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06 Feb 2025
Sticky Post By Posted in French Leaseback Permalink

Tourist Residence French Law

Sticky Post By On 6 February 2025
Tourist Residence French Law traesch lawyer

1. “Tourist Residence” Classification and Regulations

Tourist residences are governed by specific regulations (Articles D. 311-4 et seq. of the French Tourism Code) designed to ensure para-hotel services (reception, cleaning, breakfast, etc.).

A star rating is granted to the residence if it meets certain standards of facilities and services.

2. Implications for the lease

The obligations required to maintain the residence’s classification mainly fall on the operator (reception services, upkeep, hotel-type services).

Preserving the star rating can affect both the value of the premises and rental income; losing the classification could reduce the residence’s tourist appeal and thus lower revenues.

2. Commercial Lease Agreement for a Tourist Residence

1. Commercial lease status

Most of these leases fall under the scope of French commercial lease law  (Articles L. 145-1 et seq. of the French Commercial Code).

As a result, the operator (tenant) generally benefits from the right to  renew the lease, provided that the statutory conditions are met, unless a specific contractual or statutory exception applies (e.g., certain para-hotel management agreements may not strictly come under commercial lease law, though this is relatively rare).

2. Duration

As a rule, a commercial lease in France must have a minimum term of nine years, and the tenant may terminate at the end of each three-year period (the “triennial break”), unless it is a specific form of lease (e.g., a commercial seasonal lease, which is much less common).

In some tourist residence schemes, “firm” leases of 10, 11, or 12 years have been signed, sometimes including a partial waiver of the tenant’s right to terminate at each three-year interval.

3. Rent and profitability

Such lease contracts often feature a so-called “guaranteed rent” with annual or triennial indexation. However, rent adjustments or reviews may lead to rent reductions if the operator faces financial difficulties or seeks to rebalance costs.

Rent calculation may be based on turnover (a variable rent) or a fixed indexed rent (using indices from INSEE such as the ICC, ILAT, etc.). It is important to scrutinise the relevant clauses to assess their long-term viability.

4. Allocation of service charges

In tourist residence leases, the operator often bears a broad range of service charges (day-to-day upkeep, maintenance of reception facilities, operating expenses, and so forth).

Nonetheless, the owner (landlord) remains responsible for major repairs (Article 606 of the French Civil Code), except where the lease stipulates otherwise. Any clause transferring such responsibilities must be examined in light of recent legislative and case law developments (in particular, the Loi Pinel and subsequent jurisprudence on apportioning charges).

3. Real Estate Sale Contract and Specifics of Leaseback

1. Purchase with an attached lease

In the standard setup for tourist residences, the buyer acquires a property (condominium lot) and simultaneously signs a commercial lease with the operating company.

The arrangement often includes a tax incentive (e.g., LMNP or LMP status, tax depreciation, reclaiming VAT on the purchase subject to meeting furnished tourist rental requirements, etc.).

2. Post-purchase obligations

The buyer, now the landlord, must adhere to the designated use of the property (tourist rental) and maintain the minimum letting period to retain any tax benefits (commonly nine years, in the context of reclaiming VAT).

If the property is sold prematurely, the seller may be required to repay VAT or lose tax relief if the subsequent purchaser fails to continue the same commercial lease arrangement.

3. Transfer of the property and the fate of the lease

In principle, the commercial lease passes automatically to the purchaser of the lot. The new owner thus steps into the role of landlord vis-à-vis  the operator.

Conversely, the tenant (operator) may only assign the lease under the conditions expressly set out in the contract.

4. Specific Points Requiring Vigilance

1. Financial stability and track record of the operator

The profitability of the investment and the continuity of the lease strongly depend on the operator’s financial stability.

It is advisable to examine the operator’s accounts, reputation, tourist occupancy trends at the resort, and to check whether any rent renegotiations are under way or likely.

2. Clauses on renewal or early termination

Carefully review any clauses allowing the operator to terminate the lease prematurely:

  • Triennial termination,
  • Renewal terms (e.g., excessive indexation),
  • Provisions for amicable termination or unilateral termination (rare, but possible).

Check if any penalties or indemnities are provided in favour of the owner should the tenant end the lease early.

3. Condominium charges and potential works

Verify the allocation of service charges within the condominium rules and the lease: certain renovation or compliance works (spa facilities, swimming pools, common areas) may result in significant special assessments for unit owners.

In a tourist residence, the operator may well assume a substantial portion of maintenance costs but not necessarily cover all major structural works.

4. Commercial use and property designation

Confirm that the condominium documents, including the co-ownership rules and the lease, permit operation as a tourist residence. Any change in designation or classification (e.g., converting into a standard residential building) requires formal amendments and may jeopardise tax relief or rental income.

