Commercial Lease for a Hotel, Restaurant, Cafe, or Nightclub: How to Lower Your Rent?
The Pinel Law has brought many changes to commercial leases, specifically regarding rent, the allocation of charges, and their transfer. It applies to commercial leases renewed or signed on or after September 1, 2014.
In principle, the rent is set by an agreement between the owner of the commercial premises and the tenant operating the hotel, restaurant, cafe, or nightclub. However, the rent for a commercial lease (also called a “3-6-9 lease”) can be reduced every three years (three-year review) or at the end of the nine-year term (renewal of the commercial lease). Other rent reduction mechanisms can be stipulated in the contract from the outset.
The principle of rent indexation to the Commercial Rent Index (ILC)
Previously, commercial lease rents were indexed to the Construction Cost Index (ICC), but this index fluctuated too much and was often to the tenant’s disadvantage.
Now, commercial lease rents are generally indexed to the Commercial Rent Index (ILC).
After each three-year period, the tenant can request a rent reduction if the ILC has decreased. This request for a rent review can be sent to the landlord of the commercial premises by bailiff’s notice or registered letter with acknowledgment of receipt, starting the day after the three-year period ends.
Key money
Often, the operator of a hotel, restaurant, café, or nightclub must pay a “key money” upon taking possession of the commercial premises. This is a form of advance rent payment. The landlord’s aim is to offset the discrepancy between the indexed rent and the actual rental value of the premises. The tenant, for their part, can deduct this key money from their profits.
Changes in local market conditions
In addition to a decrease in the Local Market Value Index (LMI), the operator of a hotel, restaurant, café, or nightclub can also request a rent reduction in the event of a decline in local market conditions. These conditions can deteriorate, for example, following the closure of a public transportation line, the closure of a large retail business, a major company, or a neighboring administrative service, or a substantial decrease in the number of residents in the area surrounding the establishment. However, the mere fact that neighboring businesses have renegotiated a rent reduction with the same landlord does not entitle the commercial tenant to a rent reduction under their commercial lease.
This decline must have a negative impact on the hotel-restaurant-café-nightclub’s business for it to be eligible to request a rent reduction under its commercial lease.
Conversely, if these local commercial factors improve, the landlord can request an uncapped rent increase up to the market rental value of the commercial premises. However, this improvement cannot lead to an increase exceeding 10% of the rent paid in the previous year.
An increase, whether upward or downward, is also possible when the commercial lease is for a term exceeding 12 years, or in the event of a change of use.
The Indexation Clause and the Revenue Clause
Thanks to the indexation clause and the revenue clause, the rent for a commercial lease can be revised more frequently than during the three-year review. A revision can occur as soon as the rent has changed by more than 25% compared to the previously agreed amount. In principle, the rent increase through these clauses is always capped at 10% per year.
The revenue clause, on the other hand, allows the commercial lease rent to be adjusted based on the turnover or revenue of the tenant operating the hotel, restaurant, café, or nightclub.
These clauses are advantageous for hotels, restaurants, cafés, and nightclubs, whose businesses are affected by the current economic climate, but they can also work against them since they have both upward and downward effects.
The landlord and the commercial tenant can also decide to index the commercial lease rent to an index other than the ILC (Low-Cost Rent Index). An indexation clause is unlawful if it only allows upward revision, prohibiting any downward revision (Ccass. 3rd civ. 14 January 2016, n°14-24.681 recalled by CA Paris, 7 February 2018, n°16-07.034).
The Specifics of Hotel Commercial Leases
The rent for a hotel commercial lease is subject to some specific rules. The premises in which a hotel is operated are very often classified as “univalent.” This means that significant renovations to the building would be necessary for the premises to be used for any purpose other than a hotel.
The amount of the renewed rent for a hotel can be calculated according to:
– the hotel method, using the maximum occupancy rate, then the actual occupancy rate of the hotel with rental values;
– or the real estate method, using the tenant’s turnover and investment cost.
These methods can lead to a significant increase in commercial lease rents for the hotel operator. It is more advantageous for them to have the leased premises classified as multi-use.
A property is considered multipurpose, for example, when several independent activities are carried out there, such as when a hotel and a restaurant have two separate entrances and their own clientele, and the premises can also be used for a bar or a shop (CA Aix-en-Provence April 25, 2019, No. 15/18290).
The commercial tenant’s request for renewal must be submitted at least six months before the lease expires. This deadline must be respected; otherwise, the tenant risks the commercial lease being extended beyond 12 years, and the landlord may demand a rent increase, with the rent capped at the market rental value.