Complete Freedom at the Outset — and Why Drafting Matters
When a commercial lease is first signed, the parties set the rent entirely freely. Article L. 145-33 of the Code de commerce — which provides that the rent must correspond to the rental market value — applies only to reviewed or renewed leases, not to the initial rent. At origin, the parties are governed solely by contract freedom and market forces. The initial rent agreed becomes, by definition, the market rental value of the premises at that point in time.
Rent is one of the essential elements of a commercial lease. An arrangement with no real and determined price cannot be a lease — it would be a loan for use under Article 1875 of the Civil Code. The price may be modest or below market, but it must exist as a genuine financial obligation. Covering only charges, taxes, or works is insufficient (CA Lyon, 6 September 2005).
Rent-Free Periods and Reduced Rent: Structuring Incentives Correctly
A rent-free period (franchise de loyer) exempts the tenant entirely from paying rent for a defined initial period (typically two to six months) while they carry out fit-out works. The tenant still owes service charges. A reduced rent period (allègement de loyer) sets the rent at a lower level for the first year or two, stepping up to the headline rent thereafter.
The lease must always clearly state the contractual headline rent — the full amount before any franchise or reduction — because this is the base from which the statutory three-year review cap and the renewal rent cap will be calculated. If the lease only states the reduced or nil rent without identifying the underlying contractual rent, courts may treat the reduced figure as the rent for cap calculation purposes, which severely disadvantages the landlord at every subsequent review.
There is also a VAT risk: the tax authorities take the position that a rent-free period granted in exchange for works constitutes a mutual exchange of services, and VAT is chargeable on the franchise amount. The safest structure is to provide a gratuitous pre-lease "works access period" rather than a franchise within the lease term.
Stepped Rent
A stepped rent (bail à paliers) fixes different rent levels for defined periods within the lease term — typically the three triennal periods. A clause that fixes a flat annual increase without reference to an index is also a stepped rent (Cass. 3e civ., 22 June 2022, n° 21-16.042). Stepped rents interact in complex ways with indexation clauses and the statutory three-year review: the parties need to decide which figure forms the base for review calculations at each step, and whether the step displaces the indexation mechanism or runs alongside it. These interactions should be worked through explicitly in the lease.
Turnover Rent Clauses: Freedom from Statutory Review — At a Cost
A turnover rent clause (clause recettes) links the rent — in whole or in part — to the tenant's annual revenue. The two standard structures are the pure turnover rent (rare, as the landlord bears full commercial risk) and the binary rent (loyer binaire): a guaranteed minimum rent plus a variable element equal to a percentage of turnover above a threshold.
Turnover clauses fall outside the statutory rent revision mechanisms of Articles L. 145-38 and L. 145-39 and are governed solely by the parties' agreement (Cass. 3e civ., 5 January 1983; Cass. 3e civ., 18 June 2002). This freedom cuts both ways: no statutory caps, but without a properly drafted renewal clause, the guaranteed minimum rent can be frozen at its original level through all renewals. Modern shopping centre leases address this with detailed renewal clauses specifying exactly how the minimum guaranteed rent is fixed at renewal — typically by reference to market rental value within the centre. The Court of Cassation confirmed in two rulings of 3 November 2016 that where the parties confer on the commercial rent judge the power to fix the minimum guaranteed rent at market value, the judge must do so under Article L. 145-33.
Any turnover rent clause must precisely define what constitutes "turnover" for the variable calculation: which revenues are included, how online sales or click-and-collect are treated, how VAT and returns are handled, and what reporting obligations and audit rights the landlord has. Vague drafting regularly leads to disputes over whether the variable threshold has been reached and whether the landlord's auditors have the right to inspect the tenant's accounts.
Key Money (Pas-de-Porte): Supplement or Indemnity?