Conclusion and Practical Advice

1. Review the current contract:

Each tourist residence, may have unique lease and management terms (original contract, amendments, renegotiation protocols). It is essential to obtain and closely examine:

  1. The existing commercial lease (and any amendments),
  2. The condominium regulations (règlement de copropriété) and any
  3. related schedules,
  4. The minutes of general meetings of co-owners (to identify any pending
  5. works, disputes, etc.),
  6. Tax provisions (VAT, LMNP, etc.) in the event of sale or purchase.

2. Seek professional guidance:

Given the financial and legal implications, it is wise to consult a solicitor or barrister with expertise in commercial leases and real estate law, a notary experienced in tourist residences, and a tax adviser/accountant to ensure compliance and optimise the arrangement.

3. Plan ahead for renewals and renegotiations:

Tourist residences evolve in tandem with market conditions, the operator’s commercial strategy, and the potential need for refurbishments. Owners should be mindful of lease expiry dates and other key deadlines to safeguard their investment (rent, indexation, lease renewal, possible refurbishment works, etc.).

In summary, tourist Residence falls under the broader umbrella of furnished tourist rental programmes. Whether you are buying, selling, or operating a unit, it is crucial to address the specifics of the commercial lease and the associated regulations for classified tourist accommodation. A thorough review is strongly recommended before making any decisions (acquisition, disposal, renegotiation).

Ask your questions using the contact form at the bottom of the page.

06 Feb 2025
Sticky Post By Posted in French Leaseback Permalink

Leaseback in France: Key Legal Pitfalls for Investors

Sticky Post By On 6 February 2025
Leaseback in France Key Legal Pitfalls for Investors traesch lawyer

Pitfalls: The French leaseback system, known as “vente en état futur d’achèvement avec bail commercial”, has long been an attractive option for property investors looking for a secure and hassle-free investment. It allows buyers to purchase a property and lease it back to a management company, typically for a fixed period, in exchange for guaranteed rental income and tax advantages. While this structure can be appealing, leaseback contracts come with legal complexities and financial risks that investors must carefully consider.

In this guide, we will explore the most common pitfalls associated with leaseback agreements in France and provide practical solutions to help investors avoid costly mistakes.

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1. Understanding the French Leaseback Model

A leaseback contract involves purchasing a property, typically in a tourist or student residence, and immediately leasing it back to an operating company that manages rentals. The lease term usually ranges from 9 to 12 years, during which the investor receives guaranteed rental income and benefits from a 20% VAT rebate on the purchase price.

On the surface, the leaseback system appears to be a low-risk, passive investment. However, numerous legal and financial challenges can jeopardize an investor’s returns and ownership rights if not carefully assessed before signing.

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2. Pitfall 1: Lack of Rent Guarantee Protection

Issue

Many investors assume that their rental payments are fully guaranteed for the entire lease period. However, the rental income depends on the financial stability of the management company. If the operator faces financial difficulties or goes bankrupt, rent payments can suddenly stop.

Solution

✔ Due diligence: Before signing, investors should research the financial health and track record of the management company. Look at its history of payments, legal disputes, and bankruptcy risks.

✔ Bank guarantee: Some leaseback contracts include bank guarantees to ensure rental payments even if the operator defaults. If this protection is missing, negotiate for its inclusion.

✔ Rent indexation clause: Ensure the lease agreement includes an indexation clause so that rental income keeps up with inflation or an agreed market benchmark.

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3. Pitfall 2: Unfavorable Lease Terms for Investors

Issue

Leaseback contracts are usually written in favor of the management company, leaving little flexibility for investors. Some problematic clauses include:

Mandatory renewal clauses, preventing investors from exiting the agreement easily.

High maintenance costs imposed on the owner, even for issues beyond their control.

Unilateral termination rights for the management company, putting investors at a disadvantage.

Solution

✔ Negotiate lease terms: Investors should negotiate terms that allow them to exit the lease at predetermined points without excessive penalties.

✔ Understand maintenance obligations: Review the contract to clarify which maintenance costs are the investor’s responsibility and negotiate caps on unexpected expenses.

✔ Seek legal review: A lawyer specializing in leaseback agreements can spot unfavorable clauses and suggest modifications before signing.

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4. Pitfall 3: Loss of VAT Rebate Due to Non-Compliance

Issue

A major incentive for leaseback investment is the 20% VAT rebate on the purchase price. However, this benefit is conditional on the property remaining in the leaseback scheme for at least 20 years. If the lease is terminated early, the investor may have to repay the VAT rebate.

Solution

✔ Plan for long-term ownership: If an investor may need to sell early, they should ensure the buyer is willing to continue the lease, thus avoiding VAT repayment.

✔ Negotiate VAT clawback protection: Some contracts reduce the VAT repayment obligation gradually over time. Investors should negotiate for such provisions.

