Turnover-rent clause in commercial leases: securing the variable rent for the landlord

The trade-off now arises at every signing, in shopping centres, retail parks and prime street-level units alike: whether to accept a variable element indexed to the tenant's turnover in order to support the reshaping of retail brands, without eroding the capitalisable income of the asset. Asset management teams see it as a tool for aligning interests and a cushion against vacancy; valuers see it as less recurrent income, and therefore less valuable. Between the two, everything turns on the drafting: the level and indexation of the minimum guaranteed rent, the exact scope of declared turnover, an enforceable audit right, and the treatment of the rent on renewal. This guide deals with the turnover-rent clause (clause-recettes) strictly from the standpoint of the institutional landlord: how to draft it, how to monitor it, and how to fit the mechanism together with the removal of the rent cap (déplafonnement) and with the valuation of the asset.

The two-part rent: contractual mechanics and its place within the statute

A lease with a turnover-rent clause, or two-part rent lease, combines two components: a minimum guaranteed rent (MG), due in all circumstances and generally payable quarterly in advance, and a variable element based on the turnover achieved by the tenant on the leased premises.

Two structures coexist and do not have the same economic effects.

• The substitutive clause: the rent equals the higher of the two terms, the minimum guaranteed rent or a percentage of turnover. The variable element absorbs the MG, which acts as a pure floor.
• The additive clause: the minimum guaranteed rent is due in all circumstances and a percentage is added, applied to turnover exceeding a trigger threshold (break point). The yield is mechanically higher but the negotiation is tougher.

Retail brands generally prefer the substitutive formula, which caps their occupancy cost ratio. The institutional landlord that accepts this structure must understand that it gives up any share of growth for as long as the percentage does not exceed the indexed MG: on an asset that is ramping up, the variable element may remain a dead letter for several financial years.

An essential point, often misunderstood: using a variable rent in a commercial lease does not take the lease outside the statute. The tenant keeps the right to renewal, the right to the eviction indemnity under Article L. 145-14 of the French Commercial Code and the benefit of the formal requirements for notice under Article L. 145-9, and the landlord remains bound by the mandatory provisions that Article L. 145-15 sanctions by treating them as deemed unwritten (réputé non écrit). Only the method of fixing the price is affected.

Lastly, an accounting point explains retail brands' current appetite: under IFRS 16, variable lease payments based on turnover are not included in the tenant's lease liability and are expensed as they are incurred. For a listed retailer concerned about its apparent debt, converting fixed rent into variable rent lightens the balance sheet. That advantage is in principle paid for by a higher percentage: this is a negotiating lever that the landlord must make explicit.

Drafting the minimum guaranteed rent: the foundation of capitalisable income

The minimum guaranteed rent in a commercial lease is not merely a cash-flow safeguard. It is the only portion of the rent that the valuer and the investment committee will treat as recurrent. Its drafting therefore determines the value of the asset.

Setting the level

The MG is determined by reference to the market rental value of the premises, adjusted for the risk sharing agreed. Three parameters must be documented internally at the time of signing:

• the brand's target occupancy cost ratio, that is, the ratio of total rent including charges to turnover excluding tax, by line of business;
• the reference turnover used to calibrate the trigger threshold, and its origin (the tenant's previous declarations, comparables in the centre, the opening business plan);
• the gap between the MG and the market rental value, which measures the safety discount granted.

An MG set well below the rental value turns the lease into a bet on the tenant's trading. For an institutional portfolio, this discount must remain the exception, reserved for openings, repositionings of a centre or anchor brands whose footfall effect justifies the risk.

Indexing without creating a clause deemed unwritten

Indexation of the minimum guaranteed rent falls under the ordinary law on sliding-scale clauses. The relevant reference index is the commercial rent index (ILC) published by INSEE, accepted by Article L. 145-38 of the French Commercial Code for commercial and craft activities, with the tertiary activities rent index (ILAT) covering other activities.

