Minimum guaranteed rent
Some lease agreements include a minimum guaranteed rent to ensure a stable income for the lessor. This fixed amount must be paid by the lessee in each rental period, such as monthly, quarterly, or annually, regardless of the lessee’s sales or business performance. This guarantees the lessor a consistent income, even when the lessee’s sales are low.
In many commercial leases, especially retail, the total rent may include two components:
• A fixed minimum guaranteed rent that the lessee must always pay.
• An additional turnover rent, based on a percentage of the lessee’s sales above a specified breakpoint.
The minimum guaranteed rent is always due. The turnover rent is only paid if the lessee’s sales exceeds the agreed breakpoint.
There are two ways this minimum guaranteed rent can be applied:
• Per settlement period
• Accumulated over the reporting period
Per settlement period
In this scenario, the minimum guaranteed rent is checked for each individual period. If the calculated turnover-based rent is less than the minimum guaranteed rent, the lessee pays only the minimum guaranteed rent. If the turnover-based rent is higher, the lessee pays the difference as turnover rent.
Example:
The minimum guaranteed rent is $5,000 per month.
• In one month, the calculated turnover-based rent is $6,028.
The lessee pays $6,028 in total, which includes the $5,000 minimum and $1,028 extra turnover-based rent.
• In another month, the calculated turnover-based rent is $4,899.
The tenant pays $5,000, which is the minimum. No additional turnover-based rent is due.
Accumulated over the reporting period
In this method, both the minimum guaranteed rent and the turnover-based rent are added up over a longer period (for example a year). Only when the total turnover-based rent exceeds the total minimum guaranteed rent does the lessee pay extra.
Example:
The minimum guaranteed rent is $5,000 per month.
• After five months, the total minimum rent is 5 x $5,000 = $25,000. The total turnover-based rent is $24,698. No turnover-based rent is due because the minimum has not been exceeded.
• After six months, the total minimum rent is 6 x $5,000 = $30,000. The total turnover-based rent is $35,888. The lessee pays an additional $5,888 in turnover-based rent ($35,888 - $30,000 = $5,888).
• In the seventh month, the year-to-date minimum rent is 7 x $5,000 = $35,000, and the total turnover-based rent is $38,123. The total amount of turnover-based rent that was already settled in previous months is $35,888. The turnover-based rent due this month is $38,123 - $35,888 = $2,235. This prevents the lessee from overpaying.