Commercial Leases/Business Goodwill

The trial court retains two different legal qualifications for the key money. The payment of such an amount, upon entering the premises, can be assimilated to an additional rent , which aims to achieve an overall price corresponding to economic fluctuations and to bring the total rent closer to the fair rental value of the premises, or to a compensatory indemnity for commercial advantages unrelate …

Classification

The trial court retains two different legal qualifications for the key money. The payment of such an amount, upon entering the premises, can be assimilated to an additional rent , which aims to achieve an overall price corresponding to economic fluctuations and to bring the total rent closer to the fair rental value of the premises, or to a compensatory indemnity for commercial advantages unrelated to the rent . This amount then presents the character of a financial consideration intended to compensate for the depreciation of the building resulting from granting the tenant commercial property rights , who benefits from the right to renew their lease  and to eviction compensation.

It is up to the trial court to ascertain the common intention of the parties to determine the legal nature of the key money paid by the tenant . While they are required to independently assess the intention of the parties, the judges must not distort it . Thus, when, in both the lease promise and the lease itself, the parties have expressly agreed to qualify the sum paid by the tenant to the landlord as additional rent as an entrance fee, this qualification clearly reflects their common will, leaving no room for ambiguity or interpretation, and binds the judge . This is not the case when the sum paid at the signing of the lease is described as an “entrance indemnity,” and the landlord does not provide proof of the parties' common intention to consider this sum as additional rent, as this qualification cannot result solely from its subjection to VAT . Conversely, the sum paid in a single installment at the signing of the lease, which remains definitively and entirely acquired by the landlord, even in the event of termination for any reason, corresponds not to additional rent but to a compensatory indemnity for commercial advantages , even if it is subject to staggered payments at determined deadlines .

Depending on the chosen classification, the rental and tax implications differ.

In terms of leasing, when it is considered an additional rent, the key money is taken into account for the calculation of the triennial revision and the setting of the rent for the renewed lease, but not for the eviction indemnity . It accrues interest like rent paid in advance if it exceeds two terms, in accordance with Article L. 145-40 of the Commercial Code. When the entry fee is considered a compensatory indemnity, it must be taken into account in the calculation of any eviction indemnity paid to the lessee at the end of the lease .

From a tax perspective, the Administration considers that the key money is analyzed as taxable income when it constitutes a rent supplement, but it is not taxable when it solely represents “the consideration for the depreciation of the building that provides rental income, i.e., the decrease in its market value” . When it is classified as a rent supplement, the entrance fee is subject to VAT in the same way as rent . Regarding the lessee, if the amount of the key money can be included among the deductible expenses as a rent supplement, it is different for the compensation paid in consideration for the depreciation of the building, which is recorded as an asset on the lessee's balance sheet .

Cass. com., 14 November 1962, LawLex202100005857JBJ; 29 March 1966, LawLex202100005920JBJ: in this case, the key money listed in the lease under the heading “rent” constituted, due to the modesty of the latter, an additional rent for the first three years, thus bringing the total rent closer to the fair rental value of the premises at the time of the events.

Cass. 3e civ., 16 May 2000, LawLex202100005860JBJ.

Cass. com., 14 November 1962, LawLex202100005857JBJ, op. cit.

Cass. 3e civ., 14 January 2015, LawLex202300005648JBJ.

Council of State, 15 February 2019, LawLex202300005647JBJ.

Cass. com., 14 April 1992, LawLex202100005858JBJ.

CA Aix-en-Provence, 23 January 2020, LawLex202300005436JBJ.

Cass. 3e civ., 12 October 1976, LawLex202100005856JBJ; 11 October 1978, LawLex202100005861JBJ.

Cass. 3e civ., 23 January 1980, LawLex202100005862JBJ, which quashes the appeal judgment that distorts the clear and precise terms of a lease contract, which refers to a sum paid by a lessee as a “rent supplement,” by deciding that this sum constitutes a lease premium.

Cass. 3e civ., 2 December 1998, LawLex202300005566JBJ.

Cass. 3e civ., 23 September 2014, LawLex202300005568JBJ.

Cass. 3e civ., 16 May 2000, LawLex202100005860JBJ, préc.

Cass. com., 14 April 1992, LawLex202100005858JBJ, op. cit.

Commercial Leases/Business Goodwill

148. Classification

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Les décisions de justice citées dans ce paragraphe :

Les notions juridiques connexes

148. Classification

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Les décisions de justice citées dans ce paragraphe :

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