French commercial lease framework

pexels-photo-722246.jpeg

French commercial lease

Leases for premises where the lessee carries out a commercial activity are governed by the provisions of the French commercial code as well as the non-codified provisions of the Decree n°53-960 dated September 30th, 1953 (the "Commercial Lease Framework").

Free translation of the French commercial code is available here :

The main purpose of the Commercial Lease Framework is to give the lessee the right to renew the lease in order to ensure business continuity and retention of goodwill (security of tenure).

The general conditions of the lease, such as issues in regards to maintenance and repair of the building, are ruled by articles 1714 to 1778 of the French civil code .

Duration, renewal, and termination of the lease, rent setting, usage of the premises, authorised activities, sub-leasing and assignment of the lease are governed either in whole or in part by the Commercial Lease Framework.

DURATION AND TERMINATION of the french commercial lease

·        Term

The minimum term of a commercial lease is 9 years. The parties can provide for a longer term.

If the term exceeds 12 years, the lease must be filed at the Land Registry and Charges Registry ("bureau des hypothèques"), be in the form of a notarial deed, and the land registration tax has to be paid.

According to article L.145-4 of the French commercial code, unless the parties provide otherwise, the lessee is entitled to terminate the lease at the end of every 3-year period by giving at least a 6-month prior notice delivered by bailiff or by registered letter with acknowledgment of receipt.

This provision does not apply to French leaseback in tourist residences. 

In practice, the lessee often waives this right, at least for the first period and, accordingly, is bound to stay in the premises for a firm period of at least 6 years.

Any termination notice has to be served with a 6-month prior notice. If the notice is served by the lessor, it has to be delivered by bailiff, and if it is served by the lessee, it has to be delivered either by bailiff or by registered letter with acknowledgement of receipt. If the notice is delivered 6 months prior to the term of the lease, the termination will take effect on the date of the end of the term of the lease. If it is delivered afterwards, the termination will take effect 6 months after and for the last day of a quarter, i.e. either for the 31 March, 30 June, 30 September, or 31 December.

 

RENEWAL OF french COMMERCIAL LEASES

·   Conditions for renewal

In order to benefit from security of tenure, the lessee must comply with the 3 following conditions:

-    the lessee (either an entity or an individual) must be registered at the Trade and Company Registry as a company or a merchant ("commerçant"). Registration must be in force at the time the lessor gives notice or the lessee requests the lease renewal;

-   the lessee must own the business carried out in the premises and the business must be properly carried out in the premises during the 3 years prior to the end of the term of the lease;

-   the lessee must be a French resident, a resident of any member States of the European Union, or a resident of a non-EU member State and hold a resident permit (or must be able to avail her/him statutory provisions that allow reciprocity).

·   Principle

The lessee is entitled to either the renewal of the lease at the end of the lease term or to the payment of an eviction indemnity, should the lessor decide not to renew the lease.

 

Eviction indemnity

The eviction indemnity must compensate the lessee for any losses and costs incurred, such as:

-                      moving costs,

-                      higher rent to be paid,

-                      loss of business.

However, the lessee is not entitled to compensation if she/he/it is in serious breach of its obligations under the lease.

The lease is renewed when the lessor notifies the lessee an offer to renew the lease ("congé avec offre de renouvellement") or when the lessee notifies the lessor of a request to renew the lease ("demande de renouvellement").

However, the rules may differ depending on whether the lessor or the lessee delivers the notice.

-                      Notification by the lessor:

If the notification is served by the lessor in compliance with the statutory provisions (i.e. with a prior notice at least 6 months before the end of the term), the renewed lease will start upon the end of the term of the former lease.

If the notification is served after the 6 months preceding the end of the term, the former lease will terminate on the last day of the quarter following the 6 months after the notice has been delivered.

-                      Notification by the lessee:

If the lessee requests the renewal during the 6 months period prior to the end of the lease, the renewal of lease will take effect on the day following the end of the lease.

Within the 3 months following the notification served by the lessee, the lessor must inform the lessee by bailiff whether or not he/she/it accepts to renew the lease. If the lessor does not do so, he/she/it is deemed to accept to renew the lease.

In the event of refusal of the lessor, the lessee can go before the competent Court within a 2 year period, either:

(i)               to challenge the landlord's refusal to renew the lease, or

(ii)             to ask for the payment of the eviction indemnity (article L.145-10 para. 5 of the French commercial code).