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5. Pitfall 4: Difficulty Selling a Leaseback Property

Issue

Reselling a leaseback property can be challenging, as the second-hand leaseback market is not as active as the market for new developments. Most buyers prefer new properties with fresh tax incentives rather than purchasing an existing leaseback unit.

Solution

✔ Choose prime locations: Leaseback properties in high-demand tourist or student areas have a better chance of resale.

✔ Work with specialized agents: Real estate agents familiar with the leaseback market can help find buyers more easily.

✔ Ensure lease flexibility: If the lease allows the property to be used as a personal residence after expiry, it can make the unit more attractive to potential buyers.

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6. Pitfall 5: Operator Insolvency and Lease Termination

Issue

If the management company becomes insolvent or defaults on rent, the lease may be terminated, leading to several consequences:

Investors lose rental income and must find a new operator.

The VAT rebate may need to be repaid due to early lease termination.

Finding a new tenant or operator can be difficult in some locations.

Solution

✔ Financial guarantees: Some leases include insurance or bank guarantees to protect against rental payment defaults.

✔ Alternative use clauses: Investors should ensure the contract allows them to use the property personally or sell it freely if the operator fails.

✔ Legal recourse: If an operator defaults, investors may need to take legal action to recover damages. Consulting an experienced lawyer is crucial in such cases.

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7. Conclusion: Protecting Your Leaseback Investment

While leaseback contracts in France offer stable returns and tax advantages, they require careful legal scrutiny to avoid risks. Investors should:

Conduct thorough due diligence on operators.

Negotiate favorable lease terms to protect their rights

Ensure compliance with VAT rebate conditions to avoid unexpected repayments.

Plan exit strategies to minimize financial losses.

A legal expert specializing in commercial lease law can help investors navigate the complexities of leaseback agreements and ensure a profitable and secure investment. Before signing any leaseback contract, always seek professional legal advice to avoid costly mistakes.

Ask your questions using the contact form at the bottom of the page.

03 Feb 2025
Sticky Post By Posted in French business law Permalink

Breach of contractual relations in automobile distribution

Sticky Post By On 3 February 2025
Breach of contractual relations in automobile distribution traesch lawyer

Breach of a brutal distribution contract

The ruling handed down by the French Supreme Court, Commercial Division, on April 13, 2023 (Appeal no. 22-13.666) concerns a dispute between M Motors Automobiles France (MMAF) and SWA, concerning a claim for compensation for loss of opportunity due to the termination of contractual relations between the two parties.

Compensation claimed for loss of opportunity to generate gross operating profit

Mitsubishi automobile distribution

MMAF distributes Mitsubishi vehicles in France via a network of authorized distributors.

A letter of intent signed in October 2015 between MMAF and SWA indicated an agreement on the representation of the Mitsubishi brand by SWA.

In August 2016, MMAF informed SWA that it no longer wished to proceed with its application due to significant delays.

SWA then took MMAF to court, claiming damages for the brutal termination of commercial relations, citing in particular a loss of opportunity to achieve gross operating profit.

Decision of the Metz Court of Appeal

The Court of Appeal ordered MMAF to pay SWA 138,800 euros for loss of opportunity to generate EBITDA.

This sum was based on an estimate of the contract’s three-year performance period, taking into account a two-year notice period and a one-year observation period before any potential termination.

Cour de cassation ruling: the principle of full compensation for damages

The Cour de cassation partially quashed the decision of the Court of Appeal on the following grounds:

“The Court’s response

Having regard to Article 1149 of the Civil Code, in its wording prior to that resulting from Order no. 2016-131 of February 10, 2016, and the principle of full reparation for loss :

6. Under the terms of this article, the damages due to the creditor are, in general, the loss he has made and the gain of which he has been deprived.

7. In condemning MMAF to pay SWA the sum of 138,800 euros for the loss of opportunity to achieve gross operating profit, the court held that the loss of opportunity could not be proven over just two years, since the contractual notice period was two years, and that at least one year of observation was necessary before the distributor could decide to terminate the contract on the grounds of the concessionaire’s poor results.

8. In so ruling, the Court of Appeal, which awarded SWA compensation on the basis of an erroneously established duration, violated the aforementioned text and principle.”

1. Violation of the principle of full compensation

The French Supreme Court has reiterated the principle that damages must correspond to the loss suffered, without exceeding the amount of the actual loss. In this case, the Court of Appeal had based its estimate on a three-year period, which exceeded the contractual notice period of 24 months.

The Cour de cassation ruled that this period was erroneous, and that it awarded SWA compensation in excess of what the contract allowed, thus violating the principle of full compensation.

2. Loss of opportunity

The Cour de cassation ruled that the compensation awarded should be recalculated, as it was based on an inappropriate contractual duration.

Conclusion

The Cour de cassation annulled the compensation of 138,800 euros awarded to SWA for loss of opportunity and referred the case back to the Nancy Court of Appeal for a reassessment of this compensation on the basis of correct criteria. It also ordered SWA to pay the costs and rejected its claim for compensation under article 700 of the French Code of Civil Procedure.

