Case law on the removal of the cap on commercial rents

Legal context

The commented judgment deals with the removal of the cap on commercial rents, a mechanism allowing the lessor to increase the rent beyond the variation of the reference index when renewing the commercial lease. This removal of the cap is possible if significant changes in the local commercial factors are proven.

Local commercial factors

Local commercial factors include elements such as population growth, public transport use and the presence of commercial brands in the catchment area. These factors must have a positive impact on the business in order to justify the removal of the cap.

Court of Appeal decision

The court of appeal ruled that the evidence of a significant change in the local commercial factors had not been provided. It therefore rejected the request to remove the rent cap, thus maintaining the rent at its initial rental value.

Proof of Significant Change

The lessor must demonstrate that the changes in the local commercial factors have a positive impact on the tenant’s business. A simple evolution of the income or the stability of the brands is not enough to prove a significant improvement.

Case of the Luxury Jewelry Store

In this case, the lessor did not succeed in proving that the modifications of the local commercial factors had a favorable impact on the luxury jewelry business. The evolution of the income and the stability of the brands were not sufficiently significant.

International Tourist Zone

The lessor attempted to use the integration of the street into an international tourist zone to justify the removal of the ceiling. However, the court ruled that this integration did not objectively benefit a jewelry store, which is not a night-time activity.

Application of the index-linked rent

In the absence of sufficient evidence, the court applied the index-linked rent, i.e. 100,158 euros per year. This amount is based on the reference index for commercial rents, without lifting the cap.

Case law and Right to renewal

Case law reiterates that the lessor must prove an objective and lasting deterioration in the tenant’s activity in order to invoke a notable change in local commercial factors. The loss of customers due to poor management is not enough.

Conclusion

The significant change in local commercial factors must be assessed objectively and sustainably. In the absence of sufficient evidence, the rent remains capped at its index value, thus protecting the interests of the tenant.

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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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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.

Legal analysis

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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Dispute between Residathenes and several co-owner-lessors

The judgment handed down by the Paris judicial court on October 8, 2024 concerns a dispute between Residathenes and several co-owner-lessors. Residathenes, which took over the rights of R.B.L. in 2010, operates premises used as a hotel residence.

Orders to pay rent arrears and respect the purpose of the leases

The co-owner-landlords issued summonses to pay rent arrears and to respect the destination of the leases, invoking the resolutory clause.

Residathenes operates a hotel instead of a hotel residence

The landlords went to court to have the leases terminated for non-payment of rent and change of use of the premises, claiming that Residathenes was operating a hotel instead of a hotel residence. Residathenes requested payment terms and suspension of the effects of the resolutory clause, arguing that it had paid the arrears within the time limits set by the summary orders.

The court rejected the landlords’ request to acquire the resolutory clause for non-payment of rent, noting that Residathenes had paid the arrears on time.

Termination of the lease by acquisition of the resolutory clause (operation of a hotel instead of a hotel residence)

However, he noted that the resolutory clause had been acquired for non-compliance with the purpose of the leases, establishing that Residathenes was operating the premises as a hotel, in violation of the terms of the leases, which stipulated operation as a hotel residence.

Eviction of Residathenes

The court ordered the eviction of Residathenes and all its occupants from the premises located at [Address 4] at [Location 37], within two months of service of the judgment. It also ordered Residathenes to pay an occupancy indemnity corresponding to the amount of the last rent in force, plus charges, until the premises are effectively vacated.

830,418 euros in occupancy indemnity arrears

In addition, Residathenes was ordered to pay the co-owner-lessors a total of 830,418 euros in occupancy indemnity arrears, with interest at the legal rate from June 3, 2022, broken down between the various co-owners. The court rejected Residathenes ‘ request to defer payment of its debt, ruling that the company had not demonstrated any recent financial difficulties or good faith.

Finally, Residathenes was ordered to pay each of the co-owners the sum of 3,000 euros under article 700 of the French Code of Civil Procedure, and to pay the costs of the proceedings, including the costs of the summons to pay. The court ordered provisional execution of the judgment, given the age of the dispute. 

