The Pitfall of Variable Rent in the Event of a Takeover by a New Operator

A fixed rent is much more reliable, as it ensures that the amount is not dependent on the operator’s performance or discretion.

From the outset, or when operations at a residence are resumed following the bankruptcy of the original operator, a clause is included in the lease that ties the majority of the rent amount to operating results (with the guaranteed portion being very modest).

A whole range of arguments is then put forward to convince investors of the benefits of this clause: the need to share risk, a “win-win” agreement, the possibility of obtaining a higher rent compared to a traditional fixed rent… Unfortunately for the co-owners, they often receive only the guaranteed minimum throughout the entire term of the lease. While this situation is sometimes the result of poor performance by the residence, it is also often the result of the operator’s dishonest fulfillment of its obligations. For example, to avoid paying the variable portion, the operator might refuse to provide the accounting documents needed to perform the calculation specified in the lease, or artificially reduce the property’s profitability by diverting cash to other companies within the group.

Our advice: Clearly define the clauses that could trigger a rent increase

In this regard, whenever possible, opt for a fixed rent.

However, if, given the circumstances, a variable portion must be included, you should negotiate for it to be as low as possible and ensure that the events triggering its application are clearly defined and achievable. The same information used to ensure the proper application of the clause must be provided annually to the landlords (relevant accounting data). In the event of non-compliance, this information may be obtained through the courts following a simple and expedited procedure, such as summary proceedings.