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03 Feb 2025
Sticky Post By Posted in french commercial lease Permalink

Property tax and determination of rental value

Sticky Post By On 3 February 2025
Property tax and determination of rental value traesch lawyer

Rents for renewed or revised leases must correspond to rental value

Article L145-33 of the French Commercial Code:

“ The amount of rent for renewed or revised leases must correspond to the rental value.

Failing agreement, this value is determined on the basis of :

1 The characteristics of the premises in question

2 The purpose of the premises;

3 The respective obligations of the parties;

4 Local commercial factors;

5 Current prices in the vicinity “.

The lessee complains that the rent was set without taking into account the obligations of the parties.

Property tax payable by the tenant

The lessee criticized the judgment in the following terms:

“Besson chaussures complains that the ruling set the capped rent for the renewed lease at the rental value, whereas ”in the absence of an agreement between the parties, the rent for the renewed lease must correspond to the rental value determined, in particular, with regard to the respective obligations of the parties; the obligations normally incumbent on the lessor, which the latter has discharged onto the lessee, constitute a factor reducing the rental value ; in order to determine the rental value and declare that it corresponds to the capped rent of the renewed lease, the court of appeal refused to apply an abatement in consideration of the burden of property tax on the lessee, on the grounds, proper and adopted, that the terms of comparison retained by the expert correspond to leases with property tax payable by the lessee, and that this transfer of charges was commonly practised in the sector ; in so ruling when, unless expressly provided otherwise, the payment of property tax is the responsibility of the lessor, and the obligations normally incumbent on the lessor, which the latter has discharged from the lessee, constitute a factor reducing the rental value, the court of appeal violated articles L. 145-33 and R. 145-8 of the French Commercial Code.

The Court’s response

Visa des articles L. 145-33 et R. 145-8 du code de commerce

The Court of Cassation states:

In view of articles L. 145-33 and R. 145-8 of the French Commercial Code:

4. According to the first of these texts, in the absence of agreement between the parties, the amount of the rent for the renewed lease must correspond to the rental value determined, in particular, with regard to the respective obligations of the parties.

5. According to the second, obligations normally incumbent on the lessor, which the lessor has discharged to the lessee, constitute a factor in reducing the rental value.

6. In order to set the rent for the renewed lease at a certain amount, excluding taxes and charges, the judgment holds, on its own and adopted grounds, that, according to the expert, the fact that the lessee has undertaken to pay property taxes does not justify a reduction for exorbitant charges, since, on the one hand, this transfer of charges is common practice in the sector and, on the other hand, the terms of comparison used by the expert correspond to leases where the lessee is responsible for property taxes. 7. In so ruling, the Court of Appeal violated the aforementioned texts, whereas, unless expressly provided otherwise, the payment of property tax is the responsibility of the lessor, and the obligations normally incumbent on the lessor, which the latter has discharged onto the lessee, constitute a factor reducing the rental value.

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03 Feb 2025
Sticky Post By Posted in French Leaseback Permalink

Goelia Unpaid charges

Sticky Post By On 3 February 2025
Goelia Unpaid charges traesch lawyer

A lessor requests that co-ownership charges be paid by Goelia Gestion

In brief: A lessor in a tourist residence is in dispute with the condominium association, because he is refusing to pay condominium charges. He is relying on an initial agreement with the previous operator, Pierre et Vacances.

On May 12, 2022, the Rennes Court of Appeal handed down a ruling concerning a dispute between Mr. Ac A, owner of lots in the Royal Park F-G tourist residence in La Baule, and the residence’s syndicat de copropriété, represented by SARL Aprogim. Mr. A contested an order to pay co-ownership charges in the amount of 16,731.01 euros, issued on January 31, 2019 by the Saint-Nazaire Regional Court. After opposition from Mr. A, the Saint-Nazaire judicial court handed down a judgment on June 4, 2020, ordering Mr. A to pay 17,113.61 euros, with legal interest, and 1,800 euros under article 700 of the Code of Civil Procedure. Mr A has appealed against this judgment.

Initial agreement with Pierre et Vacances on charges invoked

Mr. A argued that the co-ownership charges should be paid by Goelia Gestion, the company operating the residence, in accordance with an initial agreement with Pierre et Vacances. He asked the court to rule that the syndicat de copropriété had breached this agreement and to rectify the amount of the claim to 10,977.35 euros. The syndicat de copropriété, for its part, requested that the judgment be confirmed and that Mr. A be ordered to pay 17,085.75 euros, plus interest and additional costs.