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Eviction damages

Café-bar-restaurant eviction compensation

On January 25, 2023, the Paris Court of Appeal handed down a ruling concerning a dispute between Mrs [E] [M] wife [O], operator of a café-bar-restaurant, and SCI [Adresse 1], owner of the premises. Mrs [O] had been placed in receivership in 2013, and a reorganization plan was adopted in 2014. In 2016, SCI [Adresse 1] gave Mrs [O] notice to quit without offering to renew the lease, with an offer of eviction compensation. Mrs [O] then applied to the interim relief judge to assess this compensation.

In 2020, the Bobigny Regional Court set the eviction indemnity at €119,700 and the annual occupancy indemnity at €21,043. Mrs [O] appealed against this judgment, claiming an eviction indemnity of €237,500 and an occupancy indemnity of €20,812/year. SCI [Adresse 1] also appealed, claiming an eviction indemnity of €103,141.50 and an occupancy indemnity of €28,018/year.

The Court of Appeal examined the arguments of both parties. It valued the business at €76,200 based on EBITDA and €84,900 based on sales, setting the main eviction indemnity at €89,402.

Ancillary compensation

Replacement costs were set at €8,940, commercial disturbance at €4,800 and moving costs at €2,000, for a total of €105,142.

Eviction compensation at €105,142 and occupancy compensation at €22,560/year

Regarding the occupancy indemnity, the Court set the rental value of the commercial part at €18,265 and the residential part at €6,804, i.e. a total of €25,069, with a 10% allowance for precariousness, i.e. €22,560 per year.

The Court partially reversed the 2020 judgment, setting theeviction indemnity at €105,142 and theoccupancy indemnity at €22,560/year. Mrs. [O] was ordered to pay the costs of the appeal and to bear her own irreducible expenses.

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Management lease contract stipulating an annual fee

On November 9, 2023, the Paris Court of Appeal handed down a ruling concerning a dispute between SARL La Boutique du Fouilleur and SAS All in Factory. The dispute concerned a lease management contract signed on July 27, 2017, under which SARL La Boutique du Fouilleur had entrusted the management of its business to SAS All in Factory.

Termination after one month’s unsuccessful summons

The contract provided for an annual fee and stipulated that the contract would be terminated ipso jure in the event of non-payment or non-performance of a clause after a summons had remained unsuccessful for one month.

SAS All in Factory was summoned by a bailiff on June 8, 2019 to comply with its obligations, but the summons was not delivered to its directors until June 20, 2019. SARL La Boutique du Fouilleur took over its business on July 9, 2019, taking the view that SAS All in Factory had not complied with its obligations. SAS All in Factory contested this takeover, arguing that SARL La Boutique du Fouilleur and its manager, Mr [N] [P], had acted in bad faith.

Resolution of the contract with exclusive liability

The Créteil Commercial Court initially found that SARL La Boutique du Fouilleur was exclusively at fault in the termination of the contract, and ordered it to pay damages to SAS All in Factory. SARL La Boutique du Fouilleur and Mr [N] [P] appealed this decision.

Failure to pay royalties and keep cost accounting justifying termination

The Court of Appeal overturned the Commercial Court’s judgment, ordering the termination of the contract to the exclusive detriment of SAS All in Factory. The Court ruled that SAS All in Factory had failed to meet its obligations to pay royalties and keep cost accounting records, thereby justifying termination of the contract. The court also dismissed Mr [N] [P] from the case, finding that there had been no fault detachable from his duties as manager.

The Court ordered SAS All in Factory to pay SARL La Boutique du Fouilleur the sum of €166,300 for the balance of the 2019 current account, the balance of the management lease and the re-invoicing of vehicles, as well as damages totalling €5,133 for supplier invoices and IT repairs. SAS All in Factory was dismissed of its claims for damages and of its request for the contract to be declared null and void on the grounds of fraud.