Two drafting precautions are needed. First, avoid an indexation clause that operates only upwards: case law consistently holds that such a stipulation creates a distortion between the period of variation of the index and the period elapsed, and sanctions it as deemed unwritten, on the basis of the rules on sliding-scale clauses. The sanction strikes the whole clause, which deprives the landlord of any indexation for the future and creates a risk of repayment of earlier indexations. Across a portfolio, the aggregate cost is considerable. The means of challenging such a stipulation are set out in our article on the sliding-scale clause deemed unwritten in commercial leases.

Second, state expressly that indexation applies to the minimum guaranteed rent and to the trigger threshold of the variable element. Otherwise the threshold remains frozen in current euros while the MG increases, which gradually misaligns the two terms and may produce unanticipated side effects on the total rent.

Locking in the fixing of the minimum guaranteed rent on renewal

This is the point most often overlooked. It is dealt with below, because it governs the whole question of the removal of the rent cap.

Defining the turnover base: the clause that decides the dispute

In a lease with a turnover-rent clause, the definition of the base has more economic effect than the rate itself. A clause drafted in three lines referring to "turnover achieved on the leased premises" is a clause that invites litigation.

The definition must be positive, then negative, and reflect the actual sales channels of today's retail trade.

On the inclusion side, the following must be expressly covered:

• sales of goods and services collected on the leased premises, excluding tax;
• orders placed online and collected in store (click and collect), as well as orders shipped from the premises' stock (ship from store);
• sales made by corners, concessions or third-party operators located on the premises, for their gross amount and not only for the commission received by the tenant;
• sales made by any terminal, kiosk or mobile salesperson attached to the point of sale;
• income from subscriptions, paid loyalty cards and services taken out in store.

On the exclusion side, only exhaustively listed exclusions should be accepted: turnover taxes, returns and refunds actually recorded, sales to staff within a contractual limit, stock transfers between the tenant's establishments, and disposals of fixed assets. Discounts, credit notes and promotional operations must be dealt with expressly: a clause that is silent leaves the tenant free to deduct national commercial discounts from which the asset has derived no benefit.

The treatment of gift cards deserves a dedicated stipulation, the triggering event being fixed either at issue or at use, but never at both nor at neither.

Omnichannel retail is now the main source of leakage from the base. A brand that moves its receipts to a centralised platform, reclassifies the store as a mere showroom or allocates online sales to a separate logistics entity empties the turnover-rent clause of its substance while continuing to benefit from the footfall generated by the centre. The remedy lies in the drafting: attribute turnover to the premises whenever the sale was initiated, collected, delivered, exchanged or advised on in the leased premises, and require an allocation clause in the case of a mixed channel.

Organising monitoring: declaration, certification, audit

A well-defined base without an enforceable monitoring mechanism remains merely declaratory. The institutional landlord must build a three-level mechanism, from periodic declaration to in-depth review.

Level 1: periodic declaration

The lease must require a monthly declaration of turnover, within a short period from the end of each month, in a standardised format sent electronically. The declaration must state turnover by sales channel, so that the split between online and in-store sales can be tracked. Failure to declare must be sanctioned by a fixed daily penalty and, above all, by a default assessment clause (taxation d'office) allowing the landlord to call provisionally for a variable rent calculated on the basis of the best known year, subject to adjustment.

Level 2: annual certification

An annual certificate from the tenant's statutory auditor, or failing that its chartered accountant, must be produced within a set period after the close of the financial year, expressly covering the turnover of the point of sale as defined in the lease and not the overall company accounts. This precision is decisive: a certificate referring to company-wide turnover proves nothing about the premises.

Level 3: the audit right

The audit clause must be drafted as a genuine contractual entitlement, with a scope, a notice period, an auditor and a sanction.

• Scope: access to till journals, Z receipts, the store's general ledger revenue accounts, card payment reconciliation statements, VAT returns, perpetual inventories and the interfaces of the point-of-sale system.
• Auditor: an independent firm appointed by the landlord, bound by confidentiality, with a non-compete undertaking in respect of the brand.
• Frequency and notice: one audit per set period, except where there is serious evidence of under-declaration.
• Financial sanction: the tenant bears the cost of the audit where the discrepancy found exceeds a contractual threshold, immediate adjustment of the difference plus interest, and a contractual penalty.

