Advantages and disadvantages of the turnover-related rent

A construction that is often used in franchise relationships is where the franchisee rents the premises in which he operates his business from the franchisor, who in turn rents from the owner of the premises, i.e. a so-called sublease construction. The main reason for such a sublease construction lies in the fact that in this way the franchisor retains some control over its locations in the event that the franchise relationship with the relevant franchisee ends.

A phenomenon that does not yet occur too often in franchise relationships, but which will probably become more prevalent in the future, is the so-called turnover rent. The rent is often a fixed amount, at least annually, that must be paid by the (sub)tenant in return for using the premises in which he operates his business. Another possibility, however, is to relate the rent to the turnover realized in the relevant building. For the time being, the turnover rent phenomenon is mainly common practice in the rental and lease of filling stations. In addition, it is a phenomenon that is used in new shopping centers. Many franchise organizations value placing their points of business at so-called A locations. The rental price of such A-locations, which ultimately has to be paid by the franchisee, is often corresponding. Seen in that light, turnover rent can be an interesting way to enable a franchisee to do business with the franchise organization. After all, the franchisee in question does not need to anticipate a (too) high rent as a major obstacle in advance, but knows that this will depend on the turnover achieved by him; if the turnover is relatively low then the rent is correspondingly low, if the turnover is high then it is realistic to pay a related (higher) rent. This applies vice versa for the lessor (the franchisor). After all, it benefits. If things go well for the franchisee, the franchisor will receive a higher rent. Therefore, a situation that is beneficial to both parties.

The above is also an immediate disadvantage (especially for the franchisor) now that there is a certain degree of risk in being a landlord. After all, if the turnover remains low for a number of years, the rent will also be low. In extreme cases, such a construction could also be seen as a form of subsidy / financial support by the franchisor towards the franchisee. This should be handled with extreme caution now that such a form of financial support could, where appropriate, be regarded by the tax authorities and the administrative agencies as a factor that could also lead to the establishment of a so-called fictitious employment relationship between the parties. This topic has already been covered in this series of articles.

Ludwig & Van Dam franchise attorneys, franchise legal advice