Commercial Lease: Setting and Revising Rent

Verified 12 August 2024 - Directorate of Legal and Administrative Information (Prime Minister), Ministry of Justice

At the conclusion of the commercial lease, the price of the rent is freely fixed by the parties. During the lease, the rent is revised according to various mechanisms. The review may take place every 3 years at the request of the owner or automatically by means of a sliding scale clause. The revenue clause also allows the rent to be increased on the basis of a percentage of the tenant's turnover.

The amount initial rent is not regulated. He is fixed freely by the parties to the contract. The owner (called lessor) is not bound by the rent of the previous tenant or by reference rents.

On the other hand, when the lease is reviewed or renewed, the amount of the rent is regulated.

The terms of rent payment are free (payment at the beginning or end of the month, monthly or quarterly payment).

If the lease is for all businesses, the rent is in principle higher than that of a lease that allows only a defined activity.

The lease contract may provide for the payment by the tenant of other sums in addition to the rent:

The owner of commercial premises is subject to VAT on commercial rents for certain types of premises.

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VAT for equipped premises

Owner who rents premises equipped with furniture, equipment and facilities necessary for the operation of the tenant's business (for example, a theater designed to accommodate spectators) is subject to the VAT: titleContent at the normal rate of 20%.

If the owner benefits from the exemption from VAT, he is not concerned by the declaration and payment of VAT.

VAT for bare premises

The owner who rents out bare premises, that is to say, not fitted with equipment, furniture or material necessary for the holding for which they are intended, is exempt from VAT.

However, he can opt for VAT by sending a simple letter to the tax department of the place where the premises are located.

The door step corresponds to the payment of an authorization feereal paid by the tenant (called lessee) to the owner (called lessor) upon entering the premises.

It is not mandatory and applies to vacant premises.

The amount of the doorstep is freely fixed by the parties and generally corresponds to 3 or 6 months of rent.

It is not refunded at the end of the lease.

This entry fee can be paid at once or by installments in addition to the rent. It is usually compensated by a lower rent.

FYI  

The amount of the doorstep and the terms of payment must be indicated in the lease.

At the time of drafting the lease, the landlord and tenant must decide whether the door step is a rent supplement (the most common case) or an indemnity.

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Rent supplement

In this case, the door step is taken into account for the calculation of the triennial revision and for setting the rent for the renewed lease.

For the owner, it constitutes a property income.

Doorstep is taxable person if the lease rent is subject to it. The rent of premises equipped, that is to say equipped with furniture and equipment necessary for the exploitation of the activity of the tenant is subject to VAT. If the lessor benefits from the exemption from VAT, he is not concerned by the declaration and payment of VAT.

For the tenant, the doorstep constitutes a deductible expense of the results as a percentage of the duration of the contract (1/9e per year) provided that the rent fixed in the lease is abnormally low, i.e. significantly below the rental value.

Allowance

For the ownerThere is no taxation.

For the tenant, the door step is not a deductible charge and it cannot be cushioned.

During the lease, the rent can be revised according to the triennial (legal) review every 3 years, according to a sliding scale clause (usually annual) or according to a revenue clause.

Three-year review (legal review)

The rent can be revised at the request of the landlord (also called lessor) or the tenant (also called lessee). This revision is not automatic. This is a right that can be exercised even when the lease does not provide for it.

When does the triennial review take place?

The three-year rent review can be requested by the landlord or tenant in a period of 3 years after one of the following times:

  • Entry of the tenant into the premises
  • Renewal of a previous lease
  • The previous revision takes effect.

The review is requested only when the 3-year period has expired (i.e. from the day after its expiry). There is no maximum time limit.

The request for a triennial review may also be made after the expiry of a period of 4 years, 5 years or more.

The request for review must be submitted by act of commissioner of justice (formerly act of bailiff) or by registered letter with acknowledgement of receipt (LRAR). It must specify the amount of rent charged.

When the tenant accepts the request for rent review, he can either write to the landlord with his agreement or do nothing and pay the new rent.

What index is used for the triennial review?

The triennial review shall be established taking into account one of the following indices:

  • Quarterly commercial rent index (ILC) for commercial or craft activities
  • Rent index for tertiary activities (ILAT) for other activities.

FYI  

The Quarterly Construction Cost Index (QCI), which was used as the benchmark for the triennial commercial rent review, can no longer be used for leases entered into or renewed since September 2014.

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First Rent Review

The formula for calculating the revised rent is as follows:

Current rent x (last index published at revision/ benchmark at initial fixation).

For contracts concluded or renewed since September 2014, the variation in rent may not lead to an increase of more than, for one year, 10% the rent paid in the previous year.

Example :

A lease is signed on the 1ster october 2019 with a monthly rent of €500 based on ILC. The first triennial review shall take place on 1er October 2022.

= €500 x (index of 2e quarter 2022/index of 2e quarter 2019)

= €500 x (123.65 / 115.21)

= €500 x (1+7.33%)

= €536.65

Subsequent revisions

New review requests can be filed every 3 years.

The period runs from the moment when the previously revised rent has applied.

To calculate the revised rent, the current benchmark must be taken into account on the date of the last revision.

The formula for calculating the revised rent is as follows:

Current rent x (last index published at revision/ benchmark at last revision).

