Legal judgement to cut overheads
Debenhams has won a landmark court victory that could reduce rent bills for other retailers paying turnover-based rents. The case relates to Debenhams' Swindon store, where the landlord is Sun Life & London Insurance Company, and the lease includes a top-up element based on the store's turnover.

Within the lease, turnover is defined as the gross amount of total sales. The landlord believed that VAT was included within that definition of turnover when calculating the amount of turnover rent due. Debenhams disagreed and took the case to court.

Mr Justice Etherington found that both parties shared the risk involved in trading and the commercial purpose of turnover rent was to provide a fair and true view of the state of affairs of the tenant's profit and loss. He ruled that the sales should not include VAT, because this would not give a true and fair view of the tenant's profit and loss.

Anne O'Neill, head of real estate at law firm Coudert Brothers, said: 'Gross amount of total sales is a wide term, and you would think should include VAT. However, the commercial decision is undoubtedly right, turnover should not include VAT, as it is not a receipt, but a wash through. All well-drafted turnover rent leases should deal with VAT, and exclude it from turnover, to the extent it is accounted for to Customs & Excise.'

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