The court noted a clerical error in the initial judgment, in which the claim for charges was set at 10,977.35 euros in the grounds, but 17,113.61 euros in the operative part. The court rectified this error and ordered Mr. A to pay 11,555.15 euros, with statutory interest. The court also rejected Mr. A’s request for additional documentation, ruling that the agreements between Mr. A and the companies operating the tourist residence were not enforceable against the syndicat de copropriété.

The court confirmed that Mr. A had to contribute to the co-ownership charges in accordance with article 10 of the law of July 10, 1965. It also ordered Mr. A to pay 600 euros in damages for abusive resistance and 2,000 euros in appeal costs, as well as the appeal costs.

Court confirms lessor’s obligation to pay condominium charges

In summary, the court rectified the material error in the initial judgment, confirmed Mr. A’s obligation to pay the condominium charges, and rejected his requests for disclosure of documents and rectification of the amount owed. Mr. A was ordered to pay a total of 11,555.15 euros, plus interest, damages and legal costs.

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03 Feb 2025
Sticky Post By Posted in french commercial lease, French Real Estate Law Permalink

Post-purchase discovery of hotel residence destination

Sticky Post By On 3 February 2025
Post-purchase discovery of hotel residence destination traech lawyer

On January 30, 2024, the Versailles judicial court handed down a judgment concerning a real estate dispute involving Mrs [Aa] [N], SCI BTX, several notaries, a real estate agency (CPH IMMOBILIER), and the syndic ASL GESTION. Mrs [Aa] [N] had bought a studio apartment with parking in 2016, believing it to be for residential use, but subsequently discovered that it was part of a hotel residence, resulting in unforeseen hotel charges.

Legal action for fraud seeking annulment of the sale

Mrs [Aa] [N] brought an action for fraud, seeking annulment of the sale, restitution of the purchase price and damages. She accused SCI BTX of concealing from her the true nature of the property and the associated charges. SCI BTX, the notaries and the estate agent disputed these accusations, claiming to have provided all the necessary information.

Sufficient information but lack of professional advice

The court examined the documents provided at the time of sale, including the co-ownership regulations and the minutes of the general meetings, which clearly indicated the property’s status as a hotel residence. The court concluded that Mrs [Aa] [N] had received sufficient information to understand the situation of the property, but that the notaries had failed in their duty to advise her by not fully informing her of the legal and financial implications of the purchase.

The court dismissed Mrs [Aa] [N]’s claims against SCI BTX and ASL GESTION, but ordered the notaires and the estate agency to pay her 8,855.60 euros in damages, 80% to the notaires and 20% to the estate agency. The court also ordered provisional execution of the decision.

Notary and real estate agency fines

Breach of duty to advise

In summary, the court recognized that Mrs. [Aa] [N] had been partially informed, but that the notaries had failed in their duty to advise, resulting in a loss of opportunity for her to abandon the purchase of a hotel residence. The notaries and the real estate agency were ordered to pay damages to compensate for this loss.

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03 Feb 2025
Sticky Post By Posted in French business law Permalink

Brokerage: Abrupt termination of the business relationship

Sticky Post By On 3 February 2025
Brokerage Abrupt termination of the business relationship traesch lawyer

In this ruling handed down by the Commercial Chamber of the French Supreme Court on January 31, 2024 (appeal no. 22-24.045), the Court dismisses the main and cross-appeals lodged respectively by Cofape International and Soletanche Bachy France. The dispute concerns the alleged brutal severance of the commercial relationship between the two companies, which were involved in brokerage and insurance policy management.

Brokerage and insurance policies

Commercial relations

Soletanche Bachy had a commercial relationship with Cofape, which managed insurance policies on its behalf and also acted as a broker.

On December 14, 2017, Cofape informed Soletanche Bachy that it was entrusting the management of its group health and provident insurance policies to another company as of January 2018.

In June 2018, Soletanche Bachy appointed a new broker, the company Verlingue, to take over the study and management of its insurance policies, thus terminating the relationship with Cofape. In October 2018, Soletanche Bachy terminated its provident and supplementary health plans with the company GAN, with which Cofape was collaborating.

The notice period in this brokerage case

In March 2019, Cofape sued Soletanche Bachy for damages for the brutal termination of its commercial relationship, arguing that it had not been given sufficient notice given the length of their relationship.

Cofape criticized the Court of Appeal for rejecting its claim for damages, despite a drop in its commissions and sales after the termination. Soletanche Bachy argued that it had suffered moral prejudice as a result of Cofape’s abrupt termination of its insurance brokerage contract management mission, and claimed damages.

The Court’s response

The Court also rejected this argument. In its view, the malfunctions alleged by Soletanche Bachy at the time of the change of manager did not constitute a loss that could be compensated on the basis of sudden termination.

Sufficient notice period and absence of economic dependence

The French Supreme Court confirms the decision of the Paris Court of Appeal. The notice period granted to Cofape was sufficient and appropriate to the nature of the commercial relationship between the parties. Cofape was unable to prove a state of economic dependence on Soletanche Bachy.