Two technical supports strengthen this mechanism. First, the obligation for taxable persons recording payments from private customers to use point-of-sale software meeting the conditions of inalterability, security, retention and archiving, laid down by Article 286, I, 3° bis of the French General Tax Code: the lease may usefully require production of the corresponding certificate and extraction of the archived data, which provide a reliable audit trail. Second, the generalisation of electronic invoicing and of e-reporting of transaction data, the timetable for which was set by the Finance Act for 2024, with a staggered entry into force from 1 September 2026: the data flows transmitted to the tax authorities will in time provide a benchmark for checking the consistency of turnover declarations. Leases signed today would do well to provide now for the communication of the corresponding data.

If the tenant refuses to communicate, the landlord has an immediate procedural lever: the in futurum investigative measure under Article 145 of the French Code of Civil Procedure, which makes it possible to obtain by order, on application or in summary proceedings (référé), the appointment of an expert or a bailiff (huissier) with the task of obtaining the accounting records of the point of sale, before any proceedings on the merits. In a dispute over under-declaration, the fact that this measure was taken early often determines the outcome of the negotiation.

Turnover-rent clause and removal of the rent cap: what the landlord gains and what it loses

This is the most technical aspect and the most decisive for the value of the asset.

The principle: a two-part rent escapes the rent cap mechanism

The rent cap mechanism of Article L. 145-34 of the French Commercial Code presupposes that the rent of the renewed lease is fixed at the rental value according to the criteria of Article L. 145-33. However, the Cour de cassation holds that where the parties have contractually fixed a two-part rent, the price of the renewed lease results from the agreement and not from the law: the provisions of Articles L. 145-33 and L. 145-34 do not apply of right, and the commercial rent judge (juge des loyers commerciaux) has no jurisdiction to fix the rent.

In other words, the turnover-rent clause has the effect of a structural removal of the rent cap: the rent of the renewed lease follows the contractual formula, with no index ceiling, without the 10% per year smoothing rule provided for in the fourth paragraph of Article L. 145-34, and without any debate on a significant change in local trading factors.

The downside: no statutory mechanism for increasing the rent

This advantage has a counterpart that landlords underestimate. If the lease provides nothing, the minimum guaranteed rent of the renewed lease remains that of the expired lease, possibly indexed, and the landlord has no statutory action to reassess it to market rental value. On an asset whose trading position has improved, the loss is lasting.

Case law has opened a way out: where the lease provides that the minimum guaranteed rent will, on renewal, be fixed or revised by reference to rental value, the commercial rent judge regains jurisdiction to fix it, applying the criteria of Articles L. 145-33 and R. 145-1 to R. 145-11, but without applying the rent cap rule. On the procedure before the commercial rent judge, see our analysis of judicial determination of rental value on renewal.

The standard clause to insert is therefore twofold: a stipulation for a two-part rent, and an express stipulation providing that, failing agreement between the parties on renewal, the minimum guaranteed rent will be fixed by the court according to rental value, the other parameters of the formula (rate, threshold, base) remaining unchanged or also being submitted for determination. This drafting gives the landlord the best of both regimes: no rent cap and access to the court.

The risk of requalification

The courts examine whether the variable element is genuine. A rate set at a level such that the trigger threshold can never be reached, or a purely symbolic variable element, exposes the landlord to the lease being treated as a fixed-rent lease with an ancillary element, with a return to the rent cap grid. The variable element must therefore be economically plausible in light of the tenant's forecast turnover, and that plausibility must be documented in the letting file.

The effect on the rental value of neighbouring premises

A lease with a turnover-rent clause is not a comparable that can be directly transposed to premises let at a fixed rent. The prices commonly charged in the neighbourhood, within the meaning of Article R. 145-7, must be restated to neutralise the risk borne by the tenant. A landlord that produces its two-part leases as comparables in ordinary litigation over removal of the rent cap must anticipate this discussion and provide the restatement.

The ancillary stipulations without which the turnover-rent clause is ineffective

A variable rent in a commercial lease depends on the effective trading of the premises. Any stipulation that secures that trading secures the income.

