Key money (pas de porte): definition and legal rules

Commercial property transactions often involve sums that go beyond the rent alone. Key money (pas de porte) is one of these major financial components, but its complex legal nature regularly gives rise to disputes between landlords and tenants. Between entry indemnity, entry fee and disguised rent supplement, the characterisation varies according to the circumstances and carries radically different tax and leasing consequences. This article sets out the legal rules applicable to key money, its different forms and the precautions to take in order to secure its inclusion in a commercial lease.

Legal definition of key money

Nature and characterisation of key money

Key money refers to a sum of money paid by the tenant to the landlord on entering into a commercial lease, separate from the security deposit and the rent. This apparently simple definition conceals a more nuanced legal reality. The Civil Code does not expressly define key money, leaving it to case law to clarify its contours.

The Cour de cassation traditionally distinguishes three possible characterisations depending on the parties' intention and the circumstances of the case. Key money may be a rent supplement, a compensatory indemnity or a fee for entry into the premises. This distinction is crucial because each characterisation carries specific rules on rent review, renewal and taxation.

Where key money is a rent supplement, it is treated as a fraction of the rent paid in advance. This characterisation means that the sum forms part of the base rent for the three-yearly reviews and for the calculation of the rental value on renewal. Conversely, where it is a compensatory indemnity, the key money remunerates a particular advantage granted by the landlord without forming part of the rent proper.

Distinction from other sums paid on entry

Key money is distinct from the security deposit, governed by Article L. 145-40 of the French Commercial Code. Since Law No. 2026-403 of 26 May 2026, sums paid as security by the tenant of premises intended for retail or wholesale trade or for commercial or craft services (Article L. 145-32-1) may not exceed the amount of the rent due for one quarter, for leases entered into or renewed from the promulgation of that law, and do not bear interest. For other premises and for earlier leases that have not been renewed, the text sets no ceiling, with rent paid in advance bearing interest in the tenant's favour only for the portion exceeding two terms. The security deposit is repayable at the end of the lease, after deduction of any sums owed by the tenant, within a period that may not exceed three months from the return of the keys. The function of this security, the setting of its amount and its return are detailed in our article on the security deposit in a commercial lease.

Key money must also be distinguished from the eviction indemnity (indemnité d'éviction) paid to the outgoing tenant. The latter, governed by Articles L. 145-14 et seq. of the French Commercial Code, compensates the loss suffered by a tenant deprived of renewal of the lease. The eviction indemnity is calculated on the basis of the value of the business (fonds de commerce) and various components set by case law.

Lastly, key money differs from the registration duties payable when the lease is signed. These, set by Article 662 of the French General Tax Code, amount to 0.715% of the cumulative rent over the term of the lease for leases of more than twelve years.

Legal regime according to characterisation

Key money as a rent supplement

Where key money is treated as a rent supplement, it is subject to the rules of the commercial lease statute. This characterisation generally results from an express stipulation in the lease or from a context revealing the parties' intention to spread payment of the rent over time.

The character of a rent supplement has several practical consequences. First, the sum forms part of the reference rent for the three-yearly reviews provided for in Article L. 145-38 of the French Commercial Code. The amount of the key money, spread over the term of the lease, is added to the annual rent to determine the basis of review according to the commercial rent index or the tertiary activities rent index.

Second, on renewal of the lease, key money treated as a rent supplement influences the calculation of the rental value. Article L. 145-33 of the French Commercial Code provides that the renewed rent corresponds to the rental value determined by comparison with the rents of similar premises in the neighbourhood. Significant key money paid at the time of the initial lease may justify a substantial reassessment of the renewal rent.

Key money as a compensatory indemnity

The compensatory indemnity remunerates a particular advantage granted by the landlord to the tenant. This advantage may consist of a rent below the rental value, exclusive trading rights, specific fittings or a privileged location.

Unlike a rent supplement, the compensatory indemnity does not form part of the base rent. It therefore remains neutral for the three-yearly reviews and does not directly influence the calculation of the renewal rent. This characterisation is often more favourable to the tenant, who thereby avoids a recharacterisation as rent increasing its future rental burden.

Case law accepts this characterisation where the lease expressly states the compensatory nature of the key money and specifies the corresponding advantage. A mere moderate rent is not enough to establish a compensatory indemnity if no specific consideration is identified in the deed.

The entry fee for the premises

The entry fee is the third possible characterisation, less frequent in practice. It remunerates the authorisation to occupy the premises independently of any other advantage. This characterisation applies in particular where the key money appears disproportionate in relation to the other elements of the lease.