Lastly, the Court ordered SAS All in Factory to pay the costs of the appeal and first instance proceedings, and to pay Mr [N] [P] and SARL La Boutique du Fouilleur the sum of €5,000 each under article 700 of the French Code of Civil Procedure for the first instance and appeal proceedings.

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Refusal to renew a café-brasserie lease

On September 23, 2024, the Second Civil Chamber of the Pontoise Judicial Court handed down a judgment concerning a dispute between the Établissement Public Foncier d’Ile de France (EPFIF) and Mr [T] [G] and Mrs [M] [Aa] wife [G] concerning the renewal of a commercial lease. The initial lease, signed on January 30, 2008, covered premises used as a café-bar-brasserie-tobacco shop-Française des jeux presse PMU-furnished rooms. The lease was tacitly extended until October 1, 2018, when the couple [G] requested its renewal. EPFIF refused the renewal and proposed an eviction indemnity.

Judicial appraisal of eviction and occupancy indemnities

As the parties were unable to agree on the amount of the compensation, Mr and Mrs [G] applied to the interim relief judge to appoint a legal expert to assess the eviction and occupancy compensation. The expert submitted his report on March 16, 2021. EPFIF then served a writ of summons on spouses [G] to set the compensation. Spouses [G] asked for the eviction indemnity to be updated, which was refused by the pre-trial judge.

EPFIF asked the court to set the eviction indemnity at €1,076,415, the annual occupancy indemnity at €51,631, or alternatively at €42,300, and to order spouses [G] to pay EPFIF €5,000 under article 700 of the French Code of Civil Procedure. Mr. and Mrs. [G] requested a new expert appraisal, an eviction indemnity of €1,647,300, and an occupancy indemnity of €35,716 excl. tax per annum.

Main compensation at €960,000

The court ruled that the legal expert had correctly valued the eviction indemnity at €960,000, using recognized methods adapted to the characteristics of the business. The couple [G] did not demonstrate any notable change in the accounting elements subsequent to the expert’s report. The court therefore set the main compensation at €960,000.

Ancillary indemnities

Replacement costs at €105,710 and commercial disturbance at €28,221

With regard to ancillary compensation, the court set the costs of re-investment at €105,710, commercial disturbance at €28,221, and miscellaneous costs at €2,000. Relocation and moving expenses were not awarded for lack of supporting documents. Redundancy costs will be reimbursed on presentation of supporting documents.

Occupancy allowance of €39,600 excl. tax per annum.

The total eviction indemnity was set at €1,095,931. EPFIF was ordered to pay this sum to Mr and Mrs [G] and to pay them €5,000 under article 700 of the French Code of Civil Procedure. Theoccupancy indemnity was set at €39,600 excl. tax per year from October 1, 2018 until the premises are vacated. EPFIF will be required to repay any excess sums received, with interest at the legal rate.

The court rejected the parties’ requests for a new expert appraisal and other claims. The decision is provisionally enforceable.

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Subletting presumed to be irregular

On June 27, 2024, the Third Civil Chamber of the French Supreme Court (Cour de cassation) partially overturned a decision of the Rennes Court of Appeal of October 12, 2022, in a dispute between SCI Le Pont Thomas (lessor) and Modulobox (lessee) concerning allegedly irregular subletting.

Lessor alleging unauthorized subletting seeks rent adjustment

In 2006, SCI Le Pont Thomas leased commercial premises to Modulobox. Modulobox then signed contracts with third parties for “services and office space”. The lessor, alleging unauthorized subletting, requested an adjustment of the rent.

Classification of subleases by the Court of Appeal

The Rennes Court of Appeal reclassified the Modulobox contracts as subleases. It ruled that these contracts, which provided for permanent access to the offices for a consideration calculated on the basis of surface area, and included services such as maintenance and security, constituted subleases, entitling the lessor to readjust the rent.

Argument concerning services such as furnishings and maintenance

Modulobox argued that these contracts were not subleases, but agreements for the provision of services such as furnishing and maintenance, which could not therefore be assimilated to subleases. It argued that these services, essential to the agreements, rendered their classification as subleases inappropriate, thus preventing the lessor from requesting a rent readjustment.

