On a turnover lease every sale the tenant moves down the road is rent the landlord loses. The radius clause is priced by the top-up it protects.
A radius clause is worth the turnover rent the landlord would lose if the tenant opened a competing store nearby, capitalised over the remaining lease term. On an illustrative unit paying a 200,000 base rent or 8 per cent of 3,000,000 of sales, a new store four miles away that diverts 15 per cent of sales cuts the top-up from 40,000 to 4,000 a year: 36,000 a year, 143,738 in present value over five years, which is the least the landlord should accept to release the clause.
Worked in full in Retail Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A radius clause stops the tenant, for the life of the lease, from trading another shop within a set distance of the centre, or counts that shop's sales as if they were taken in the centre. It exists only because of turnover rent. On a fixed rent the landlord does not care where else the tenant trades; on a turnover lease, every sale the tenant moves down the road is rent the landlord does not receive.
| Input | Value |
|---|---|
| Base rent | 200,000 |
| Turnover rent percentage | 8% |
| Store sales, ex VAT | 3,000,000 |
| Share of sales the new store diverts | 15% |
| Service charge | 45,000 |
| Business rates | 60,000 |
| Unexpired lease term | 5 years |
| Discount rate | 8% |
The rent is the higher of the base and 8 per cent of turnover. The natural breakpoint, where 8 per cent of sales equals the base, is 2,500,000; the arithmetic is in how to calculate the natural breakpoint.
Top-up = MAX(0, percentage × sales − base rent)
Lost top-up = top-up before diversion − top-up after
In Excel: =MAX(0,B3*B4-B2)-MAX(0,B3*B4*(1-B5)-B2), with base rent in B2, the percentage in B3, sales in B4 and the diversion in B5.
| Before | After | |
|---|---|---|
| Sales in the centre | 3,000,000 | 2,550,000 |
| 8% of sales | 240,000 | 204,000 |
| Top-up above base | 40,000 | 4,000 |
| Rent paid | 240,000 | 204,000 |
The tenant moves 450,000 of sales to the new shop and the landlord loses 36,000 a year. A 15 per cent fall in sales becomes a 90 per cent fall in the top-up, because the top-up is only the slice of sales above the breakpoint. That gearing is why the clause matters more than the diversion figure suggests.
Over five years at 8 per cent the annuity factor is 3.9927, so the lost top-up is worth 143,738 today, 180,000 undiscounted. At 6 per cent it is 151,645 and at 10 per cent 136,468. That is the minimum release premium: a landlord asked to waive the clause so the tenant can open nearby should not take less, and should take more if the diversion is uncertain or the lease is long.
The base rent is protected for the term. It is not protected at renewal, when the incoming rent has to be affordable on the sales the unit actually achieves. The occupancy cost of rent, service charge and rates was 345,000, 11.5 per cent of sales; after the diversion it is 309,000 on lower sales, 12.1 per cent.
If the trade's ceiling is an illustrative 12 per cent of sales, the rent the unit can bear was 255,000 before the new store and 201,000 after: barely above the 200,000 base. At renewal the landlord is negotiating from the diverted sales, and the new rent may have no top-up headroom at all. The method is in how to calculate a retailer's occupancy cost ratio.
| Diversion | Centre sales | Top-up | Lost a year | Present value |
|---|---|---|---|---|
| 5% | 2,850,000 | 28,000 | 12,000 | 47,913 |
| 10% | 2,700,000 | 16,000 | 24,000 | 95,825 |
| 15% | 2,550,000 | 4,000 | 36,000 | 143,738 |
| 20% | 2,400,000 | 0 | 40,000 | 159,708 |
| 30% | 2,100,000 | 0 | 40,000 | 159,708 |
Beyond a diversion of 16.67 per cent the top-up is gone and the in-term loss stops growing at 40,000 a year. Above that point the clause protects only what is left of the base rent's affordability at renewal, which the table does not show and which can be the larger number.
Either form has to be reasonable in distance and duration to be enforceable, and restrictive covenants in leases can raise competition law questions; take legal advice on the drafting. The money question is the same either way.
Valuing the clause as a share of the top-up: 15 per cent of 40,000 is 6,000 a year, a sixth of the real loss. Every diverted sale costs the landlord 8 per cent of its value, and all of it comes out of the top-up until the top-up is exhausted. So the loss is set by where sales sit against the breakpoint: on a unit trading well above it, the clause protects 8 per cent of everything diverted; on a unit just above it, a small diversion wipes out the whole top-up; on a unit below it, the clause is worth nothing in the term and matters only at renewal. Always run the top-up before and after. The mechanics of the top-up are in how turnover rent is calculated.
Compute the top-up before and after the diversion, capitalise the difference over the unexpired term, and add the renewal risk on top: 143,738 here before the renewal question. Retail Real Estate treats every rent as something the tenant's sales reveal, and the free workbooks for the book run occupancy cost and rent capacity unit by unit.
A covenant that stops the tenant trading another shop within a set distance of the centre, or counts that shop's sales as turnover under this lease. It protects turnover rent. In the illustrative case, a store diverting 15 per cent of sales would cut the landlord's turnover rent top-up from 40,000 to 4,000 a year.
At least the present value of the turnover rent it would lose over the unexpired term, plus an allowance for weaker rent at renewal. Losing 36,000 a year for five years at 8 per cent is 143,738; at 6 per cent it is 151,645. A longer lease or a less certain diversion justifies more.
Much less. Without turnover rent the landlord loses nothing in the term when sales move elsewhere. The remaining risk is renewal: lower sales cut the rent the unit can bear, here from 255,000 to 201,000 at an illustrative 12 per cent occupancy cost ceiling.
This article is one calculation from Retail Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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