The entry fee follows a regime close to that of the compensatory indemnity. It does not form part of the rent and remains neutral for reviews and renewal. Its characterisation results from a factual analysis of the circumstances and of the parties' intention.

Stipulation and drafting of key money

Recommended contractual clauses

The drafting of the commercial lease must specify unambiguously the nature and regime of the key money. A model clause might provide: "The tenant shall pay to the landlord, as a compensatory indemnity for the moderate rent granted for the first three-year period, a sum of [amount] euros payable in cash on signature of this lease. This sum does not form part of the rent within the meaning of Article L. 145-38 of the French Commercial Code and remains the landlord's property without any possibility of review or repayment."

This wording has the advantage of expressly characterising the key money and specifying its legal regime. It avoids later recharacterisation as a rent supplement and secures the parties' position. The indication of the consideration (moderate rent) reinforces the characterisation as a compensatory indemnity.

For key money treated as a rent supplement, the clause might state: "In addition to the principal rent, the tenant shall pay a rent supplement of [amount] euros payable on signature of the lease. This supplement forms part of the base rent for the three-yearly reviews and for the calculation of the rental value on renewal."

Payment terms and guarantees

Key money is generally paid in cash on signature of the commercial lease. This practice avoids the complications of staged payment and secures the landlord. However, the parties may agree on deferred or instalment payment, particularly for large amounts.

In the event of deferred payment, the landlord may require additional guarantees: a personal joint and several guarantee, an on-demand guarantee or a pledge over the business. These security interests offset the risk of non-payment and strengthen the legal certainty of the transaction.

The deed of guarantee must expressly cover the key money. A guarantee (cautionnement) must be express and cannot be extended beyond the limits within which it was entered into (Article 2294 of the French Civil Code); a guarantor who is an individual must also personally write the statement provided for by Article 2297, within a limit expressed in words and in figures. A guarantee limited to rent and charges would therefore not cover the key money unless specifically stated.

Tax consequences of key money

Tax treatment for the landlord

The tax treatment of key money varies according to its legal characterisation. Where it is a rent supplement, the sum is treated for tax purposes as property income taxable in the year it is received. This rule derives from Article 29 of the French General Tax Code, which brings income from the letting of buildings within property income.

For a compensatory indemnity or an entry fee, administrative doctrine distinguishes according to the term of the lease. If the lease exceeds fifteen years, the key money may be treated as a property capital gain taxable under the regime of Articles 150 U et seq. of the French General Tax Code. This characterisation nevertheless remains exceptional and requires a case-by-case analysis.

In practice, the tax authorities tend to recharacterise key money systematically as additional rent taxable as property income. This position, confirmed by several ministerial answers, leads to a recommendation of prudent accounting from the moment of receipt.

Tax treatment for the tenant

On the tenant's side, key money is generally a deductible charge against taxable profit. Article 39 of the French General Tax Code authorises the deduction of general expenses incurred in the interest of the business.

For key money treated as a rent supplement, the deduction follows the rules applicable to rent: immediate deduction for businesses under the actual profit regime. In the case of a compensatory indemnity, the deduction may be spread over the term of the initial lease if the amount is significant in relation to other expenses.

Businesses subject to the industrial and commercial profits regime enjoy greater flexibility in spreading the deduction. The authorities generally allow key money to be amortised over the term of the lease, particularly where its amount exceeds the current expenses of the financial year.

Rent review and renewal of the lease

Impact on three-yearly reviews

Article L. 145-38 of the French Commercial Code provides for the three-yearly review of the rent according to the change in the commercial rent index or the tertiary activities rent index. The basis of review is the rent stipulated in the lease, increased where applicable by ancillary items treated as rent.

Key money characterised as a rent supplement forms part of this basis of review. The amount, spread over the term of the lease, is added to the annual rent to determine the basis of review. This mechanism can lead to substantial increases at the three-yearly dates. The various mechanisms for changes in rent during the lease and on renewal are presented in our article on rent increases in commercial leases.

Conversely, key money characterised as a compensatory indemnity or an entry fee remains neutral for reviews. This distinction justifies particular attention to the drafting of the contractual clauses and to the characterisation adopted.

Consequences on renewal

The renewal of a commercial lease is governed by the rules of Articles L. 145-33 et seq. of the French Commercial Code. The new rent corresponds to the rental value determined mainly by comparison with rents charged in the neighbourhood for similar premises.