The French Supreme Court qualifies office lease agreements with specific services

The Cour de cassation ruled that the contracts in question provided overall remuneration for both the provision of office space and the specific services provided. It ruled that these agreements could not be considered as subleases within the meaning of article L. 145-31 of the French Commercial Code. Consequently, it quashed the judgment on this point, overturning the Court of Appeal’s classification, and referred the case back to the Paris Court of Appeal.

Consequence: rejection of the lessor’s request for rent adjustment

This decision calls into question the lessor’s request for a rent adjustment, since the assimilation to subletting is ruled out. SCI Le Pont Thomas is also ordered to pay the costs of the proceedings and 3,000 euros to Modulobox under article 700 of the French Code of Civil Procedure.

Legal issues

This case highlights the complexity of distinguishing between subletting and providing services, with major consequences for lessors’ rights under commercial leases. Here, the Cour de cassation reaffirms that the intention and content of the services provided in the agreements can exclude the qualification of sublease, thus limiting lessors’ recourse to readjust rents in the case of mixed agreements.

Full text:

DECISION OF THE COUR DE CASSATION, THIRD CIVIL CHAMBER, JUNE 27, 2024

I. Société Le Pont Thomas, a société civile immobilière (non-trading property company) with its registered office at [Address 1], lodged appeal no. N 22-22.823 against a judgment handed down on October 12, 2022 by the Rennes Court of Appeal (5th Chamber), in a dispute with Société Modulobox, a société à responsabilité limitée (limited liability company) with its registered office at [Address 2], the defendant in the appeal.

II. Modulobox, a société à responsabilité limitée (limited liability company), lodged appeal no. S 22-24.046 against the same judgment in the dispute with Le Pont Thomas, a société civile immobilière (non-trading property company), the defendant in the appeal.

The plaintiff in appeal no. N 22-22.823 puts forward a plea in law in support of its appeal.

The plaintiff in appeal no. S 22-24.046 puts forward two grounds for cassation in support of its appeal.

The files have been sent to the Public Prosecutor.

On the report of Mrs. Aldigé, Conseiller référendaire, the observations of SCP Le Bret-Desaché, counsel for the company Modulobox, of SARL Meier-Bourdeau, Lécuyer et associés, counsel for the company Le Pont Thomas, and the opinion of Mrs. Compagnie, avocat général, after debates at the public hearing of May 14, 2024, in which were present Mrs. Teiller, President, Mrs. Aldigé, Conseiller référendaire rapporteur, Mr. Echappé, Conseiller de la magistrature, and Mr. Ménard. Echappé, Conseiller doyen, M. David, Mmes Grandjean, Grall, M. Bosse-Platière, Mme Proust, conseillers, Mme Schmitt, M. Baraké, Mmes Gallet, Davoine, MM. Pons, Choquet, conseillersréférendaires, et Mme Maréville, greffier de chambre,

the Third Civil Chamber of the Cour de Cassation, composed, pursuant to article R. 431-5 of the Code de l’Organisation Judiciaire, of the aforementioned president and councillors, having deliberated in accordance with the law, has delivered the following judgment;

Joinder

1. Appeals no. 22-24.046 and 22-22.823 are joined due to their related nature.

Facts and procedure

2. According to the judgment under appeal (Rennes, October 12, 2022), handed down on remand after cassation (3rd Civ., September 9, 2021, appeal no. 20-19.631), on July 27, 2006, the société civile immobilière Le Pont Thomas (the lessor) leased commercial premises to the company Modulobox (the lessee).