Example :

A lease is signed on the 1ster june 2015 with a monthly rent of €500, based onILC. On the first review in June 2018, the rent is set at €519.42. During the 2e triennial review of 1er in june 2021, the formula to calculate:

Current rent x (last index published at revision/ benchmark at last revision)

= Current rent x (index of 2e quarter 2021 / index of 2e quarter 2018 )

= 519.42 x (118.41/112.59)

= €546.26

Removal of the three-year review ceiling

The three-year rent review is in principle capped, i.e. it cannot exceed the change in the commercial rent index (ILC ) or the index of rents for tertiary activities (ILAT). However, in certain specific cases, the rent revision is not capped and is therefore fixed according to the rental value.

The landlord may apply for a rent cap in any of the following cases:

  • Hardware change to local factors of commercial activity (increase in population, new arteries, street turned pedestrian, etc.)
  • Provision relating to the duration of the lease
  • Change of activity (called de-specialization) in the lease made by the tenant

In these cases, the amount of rent may correspond the rental value of the premises.

The rental value of the property takes into account the following:

  • Characteristics of the premises (location, area, standing and layout of the premises...)
  • Destination of the premises (nature and number of businesses authorized by the lease, e.g. bakery)
  • Obligations of the parties, in particular the apportionment of the taxes and charges of the co-ownership
  • Local factors of commercial activity (e.g. reputable signs, transport)
  • Prices in the neighborhood.

Warning  

The increase in rent following the removal of the ceiling may not exceed, for a year, 10% the rent paid in the previous year. It's called rent smoothing.

Scaling Clause

At the conclusion of the lease, the parties may agree on a sliding scale clause (or indexing clausen), allowing the rent to vary according to a reference index mentioned in the contract.

The index differs according to the activity carried out:

  • For commercial or craft activitiesHowever, this is the quarterly index of commercial rents (ILC).
  • For other activities : the index of rents for tertiary activities (ILAT)

The Construction Cost Index (CCI) can also be used for rent indexation under a sliding scale clause.

The periodicity is freely determined by the parties to the contract, but in practice the rent is often reviewed every year.

The rent is revised automatically on expiry of the contract, without the intervention of the owner (called lessor).

Protection against excessive rent variation

If, as a result of the sliding scale clause, the rent increases or decreases by more than ¼ in relation to the price previously fixed, one of the parties may request the immediate revision of the rent. The judge will then set it at the rental value.

That request is being made by registered letter with AR or by act of Commissioner of Justice (formerly act of bailiff).

The increase may not exceed 10%the rent paid in the previous year.

Recipe clause

The revenue clause (or variable rent clause) is a clause of the commercial lease that provides that the rent varies according to the turnover of the tenant.

In addition to a variable part that corresponds to a percentage of the turnover realized by the tenant, the rent often includes a fixed part (called Guaranteed minimum rent).

This provision is often used for premises located in shopping centers.

When the lease expires (after a minimum of 9 years), the tenant benefits from the right to renewal of the commercial lease if he has been in business there for more than 3 years.

The rent for the renewed lease is freely determined by the parties. If they fail to reach an agreement, the rent is set by the court, which in principle will apply the rent-cap rule.

Renewed lease rent cap

The cap on the renewed rent means that the rent change cannot exceed the change in thequarterly commercial rent index (ILC) or thequarterly index of tertiary activity rents (ILAT).

The capping rule applies in the following 2 cases:

  • When the lease is renewed 6 months before the lease expires : this renewal is effected by a leave given by the lessor 6 months before the expiry date, or by a request for renewal made by the lessee 6 months before
  • When the lease continues beyond 9 years tacitly (without the owner or tenant reacting) not to exceed 12 years.

The parties may decide to exclude the capping of the commercial lease at the time of the conclusion of the lease or its renewal.

Removal of the rent cap on the renewed lease

In some cases, the rent for the renewed lease may be set without following the rent cap rule. The rent that has been removed from the ceiling is then fixed at the rental value.

The ceiling is removed to allow for the removal of the ceiling if the rental value has changed or depending on the duration of the lease or the nature of the leased premises.

Capping related to the duration of the lease

When the lease is concluded or renewed for a over 9 years, the rent for the renewed lease shall be capped and fixed at the rental value.

Rent is also removed when the lease continued for a period of time 12 years old because of the inaction of the parties. In practice, this corresponds to the situation where the parties have not granted leave or have not applied for the renewal of the lease.

Deceilings linked to significant changes

There are several factors that determine the rental value of a renewed rent:

  • Characteristics of the room
  • Destination of the premises
  • Respective obligations of the Parties
  • Local marketing factors
  • Major improvements to leased spaces

Modifying only one of these elements may justify the removal of the rent ceiling. This amendment must be significant, i.e large enough. It is the judge who assesses the existence of this amendment on a case-by-case basis.

Example :

Rent may be waived when rented premises are modified or extended. This is the case when the lessor adds an additional surface or a cellar to the rented premises.

A change in commercial activity may also allow rent caps to be removed. For example, the rent of a bar-tobacconist that was obtained during the course of the lease, the authorization of the lessor to sell “all telephony products”, can be removed during the renewal.

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