No moral prejudice

Soletanche Bachy cannot obtain compensation for non-material damage linked to malfunctions in the transition of insurance policy management. Consequently, the appeals are dismissed, and the parties are left to bear their own costs.

https://frenchrealestatelaw-traesch.fr/Ask your questions using the contact form at the bottom of the page.

03 Feb 2025
Sticky Post By Posted in french commercial lease Permalink

Deflating the rent: authorization to operate a terrace

Sticky Post By On 3 February 2025
Deflating the rent authorization to operate a terrace traech lawyer

Landlords plead significant modification of local commercial factors

Municipal authorization to operate a terrace

Summary: The July 4, 2024 ruling by the French Supreme Court (no. 23-13.515) confirms the rejection of a request to de-cap the rent on a commercial lease. The lessors claimed a significant change in local commercial factors due to a municipal authorization to operate a terrace. The Court ruled that the terrace had already existed under the previous operators, thus rejecting the argument of significant change. This ruling is a reminder of the strict requirement of proof to justify a change in the rent ceiling.

1 Facts and procedure

The judgment under appeal, handed down by the Dijon Court of Appeal on December 1, 2022, concerns a dispute between the lessors, Mrs [M] [C] and Messrs [W] and [U] [C] (acting as bare owners), and the Lauman company, lessee under a commercial lease for a restaurant-bar-brasserie.

At the end of the initial lease signed on November 1, 2002, the parties proceeded to renew the lease with effect from November 1, 2011, with the landlords requesting that the rent be set at a reduced rate on the grounds of a significant change in local market factors. This request was based on the tenant’s obtaining a municipal permit to operate a 93 m² terrace on the public domain.

Believing that this change justified an increase in the rent, the landlords took the matter to court. The Dijon Court of Appeal rejected their request, a decision against which they appealed to the French Supreme Court.

2. The landlords’ arguments

The lessors put forward two main arguments:

a) The existence of a significant change in local commercial factors

They argued that the municipal authorization granted in 2005 to operate a 93 m² terrace constituted a significant change in the operating conditions of the business, leading to an increase in the value of the goodwill and thus justifying a rent review outside the limits of the legal ceiling.

They argued that this terrace represented a significant increase in the surface area available for the operation of the restaurant, especially as the municipal fee was low.

b) The Court of Appeal’s error of assessment as to the existence of a significant modification

The landlords criticized the ruling for relying on a statement by a former waitress to the effect that the terrace already existed before the lease expired, and that it extended right up to the steps of a church.

They felt that this attestation was insufficient to reject their argument, in the absence of precise information on the actual extent of the terrace prior to 2005.

They considered that the Court of Appeal had not correctly drawn the legal conclusions from its own findings.

The Cour de cassation’s response

The Cour de cassation dismissed the appeal, recalling the following principles:

1) The principle of capping commercial rents and its exceptions

In accordance with articles L. 145-33 and L. 145-34 of the French Commercial Code, the rent for a renewed lease is, in principle, capped unless a significant change in the factors used to calculate rental value can be demonstrated. These factors include, in particular, local market factors.

The burden of proof lies with the lessor requesting the removal of the ceiling.

2) Sovereign appraisal by trial judges

The Court reiterated that the assessment of whether the modification is significant is a matter for the trial judges to decide.

The Court of Appeal rightly examined whether the extension of the terrace in 2005 constituted a significant change in local commercial factors.

It noted that, prior to 2005, Lauman already had a large terrace, extending right up to the church steps, which contradicts the claim that the 2005 municipal authorization created a significant break in the operation of the business.

3) Absence of proof of a significant change

The appeal court noted that the authorization to operate the terrace granted in 2005 did not constitute a significant change, since the terrace already existed under the previous operators.

Consequently, it rightly deduced that the conditions for de-capping had not been met.

Solution of the French Supreme Court

The appeal is dismissed.

The lessors are ordered to pay the costs.

Their claims under article 700 of the French Code of Civil Procedure are rejected.

This ruling illustrates the strict evidentiary requirements imposed on landlords who invoke a significant change in local commercial factors to request a rent adjustment.

Three main conclusions can be drawn from it:

  1. Municipal authorization to operate a terrace on the public domain can be a factor in raising the rent, but only if it leads to a real change in the operating conditions of the business.
  2. The prior existence of a terrace operated by the lessee or his predecessors may neutralize the lessor’s argument in favor of de-capping.
  3. The Cour de cassation does not go back on the sovereign assessment of the lower courts, except in cases of manifest error or lack of legal basis.

Thus, in order to obtain a de-capping of the commercial rent, lessors must provide indisputable proof of a significant change in the commercial environment of the premises. In this case, such proof was not deemed sufficient, and the appeal was dismissed.