Key money (droit d'entrée or pas-de-porte) is a capital sum paid by the tenant to the landlord at the start of the lease. It survives primarily for premium locations and has significant tax and legal consequences that depend on how it is legally characterised — a distinction the parties must make explicitly.
| Characterisation | Tax treatment | Effect on review/renewal base | Effect on eviction indemnity |
|---|---|---|---|
| Rent supplement (supplément de loyer) | Tenant: deductible charge; amortisable. Landlord: taxable as rental income. | Spread over the lease term (÷ number of years) and added to the contractual rent to calculate the review/renewal base. | Does not form part of the eviction indemnity assessment. |
| Compensatory indemnity (indemnité compensatrice) | Tenant: neither deductible nor amortisable. Landlord: not taxable as rental income. | No reintegration into the rent base for review or renewal purposes. | Becomes an element of loss the tenant can claim in the eviction indemnity calculation. |
Civil courts will not requalify a pas-de-porte that has been expressly characterised by the parties (CA Paris, 4 May 1995). However, the tax authorities are not bound by the parties' characterisation and will look at the economic substance — if the lease grants particular advantages or the rent was set below market value, they will treat the key money as a rent supplement regardless, and may assess VAT on the full amount. Failing to characterise the key money creates a significant tax reassessment risk and potential drafter liability. Calculation consequence: for a 9-year lease with €10,000 annual rent and €9,000 key money, the review and renewal base is €11,000 (€10,000 + €9,000 ÷ 9).
Drafting the Renewal Rent Clause: The Decision That Pays Off Nine Years Later
Articles L. 145-33 and L. 145-34 govern the fixing of the renewal rent and the capping of any increase, but they are not of mandatory application. The parties can agree at the outset how the renewal rent will be determined, and that contractual method will take precedence over the statutory rules (Cass. 3e civ., 11 February 1987; Cass. 3e civ., 10 March 2004). Since the Pinel Act introduced the plafonnement du déplafonnement, it expressly excludes from the phasing-in mechanism leases where the renewal rent is automatically fixed at market value by contractual clause — making it even more valuable to negotiate a renewal rent clause in the original lease.
This is one of the most consequential decisions made at lease signature — and one of the most frequently overlooked. Nine years is a long time in a dynamic property market, and the landlord who did not negotiate a market-value renewal clause may find themselves deeply constrained by a statutory cap the market has long since left behind.
- Headline rent: state it clearly and separately from any rent-free period or reduced rent concession. The headline rent is the base for all future indexation, 3-year review caps, and renewal rent caps. Never allow the lease to state only the reduced or nil rent.
- Rent-free periods (VAT risk): for periods granted in exchange for works, consider structuring as a gratuitous pre-lease access period rather than a franchise within the lease term. The tenant must be insured during this period and must not begin trading before the lease comes into effect.
- Stepped rents: address explicitly how each step interacts with indexation and with the three-year review base. A flat annual increase without index reference is also a stepped rent (Cass. 3e civ., 22 June 2022).
- Turnover rent clauses: define turnover precisely; include reporting obligation and audit right; include a renewal clause specifying how the minimum guaranteed rent is fixed at renewal — without one, it may be frozen at its original level indefinitely.
- Key money: characterise it expressly as a rent supplement in the lease. Spread it over the lease term for review and renewal base calculations (key money ÷ years = annual supplement added to headline rent). Failure to characterise creates tax reassessment risk and potential drafter liability.
- Renewal rent clause: consider negotiating a contractual renewal method in the original lease — it can fix the renewal rent at market value, bypass the Pinel Act phasing-in cap, and provide certainty for both parties. A contractual method agreed at origin takes precedence over the statutory rules.
Getting the rent structure right at the outset protects both parties for the entire lease term and beyond. We advise landlords and tenants on initial rent negotiation, incentive structures, turnover clause drafting, and the long-term implications of renewal rent provisions.
Book a ConsultationThis article is for general information and educational purposes only. It does not constitute legal advice and does not create a lawyer-client relationship. Laws and regulations may have changed since publication. Always seek qualified French legal advice before concluding a French commercial lease.
Key Legal References
Market value standard for rent review and renewal — not applicable to the initial rent
Rent cap at renewal and Pinel Act phasing-in cap
Turnover clause falls outside statutory revision mechanisms of Arts. L. 145-38 and L. 145-39
Binary rent minimum: commercial rent judge must fix at market value under Art. L. 145-33 where clause confers that power
Stepped rent: clause providing flat annual increase without index reference is also a stepped rent
Parties can fix the renewal rent method at origin; contractual method takes precedence over statutory rules
