Do you consider starting a business in France? But you might be confused about the terms: D.A.B. – droit au bail, pas-de-porte et fonds de commerce.
In this article, we’ll answer the following questions:
- What do these terms mean?
- What are the differences?
- When are they required?
- How are they accounted for?
- And by the way, what’s the alternative to the standard commercial lease in France?
Meaning of Pas-de-porte, fonds de commerce and D.A.B. (Droit au Bail)
Dictionary
Before diving in, here are the raw translations that could become handy for you:
- locataire = tenant
- bailleur = landlord
- droit au bail = option rights
- pas-de-porte = key money
- bail commercial (baux commerciaux) = commercial lease (commercial leases)
Definition of Droit au bail, a.k.a. Option rights
So, what’s the point of a droit au bail (option rights)? The answer is simple:
The option rights guarantee the current tenant the renewal of his commercial lease. If the owner – bailleur in French – refuses to renew the lease when it expires, he has to pay an eviction indemnity to the tenant.
So option rights protect the tenant. And this right can be valorized when he wishes to transfer his lease to a replacement. Hence the possibility of selling the right. This means that:
a new tenant wishing to take over a former tenant’s lease may be required to pay the option right.
“Taking over the lease” = it means that there is no new contract signed between the landlord and the new tenant. The new tenant simply takes over an existing lease for the time remaining on the contract.
The amount paid for the option right is negotiated freely.
Definition of Pas-de-porte, a.k.a. Key money
Often referred to as the “entrance fee” (droit d’entrée), key money may be requested from the new tenant by his landlord.
The sum is required when the contract is signed. The amount is freely determined according to the attractiveness of the premises. Key money does not concern the previous tenant.
Definition of Fonds de commerce
The translation of this term is often debated. Some refer to it as goodwill, others just as “business”. But to simplify,
le fonds de commerce is a set of elements that can be transferred to the buyer of a commercial activity.
And option rights are a constituent element of the fonds de commerce. Just like the clientele, the accounts on social networks and marketplaces, the website and domain names, the inventory, the trade name, the employment contracts, etc.
You’re taking over not only the premises, but also the business carried on there.
A landlord sometimes opposes the transfer of the right to the lease
Quite often, transferring a commercial lease entails a change in business activity. In other words, the former tenant has not sold his business (fonds de commerce), only the option rights to the lease.
This is not always to the liking of the owner of the premises. For this reason, some landlords in France prohibit the transfer of option rights alone when signing a contract.
In such cases, the former tenant can only transfer the right if it is sold as part of the fonds de commerce. If the business is sold, the landlord cannot object. However, he can add clauses to the lease concerning this transfer.
How to account for key money and option rights in France?
Accounting for option rights (droit au bail)
The droit au bail can only be accounted for as an indemnity. It is recorded as an intangible fixed asset on your balance sheet. It therefore has no impact on your income statement.
Accounting for key money
There are 2 ways of accounting for key money:
- As an extra rent. This is the most common case. It is then a deductible expense in your income statement. It is therefore tax-deductible. But this deduction must be spread over the term of your lease.
- As an indemnity. In this case, it’s an intangible asset on your balance sheet. You cannot deduct it from your income for tax purposes.
These 2 approaches are not mutually exclusive. We can therefore partly record the key money as an extra rent supplement and partly as an indemnity.
How to avoid paying option rights or key money?
Location without option rights
The most common case is the absence of a previous tenant. You take over a vacant premises. You will therefore sign a new lease instead of taking over that of a tenant.
The other case is where you negotiate the right. If the current tenant is in a hurry to leave and there are only few interests for the takeover, negotiations can turn in your favor.
Local without key money
Several cases:
- If you’re taking over a current lease, the landlord can’t demand key money,
- If the landlord decides not to require key money. But be careful. Key money is generally counted as an extra rent. If you don’t pay it, the landlord may charge a higher monthly rent in return.
As with option rights, key money is negotiable. You have the right to refuse it. If the premises have difficulty finding takers, you increase your chances of paying little or no key money.
What are the alternatives to a commercial lease?
A commercial lease can be a heavy option for a young entrepreneur, as it commits you – depending on the clauses of the contract – for a minimum of 3, 6 or 9 years in France.
On the other hand, it ensures that you keep your address for the long term. It has its upside.
If you’re looking for an alternative, there are also short-term leases in France, also known as bail à l’américaine.
This type of lease has major advantages: no option rights, no key money, and a shorter commitment period.
But you can see it coming, the landlord will tend to demand a higher rent in return.
Key Takeaways
Let’s sum it up:
- Droit au bail = option rights. The former tenant can demand it from the new tenant taking over the lease.
- Pas-de-porte = key money. The landlord can demand it from the new tenant signing a commercial lease.
Pas-de-porte and droit au bail are never mandatory in France, and are freely negotiated.
You may not be required to pay any key money or option rights, notably in the case of a bail à l’américaine (also known as a short-term lease). But these advantages are often offset by a higher rent.
Keep in mind there are occasionally confusions regarding key money. It is sometimes used as a general word regrouping what we in this article called option rights and key money.
Also, key money as we defined here is a widespread practice in many countries. Option rights are not a French specialty either. It is also used in Germany for instance.
My final word of advice: don’t rush into anything, especially if you’re renting commercial premises for the first time. Don`t hesitate to meet several agencies, landlords and tenants. Be curious about their situation, their constraints, their business, the type of clientele they attract, and so on.
This will enable you to make a commitment with a wealth of knowledge and information that will increase your chances of success.