3. The lessee entered into contracts with third parties entitled “provision of services and office space”.

4. Alleging irregular subletting, the lessor summoned the lessee to readjust the principal rent.

Examination of the grounds

The first, third and fourth grounds of appeal and the fourth ground of appeal in appeal no. 22-24.046

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

But on the second part of the first plea in law of the same appeal

13/11/2024 10:19 Cour de cassation, civil, Civil Division 3, June 27, 2024, 22-22.823 22-24.046, Published in the bulletin – Légifrance

https://www.legifrance.gouv.fr/juri/id/JURITEXT000049857491?init=true&page=1&query=22-22.823&searchField=ALL&tab_selection=all 2/4

Statement of grounds

6. The tenant criticizes the judgment for finding the existence of sublease agreements and, consequently, for upholding the landlady’s action for readjustment of the rent, on the grounds that “only a lease agreement can justify readjustment of the rent between the landlord and his lessee ; that for a sublease to exist, the contract must meet two cumulative conditions: firstly, it must relate solely to the provision of the premises or, at the very least, this provision must not be accompanied by significant additional services; and secondly, it must provide the principal lessee’s co-contracting party with continued enjoyment of the premises; an agreement to make space available to a third party by a commercial lessee, distinct from a sublease, providing for the payment of a price corresponding to enjoyment for a limited period and to services provided by the main lessee, relating to equipment, maintenance of the premises and control of reception and security, cannot be qualified as a sublease enabling the lessor to request readjustment of the main rent on the basis of article L. 145-31 of the French Commercial Code; that in the present case, Modulobox had argued in its pleadings and supported by evidence that the provision of fully-equipped premises with numerous services included in the price of the offices according to their surface area, such as furnishing and maintenance of the premises, heating, internet access, telephone, insurance, access to shared areas (refectory, kitchenette, meeting room, relaxation room, free self-service coffee machine, sanitary facilities), reception service, surveillance and security of the buildings could not be qualified as a sublease; that by claiming that the essential service of the contract with Modulobox is the provision of office space and not the supply of services such as maintenance, reception and security, insurance and wifi, which are merely ancillary to the supply of office space, when, on the contrary, the numerous services provided by the Modulobox company to equip and maintain the premises, as well as the control of reception and security services provided by the latter, constituted a necessary and indispensable condition and were such as to demonstrate that the leasing contracts entered into by the latter could not be reclassified as a sublease allowing for a readjustment of the rent, the Court of Appeal violated article 1709 of the French Civil Code, together with L. 145-31 of the French Commercial Code.

The Court’s response

Having regard to articles 1709 of the French Civil Code and L. 145-31, paragraph 3, of the French Commercial Code:

7. Under the terms of the first of these texts, the leasing of things is a contract by which one of the parties undertakes to allow the other to enjoy a thing for a certain period of time, and in return for a certain price which the latter undertakes to pay.

8. Under the second, when the sublease rent is higher than the main rental price, the owner has the right to demand an increase in the main rental price, the amount of which, in the absence of agreement between the parties, is determined in accordance with a procedure laid down by decree by the Conseil d’Etat, in application of the provisions of article L. 145-56 of the French Commercial Code.

9. Subletting, as defined in article L. 145-31 of the French Commercial Code, does not apply when the lessee makes the leased premises available to third parties in return for an overall fixed price, which covers both the provision of the premises and the specific services required by customers.

10. In order to qualify the lease as a sublease and uphold the claim for readjustment of the rent, the court noted that the contracts for the provision of office space to companies specifically mentioned the office number and surface area, that they provide for a financial consideration based on the surface area of the office and solely on the provision of services, that the companies have permanent access to their office, that they undertake to maintain it in a good state of repair and to lock it up, and that the duration of the contracts is fixed at one month but renewable by tacit agreement.

11. He concludes that the essential service of the contract is the provision of office space to third parties, exclusively and without any time limit, since the services provided, such as maintenance, reception, security, insurance and wifi, are merely incidental to the provision of equipped office space.

12. In so ruling, even though it was clear from its findings that the overall fixed fee paid for both the provision of equipped offices and the specific services sought by customers, the Court of Appeal, on grounds that failed to characterize sublease contracts within the meaning of article L. 145-31 of the French Commercial Code, violated the aforementioned texts.