Full text

Facts and procedure

1. According to the judgment under appeal (Dijon, December 1, 2022), handed down on referral from the French Supreme Court (3rd Civ., October 13, 2021, appeal no. 20-12.901, published), Mrs [M] [C] and Messrs [W] and [U] [C] (the lessors) agreed, with effect from November 1, 2011, to the renewal of the commercial lease held by Lauman (the lessee), a restaurant-bar-brasserie operator, in return for the setting of a rent with a reduced ceiling.

2. They then summoned the tenant to fix the rent for the renewed lease at the rental value.

Examination of the plea

The third and fourth grounds of appeal

3. Pursuant to article 1014, paragraph 2, of the Code of Civil Procedure, there is no need to issue a specially reasoned decision on these complaints, which are clearly not such as to lead to cassation.

First and second grounds of appeal

Statement of the plea

4. The lessors object to the decision rejecting their request for the setting of an uncapped rent, on the grounds that:

“1°/ that a municipal authorization allowing a restaurant-bar-brasserie to extend its terrace onto the public domain is likely to constitute a significant change in local commercial factors, and therefore a significant change in the rent.

local commercial factors, and therefore grounds for removing the ceiling on the rent increase for the lease of which the restaurant owner is the lessee; that in the case in point, after having noted that it was common ground that during the expired lease, Lauman had obtained from the commune of [Locality 4] an authorization to occupy the public domain, issued on May 19, 2005, corresponding to a terrace with a surface area of 93 m² which, according to the legal expert, could be considered exceptional both in terms of its surface area and the low price of the fees paid, and that the Lauman company did not provide proof of any prior written authorization from the municipality for the operation of such a terrace, the appeal court could not then assert that there was no reason to adjust the rent in the absence of any change in local commercial factors, on the pretext that a statement by a former waitress (Mrs. [H]) employed in 2003-2004 in the establishments that preceded the one operated by the Lauman company indicated that they had a terrace “extending right up to the church steps [5]”, which was insufficient to establish that the extension of the terrace’s surface area during the expired lease was limited to a mere 15 m², in the absence of any reference to an objective element specifying this surface area, which would enable the judge to verify it, to ascertain the surface area in square meters occupied by the terrace of these establishments and to compare it with the existing one; that in so ruling, the Court of Appeal failed to enable the Cour de cassation to exercise its review powers, thereby depriving its decision of a legal basis under articles L. 145-33, L. 145-34 and R. 145-6 of the French Commercial Code;

2°/ that a significant change in local commercial factors gives rise to a right to de-cap the rent of the renewed lease when it occurs during the term of the expired lease; it is common ground that the expired lease took effect on November 1, 2002, and it follows from the judgment’s own findings that Mrs [H]’s attestation that the terrace extended right up to the steps of the church [5] concerned the period from 2003 onwards, i.e. the period covered by the disputed lease; that in asserting that the lessee benefited “prior to the expired lease” from a large terrace extending as far as the church steps [5] in order to rule out the existence of a significant extension of the terrace, and consequently a significant change in the local commercial factors, during the expired lease, the appeal court failed to draw the legal conclusions from its own findings and thus violated articles L. 145-33, L. 145-34 and R. 145-6 of the French Commercial Code.

The Court’s response

5. Pursuant to articles L. 145-33 and L. 145-34 of the French Commercial Code, it is up to the lessor, when applying for the de-capping of the price of the renewed lease, to establish the existence, during the course of the lease to be renewed, of a significant change in the elements used to calculate the rental value mentioned in 1° to 4° of article L. 145-33.

6. Whether or not the change is significant is a matter for the court to decide.

7. The Court of Appeal first rightly held that a municipal authorization to extend the operation of a terrace onto the public domain contributed to the development of commercial activity, so that it was necessary to investigate whether this situation could have modified the local commercial factors constituting grounds for de-capping.

8. It then noted that the lessee had obtained from the municipality of [Locality 4] an authorization to occupy the public domain, issued on May 19, 2005, corresponding to a terrace with a surface area of 93 m², divided into a part in line with the establishment and a part against the church [5], and that although the lessee did not provide proof of any previous written authorization from the municipality for the operation of such a terrace, and in particular of a surface area of 71 m² between 1989 and 1999, increased to 79 m² between 1999 and 2005, the testimony of a former waitress employed by the previous operators between 2003 and 2004 showed that these establishments had a terrace extending right up to the church steps [5], which contradicted the landlords’ contention that the terrace between 1989 and 2005 consisted only of a few tables and chairs located under an awning in front of the commercial premises.

9. The Court therefore found that the tenant, who had enjoyed a large terrace prior to the expired lease, had not benefited from a significant extension of the terrace in 2005, and deduced that, since the lessors had not provided evidence of a significant change in the local commercial factors, the claim for the setting of a price below the ceiling had to be rejected.

