in which the appeal judges ruled that a lease term in which a turnover rent was included should be based on the department store’s turnover gross of VAT, not net. Turnover rents are rents that depend in whole or in part on the sales of the tenant.

Debenhams had successfully argued in a lower court that since normal accounting policy was to exclude VAT from the accounts of a business, it could not be included in the calculation.

The landlord disagreed. In this case, the relevant lease was entered into in 1965, which was before the introduction of VAT in the UK and when a system of purchase tax existed. Purchase tax was normally shown as a deduction form sales in the accounts of retailers.

The judges were persuaded that what was important in this case was what was in the minds of the people agreeing the lease in 1965, not modern accounting policies. The definition of turnover in 1965 would have included purchase tax and therefore to exclude VAT in the calculation of turnover for the purposes of the turnover rent clause would be unfair.

Modern turnover rent clauses should deal with VAT – which is normally excluded from the calculation – quite explicitly, but where a lease was entered into before 1973, there could be a problem.