• Clause requiring personal, effective and continuous trading: an obligation to trade without interruption, on the days and at the hours when the centre is open, with a range and level of stock consistent with the brand's concept. Without it, a prolonged closure reduces the variable element to zero without any clear breach of contract.
• Brand clause: a prohibition on changing brand or concept without prior agreement, since the commercial positioning directly determines turnover.
• Territorial non-compete clause: a prohibition on the tenant and its group companies opening a point of sale under the same brand within a set radius, failing which the landlord finances the cannibalisation of its own base.
• Controls on assignment and sub-letting: reinforced approval, joint and several guarantee from the assignor, and an obligation on the assignee to take over in full the declaration mechanism and the audit right.
• Interplay with change of use (déspécialisation): a partial or full change of use within the meaning of Articles L. 145-47 et seq. alters the structure of turnover. The lease must provide for the corresponding renegotiation of the rate and the threshold, the addition of an activity moreover having its own consequences for the rent.
• Service charges and works: the allocation must comply with the precise and exhaustive inventory required by Article L. 145-40-2 of the French Commercial Code and Articles R. 145-35 et seq., arising from Law No. 2014-626 of 18 June 2014 and its implementing decree of 3 November 2014. Expenditure on major repairs under Article 606 of the French Civil Code cannot be re-invoiced to the tenant. In a structure with a turnover-rent clause, the overall occupancy cost ratio includes charges: an irregular re-invoicing mechanism affects the negotiation of the variable element.

Effects on asset valuation and on reporting

An asset let with a turnover-rent clause is not valued like an asset let at a fixed rent. The valuer reasons by capitalising recurrent net income, following the methodologies of the Charte de l'expertise en évaluation immobilière and the RICS standards. The minimum guaranteed rent is the secured income stream; the variable element is a conditional stream, dependent on the performance of a third party, volatile by nature and not contractually guaranteed.

Three operational consequences follow for a property company or a fund.

First, the variable element is generally taken with a discount, or even capitalised separately at a higher rate, where it is not simply excluded from the reference income. An MG set too low destroys value in a valuation even though the rent invoiced is high.

Second, the documentary quality of the declaration mechanism becomes a valuation issue. A history of declared, certified, audited and stable turnover strengthens the credibility of the variable income stream with the valuer and the lender. A purely declaratory mechanism, without certification or audit, will be treated as unreliable income.

Finally, financing follows the same logic. Bank covenants based on ICR or DSCR rely on contractual income. An asset in which half of the rent is variable supports a lower debt capacity than an equivalent asset let at a fixed rent. The trade-off between a high MG and a high percentage is therefore not neutral for the financing structure of the portfolio: it is a capital allocation decision, not a mere lease clause.

Timeline of action in the event of under-declaration

Time works against the landlord. The effective sequence is as follows.

On detection of an anomaly, such as a discrepancy between declarations and footfall data, an unexplained fall coinciding with the growth of the online channel, or failure to produce the annual certificate, the first step is a formal notice (mise en demeure) referring precisely to the declaration stipulations and the audit right, with a short deadline. This notice is the evidential starting point of the dispute.

If the tenant refuses, applying to the court under Article 145 of the French Code of Civil Procedure makes it possible to fix the accounting evidence before any alteration, the legitimate reason being established by the contractual stipulation itself. The ex parte application route deserves consideration where the element of surprise determines the usefulness of the measure.

At the same time, the question of the forfeiture lever must be weighed. Breach of the declaration obligation may be covered by the forfeiture clause (clause résolutoire), the enforcement of which follows the formalities of Article L. 145-41 of the French Commercial Code, with a payment order or notice (commandement) remaining unsuccessful for one month and the court having the power to grant time that suspends the effects of the clause. Termination is not always the aim when dealing with a well-performing brand: the commandement nevertheless remains a powerful negotiating tool, provided it has been drafted on a precise stipulation. The formal requirements of this instrument are dealt with separately in our article on the commandement invoking the forfeiture clause.

As regards limitation periods, an action for payment of rents and variable supplements falls under the ordinary five-year limitation period of Article 2224 of the French Civil Code, whereas actions brought under the commercial lease statute are time-barred after two years under Article L. 145-60 of the French Commercial Code. The characterisation of the action therefore determines the scope of any catch-up: a late audit may run into partial limitation.