10. The plea is therefore unfounded.

FOR THESE REASONS, the Court :

DISMISSES the appeal;

Order Mrs [M] [C] and Messrs [W] and [U] [C] to pay the costs;

In application of article 700 of the French Code of Civil Procedure, dismisses the claims; Thus made and judged by the Court of Cassation, Third Civil Division, and delivered by the President at its public hearing on July 4, 2004.ECLI:FR:CCASS:2024:C300392

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10 Jan 2025
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Breach of commercial relations (accounting)

Sticky Post By On 10 January 2025
Breach of commercial relations (accounting) traesch lawyer

Compensation for sudden termination of an established commercial relationship

Termination of a service contract

In this ruling handed down by the Commercial Chamber of the French Supreme Court on September 4, 2024 (appeal no. 23-10.446), the Court dismisses the appeal lodged by GRG against a ruling by the Paris Court of Appeal dated October 5, 2022. Mecarungis had sued GRG for damages for the brutal breach of an established commercial relationship following the termination of a service contract.

Key points of the ruling

Termination of an accounting services contract

GRG, a partner and client of Mecarungis, had terminated a contractual relationship for the provision of services, which led Mecarungis to claim damages for the brutal termination of an established commercial relationship.

The monopoly of chartered accountants

GRG argued that Mecarungis’s business constituted a service falling within the monopoly of chartered accountants and that, consequently, the rules governing the sudden termination of commercial relations could not be applied.

GRG also argued that the contractual relations between Mecarungis and its members, the company’s shareholders, should not be subject to the rules on the sudden termination of established commercial relations.

The activity does not fall within the remit of a chartered accountant

On the first point, the Cour de cassation confirmed that Mecarungis’ activity did not fall within the scope of a chartered accountant within the meaning of Ordinance no. 45-2138 of September 19, 1945. In fact, Mecarungis confined itself to managing the central fund and monitoring invoicing on behalf of its members, without carrying out a full accounting or auditing assignment.

The rules governing sudden termination of established commercial relations apply even between shareholders.

On the second plea, the Court ruled that the rules governing the sudden termination of established commercial relations applied, since the relationship between GRG and Mecarungis concerned the provision of services, irrespective of the fact that GRG was a shareholder in Mecarungis.

Conclusion

The French Supreme Court rejected GRG’s appeal, confirming the decision of the Court of Appeal, and ordered GRG to pay Mecarungis 202,700 euros in damages, plus 3,000 euros under article 700 of the French Code of Civil Procedure.

This ruling reaffirms the principle that the rules governing the abrupt termination of established commercial relations can be applied even between companies with capital ties, as long as the commercial relationship is based on the provision of a service.

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10 Jan 2025
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Goelia Gestion Résidence Cap Bleu

Sticky Post By On 10 January 2025
Goelia Gestion Résidence Cap Bleu traesch-avocat

Litigation Cap Bleu tourism residence operated by Goelia Gestion

Tourist residence in Martigues

On November 19, 2020, the Aix-en-Provence Court of Appeal handed down a ruling concerning a dispute between the Syndicat des copropriétaires de la Résidence Cap Bleu and SARL Goelia Gestion and SARL Cabinet Strozzi. The tourist residence, located in Martigues, had a swimming pool whose waterproofing was ensured by a liner. After Rhode Tourisme went into receivership, Goelia Gestion took over management of the residence in June 2013. Goelia Gestion operates on the basis of commercial leases signed with the owners. Urgent work was carried out by A+ Piscines to repair the swimming pool, partly financed by Goelia Gestion.

The Syndicat des copropriétaires disputed the quality of the work and refused to pay the balance to Goelia Gestion.

The Syndicat des copropriétaires disputed the quality of the work and refused to pay the balance due to Goelia Gestion. As a result, Goelia Gestion sued the Syndicat for payment of €12,000, plus damages. The Tribunal de Grande Instance d’Aix-en-Provence ordered the Syndicat to pay this sum, as well as irreducible costs, but dismissed the Syndicat’s warranty claim against Cabinet Strozzi.

Faulty management of the swimming pool works

The Syndicat appealed, accusing Cabinet Strozzi of faults in the management of the pool works, in particular for failing to check the insurance cover of the A+ Piscines company and for failing to take delivery of the works. The Court of Appeal confirmed that Cabinet Strozzi was not responsible for the choice of contractor or the defects, as the management of the pool had been delegated to Goelia Gestion. The Court also rejected the Syndicat’s other claims, including those concerning escrowed sums and unjustified debts.

However, the Court recalculated the administrative fees invoiced by Cabinet Strozzi, fixing them at €2,259.72 instead of €1,958.74, and ordered the Cabinet to reimburse this sum to the Syndicat. The Court dismissed the Syndicat’s claims for damages for loss of cash flow and compensation under article 700 of the French Code of Civil Procedure. Cabinet Strozzi was ordered to pay the costs of the appeal proceedings. 

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