The franchisor/landlord and franchisee/lessee are increasingly striving, for various reasons, to gear the rent of retail space to the turnover to be achieved. From the landlord’s perspective, for example, to lower the threshold for letting/franchising and from the tenant’s perspective to limit the risk of excessive fixed costs. It may then concern a full turnover rent or a partial turnover rent with a fixed (basic) component.
However, this system is difficult to fit into the legal system. Although the law assumes that the parties are free to determine the rental price for the first agreed rental period and can therefore also agree on a turnover-related rental price, in the case of retail space, the parties can, in principle, after the first rental period of five years, in the event of an extension, at least if there is an indefinite term, request unilateral adjustment of the rent once every five years, equal to the rent of comparable industrial space in the vicinity, i.e. regardless of the turnover and the provisions of the lease. If the parties cannot reach an agreement in mutual consultation, advice must be sought from an expert to be appointed jointly. If that does not help either, the parties are free to have the rent determined by the court.
When determining the rent to be revised, the court (and therefore also the advisory expert) is bound, barring special circumstances, to the legal system of the reference rent of comparable industrial space. Turnover does not play any role in this system, even though this was the starting point of the parties. The parties are often insufficiently aware of this limitation when entering into the rental agreement.
Turnover rents are therefore not compatible with this legal system, which often leads to problems. This is fundamentally different abroad.
In the case of a (first) contractual extension after the first five years, the court usually still takes into account the originally agreed turnover-related rent, but after the first extension of usually five years, it proves difficult to convince the franchisees who score well of a rent reduction. prevent, but also not easily, from imposing a rent increase on poorly scoring franchisees. The latter because tenancy law for retail space precisely aims to offer protection to the franchisee/tenant.
In combination with a franchise agreement, the question then arises whether such a rent adjustment does not interfere improperly with the overall legal relationship. After all, the original party intention is undermined by the law, while in franchise relations it can be arbitrary where the franchise fee ends and the rent begins.
The parties can try to prevent this risk by requesting prior approval from the court of this turnover-related rent clause that deviates from the law. This does not mean that approval is granted in all cases and in which the mixed legal relationship rent/franchise may also play a role. Whether permission is granted also depends on whether the turnover-related rent clause is not to the detriment of the franchisee/lessee. This will not be the case soon. Requesting this permission has been possible since the amendment of tenancy law in 2003. This option is still (too) little used. It is then up to the court to determine whether this is not detrimental to the franchisee/lessee, in which situation approval must be withheld. This will in any case provide certainty before the commencement of the franchise rental agreement regarding the legal validity of the turnover-related rental price, including for any renewal period.
Ludwig & Van Dam franchise attorneys, franchise legal advice