-                      Renewal:

In the event of a renewal, the lease is renewed on the same terms and conditions as the previous lease, and for the duration of 9 years, unless the parties expressly provide for a longer term.

Lease extension

If the parties remain silent after the the end of the lease, the terminated lease is tacitly extended for an undetermined period of time.

In this respect, all its provisions remain in force between the parties.

Either party is entitled to terminate the lease at any moment with a 6-month prior notice. The termination date of the lease will be determined by application of the rules set out above.

 

MODIFICATION OF THE RENT DURING THE life OF THE french commercial LEASE

As a general rule, neither the lessor nor the lessee can change the amount of the rent during the life of the lease.

However, according to mandatory provisions of the French commercial code, the rent of a commercial lease may be reviewed at the request of either party, in the following circumstances:

·        Statutory provisions: 3-year review

Articles L. 145-37 and L. 145-38 of the French commercial code provide that either party can ask for a rent review after 3 years from the date on which the rent was last set.

According to article L. 145-33 of the French commercial code, the reviewed rent must correspond to the market rental value ("valeur locative") of the premises.

This value takes into account, unless the parties have agreed otherwise:

-      the characteristics of the premises,

-      the purpose for which the premises are used,

-      the parties' respective obligations,

-      the local commercial factors and the level of rent in the neighborhood.

However, article L. 145-38 of the French commercial code provides that increases or decreases of rent upon 3 year review are limited to the variations of the index of variation used, such as the ILC ("indice des loyers commerciaux"), over the relevant 3 year period (i.e. since the rent was last set).

The index to be considered in order to determine the variation applied to the rent are the index of the quarter during which the last rent determination occurred and the index of the quarter on which the revision request is made.

The value resulting from the increase of the index of variation shall constitute a cap. According to a well-known case law (Civ. 3e, 6 February 2008, n° 06-21.983), the reviewed rent has to be set at the rental value if the rental value is between :

(i)               the amount of the rent previously agreed on by the parties or set by the court and ;

(ii)             the value resulting from the increase of the index of variation.

Article L. 145-38 of the French commercial code provides an exception to increases (or decreases) of rent where a change in local commercial factors has occurred since the last rent review and results in a fluctuation (increase or decrease) of more than 10% of the rental value of the premises. In this case, the rent is reviewed in order to equal the new rental value of the premises and may be lower than the rent previously in force.

Rent review must be requested either by registered letter with acknowledgment of receipt or by a bailiff deed. It must contain the amount of the new offered rent. The date upon which the revised rent will be due is the date the request was delivered.

Rent review can be requested even if the rent is subject to an indexation clause. The review will then occur 3 years after the rent was last determined by the parties, without taking into consideration the rent reviews made further to the indexation.

 ·        Increase or decrease of the rent by more than 25 %

Note that according to article L.145-39 of the French commercial code, in the event that the rent is decreased or increased, by the effect of the indexation clause, by more than 25% in comparison with the rent previously determined through a contract or by court decision, either party could request the rent to be set (decreased or increased) at the rental value of the premises.

According to a constant case law, when the rent is composed of a minimum  rent and an additional variable component, the provisions of above-mentioned article are not applicable.

 

RENEWAL OF french COMMERCIAL LEASES & setting the rent

·        The Principle

According to article L. 145-33 of the French commercial code, the rent set upon renewal of the lease shall correspond to the rental value of the premises.

However, statutes and case law provide that the increase of rent on renewal of the lease may be capped depending on the activity carried out in the premises and the duration of the lease.

Their rent is not capped on renewal of lease for premises used exclusively for one purpose (such as tourist residences), or for leases entered into force more than 9 years or effectively lasting more than 12 years.

As a result, the limitation mainly applies to 9-year leases of premises used for general business purposes.

For such leases, the rent variation may not exceed the variation fixed in the ILC since the lease took effect, unless one of the parties to the lease can produce evidence of a substantial change of the factors upon which the initial rent was set.

In addition, on premises in which only one type of activity can be operated the rent will not be capped in the event of a lease renewal, such as a movie theatre or a bank, provided that the premises are specifically equipped with safes that could be considered specific so as to prevent the operation of any other activity in the premises (storage premises do not benefit from such exemption).

Accordingly, no limitation will apply to the determination of the rent in case of lease renewal of such premises.

Any question ?