Conclusion

The turnover-rent clause is not a tool for yield: it is a tool for alignment, whose real cost is a lower valuation of the income stream. An institutional landlord should accept it only on three cumulative conditions: a minimum guaranteed rent close to market rental value, a turnover base drafted for omnichannel retail and not for the retail trade of fifteen years ago, and a genuinely enforceable three-level monitoring mechanism: monthly declaration, annual certification and a sanctioned audit right.

The absolute priority remains the clause fixing the minimum guaranteed rent on renewal. Without an express stipulation referring to rental value and giving the commercial rent judge jurisdiction, the removal of the rent cap obtained through the two-part rent turns against the landlord, which is left with no mechanism for increasing the rent. Before any signing, have your existing leases with turnover-rent clauses audited on this single point: identify those whose renewal will fall within the next three years and which do not contain this clause. This is where the most costly and most easily avoidable losses of value lie.

Frequently asked questions

Does a lease with a turnover-rent clause escape the cap on the renewal rent? Yes. The Cour de cassation holds that where the parties have contractually adopted a two-part rent, the price of the renewed lease derives from the agreement and not from Articles L. 145-33 and L. 145-34 of the French Commercial Code: the rent cap rule does not apply, nor does the 10% per year smoothing provided for in the fourth paragraph of Article L. 145-34. In return, the landlord has no statutory action to increase the minimum guaranteed rent. Only an express clause providing for the minimum guaranteed rent to be fixed by reference to rental value makes it possible to apply to the commercial rent judge.

Can the commercial rent judge fix the minimum guaranteed rent? Only if the lease so provides. In the absence of a stipulation referring to rental value, the rent judge has no jurisdiction to fix the rent of a two-part lease. Where the clause exists, the judge applies the criteria of Article L. 145-33 and Articles R. 145-1 to R. 145-11, without the rent cap rule. The drafting must specify whether the application concerns only the minimum guaranteed rent or also the rate and the trigger threshold.

Do online sales collected in store fall within the base of the variable rent? Only if the lease says so. A lease that is silent on click and collect and ship from store exposes the landlord to a growing share of flows escaping the base, even though the premises bear the logistics and customer service. The clause must attribute to the premises any sale initiated, collected, delivered, exchanged or advised on in the premises, and provide an allocation rule for mixed channels.

What documents can the landlord require in order to audit declared turnover? The scope depends on the audit clause. A full clause covers till journals and Z receipts, card payment reconciliation statements, the general ledger of the point of sale's revenue accounts, VAT returns and the archived data from the till software certified within the meaning of Article 286, I, 3° bis of the French General Tax Code. If the tenant refuses, an in futurum investigative measure based on Article 145 of the French Code of Civil Procedure makes it possible to obtain disclosure by court order before any proceedings on the merits.

Is a clause indexing the minimum guaranteed rent that operates only upwards valid? No. Such a clause is sanctioned as deemed unwritten, case law holding that it distorts the normal operation of the sliding scale. The sanction affects the clause as a whole, which deprives the landlord of any indexation for the future and opens the way to an action for repayment of earlier indexations. Across a portfolio, a systematic review of indexation clauses is a priority task.

Does a turnover-rent clause reduce the value of the asset? It changes the structure of the income taken into account in a valuation. The minimum guaranteed rent is treated as a recurrent, capitalisable stream; the variable element, dependent on the tenant's performance, is generally discounted or capitalised at a higher rate. A certified and audited turnover history significantly improves the treatment of this component. The impact also carries through to debt capacity, since bank covenants rely on contractually guaranteed income.

What should be done if the tenant stops trading when the lease is at a variable rent? The minimum guaranteed rent remains due, but the variable element disappears. The answer is preventive: a clause requiring personal, effective and continuous trading, backed by a daily penalty and covered by the forfeiture clause, makes it possible to sanction closure. In the absence of such a stipulation, a challenge on the basis of ordinary law is more uncertain and slower, and the landlord suffers the loss of footfall for the whole centre.