Key money paid at the time of the initial lease may influence this assessment in two ways. First, if comparable leases also include key money, it enters into the comparative analysis of the rental value. Second, significant key money may show that the initial rent was lower than the real rental value, justifying a reassessment on renewal.

Case law generally holds that the existence of initial key money shows an imbalance between the stipulated rent and the real rental value. This presumption may lead to significant increases on renewal, particularly in sectors where rental values have risen. On the cases in which the renewed rent escapes the cap and on the determination of the rental value, see our analysis of the lifting of the cap on commercial rent.

Disputes and case law

Recharacterisation by the courts

The courts exercise strict control over the characterisation of key money. They look for the parties' real intention beyond the contractual stipulations and analyse the overall economics of the transaction. This approach may lead to recharacterising key money stipulated as a compensatory indemnity as a rent supplement.

The criteria for recharacterisation include in particular the amount of the key money in relation to the annual rent, the existence of an identifiable consideration, and consistency with local market conditions. Key money representing several years' rent without specific consideration will often be recharacterised as a rent supplement.

Protection against abuse

The legislature does not prohibit key money in commercial leases. Article L. 145-15 of the French Commercial Code deems unwritten any clauses, stipulations and arrangements that have the effect of defeating the right to renewal or the provisions it lists, in particular Articles L. 145-37 to L. 145-41 on rent review, guarantees and the termination clause. It does not refer to sums paid on entry into the premises as such.

The validity of key money is therefore not in question; it is its characterisation that determines its regime: rent supplement or indemnity compensating an advantage granted to the tenant, such as a moderate rent, commercial exclusivity, special fittings or a privileged location.

In the case of abusive key money, the tenant may seek annulment of the clause or repayment of sums unduly received. The claim is time-barred after five years from payment under Article 2224 of the French Civil Code. This protection reinforces contractual balance and deters unfair practices.

Frequently asked questions

Is key money mandatory in a commercial lease?

No. No provision requires key money: it results from an agreement between the parties, and its characterisation determines its regime. Key money without identifiable consideration is exposed to recharacterisation as a rent supplement.

Can the amount of key money be reviewed during the lease?

It depends on its characterisation. Key money that is a rent supplement forms part of the basis of the three-yearly review. By contrast, a compensatory indemnity or an entry fee cannot be reviewed, unless the lease expressly provides otherwise.

Is key money recoverable at the end of the lease?

In principle, no. Key money is a sum definitively acquired by the landlord, unlike the security deposit, which remains repayable. This rule follows from the very nature of key money, which either remunerates an advantage granted or is a rent supplement paid in advance.

How can the payment of key money be optimised for tax purposes?

For the tenant, it is advisable to negotiate spreading the deduction over the term of the lease rather than an immediate deduction if the amount is large. For the landlord, characterisation as a compensatory indemnity may defer taxation depending on the circumstances, but the tax authorities tend to recharacterise systematically as property income.

Can key money be annulled for disproportion?

In principle, no. In synallagmatic contracts, a lack of equivalence between the parties' performances is not a ground for nullity of the contract, unless the law provides otherwise (Article 1168 of the French Civil Code), and Article L. 145-15 of the French Commercial Code does not refer to key money. A manifestly disproportionate amount without real consideration is mainly exposed to recharacterisation as a rent supplement, with its consequences for rent review and renewal.

Does key money affect the assignment of the commercial lease?

Indirectly, yes. A lease with a moderate rent offset by initial key money generally has a higher asset value. This added value may be reflected in the sale price of the business or in the terms of assignment of the lease with the landlord's consent.

Must key money be registered with the tax authorities?

Registration of the commercial lease with the tax authorities automatically includes the key money stipulated in the deed. Registration duties are, however, calculated only on the rent and not on the key money, except in the case of exceptional recharacterisation by the authorities. The consistency between the contractual characterisation and the tax return should be checked.

Practical recommendations

Key money is a legitimate but technically complex contractual mechanism. Its inclusion requires precise drafting that characterises its legal nature unambiguously and specifies the corresponding consideration. The distinction between rent supplement and compensatory indemnity carries major consequences for both reviews and taxation.

Before any commitment, have the consistency of the envisaged amount with local market conditions and the overall economics of the lease analysed. A manifest disproportion exposes you to an unfavourable judicial recharacterisation. Favour characterisation as a compensatory indemnity where a specific consideration can be identified and documented in the contract.