And the first part of the second plea in law of the same appeal

Statement of grounds

13/11/2024 10:19 Cour de cassation, civil, Civil Division 3, June 27, 2024, 22-22.823 22-24.046, Published in the bulletin – Légifrance

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13. The tenant criticizes the judgment for granting the request for readjustment of the principal rent and for setting the amount of the readjusted rent at a certain sum and for a certain period, whereas “the annulment of the first ground for annulment, having established the existence of sublease agreements for the property leased by SCI Le PontThomas to Modulobox, located in the Basses Forges business park in Noyal-sur-Vilaine, will entail the annulment of the second ground for annulment. Vilaine will, by way of consequence, pursuant to article 624 of the French Code of Civil Procedure, result in the judgment upholding SCI Pont Thomas’s request for an adjustment of the principal rent, and consequently setting the amount of the adjusted rent at 94,018, 15 euros excl. VAT per annum for the period from June 19, 2013 to December 31, 2016. ”

The Court’s response

Having regard to article 624 of the French Code of Civil Procedure:

14. According to this text, the cassation extends to all the provisions of the judgement overturned having a link of indivisibility or necessary dependence.

15. The annulment of the part of the judgment finding the existence of sublease contracts for the leased premises extends to the parts of the judgment granting the claim for readjustment of the principal rent and fixing the amount of the readjusted rent at a certain sum, which are linked to it by a necessary dependency link.

16. This annulment renders irrelevant the examination of the appeal in cassation no. 22-22.823 lodged by the lessor, who complains that the judgment set the amount of the readjusted rent at a certain sum.

FOR THESE REASONS, and with no need to rule on the other complaints of appeal no. 22-24.046, the Court :

REVERSE AND ANNUL, except insofar as it dismisses the claim that the action for readjustment of rent is time-barred and declares the action admissible, the judgment of the Rennes Court of Appeal of October 12, 2022, between the parties;

Restores the case and the parties to the status they were in prior to this judgment, except for these points, and refers them back to the Paris Court of Appeal;

Order Société Civile Immobilière Le Pont Thomas to pay the costs;

Pursuant to article 700 of the French Code of Civil Procedure, rejects the claims made by société civile immobilière LePont Thomas and orders it to pay société Modulobox the sum of 3,000 euros;

Orders that, at the request of the Public Prosecutor of the Cour de cassation, the present judgment shall be transmitted to be transcribed in the margin or following the partially quashed judgment.

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In its ruling of November 29, 2023, pourvoi n° 22-21.623, the Court of Cassation, Commercial Division, was called upon to rule on a dispute concerning the execution of a promise to sell shares in a company operating a hotel residence. Mr. P., the seller, had granted this promise to Holding BSP, represented by its manager, Mr. B., in a deed signed on September 10 and 11, 2018 and amended on September 24, 2018.

However, at the time of the promise, Holding BSP was not yet registered, and therefore did not yet have legal personality, a situation which, according to Mr. P., should render the deed null and void.

The seller refused to sign the deed of sale

Holding BSP having been registered on October 1, 2018, the seller refused to sign the reiterative deed, leading the company to take legal action to force the execution of the promise to sell. The Papeete Court of Appeal upheld the validity of the deed, despite the absence of any explicit mention that Mr. B. was acting “in the name of” or “on behalf of” the company in formation.

Only deeds expressly concluded in the name of or on behalf of a company in formation can be taken over by the latter after its registration.

The French Supreme Court has reiterated the principle that only deeds expressly entered into in the name of or on behalf of a company in formation may be taken over by the latter after its registration, failing which the deed is absolutely null and void. This principle, designed to ensure legal certainty, means that the absence of a legal personality at the time the deed is concluded in principle prevents its validity.

However, the Cour de cassation has qualified this by recognizing the judge’s power to assess the common intention of the parties. In this case, the Court of Appeal found that Mr. P. was fully aware that Mr. B. was acting on behalf of a company in formation. It therefore concluded that the intention of the parties was to conclude the deed on behalf of the future company, which justifies the execution of the promise despite the inappropriate wording.

The promise to transfer shares must be executed

The Cour de cassation dismissed the appeal, upholding the decision of the Cour d’appel, which had ordered the execution of the promise to sell and ordered Mr. P. to pay costs and damages to the defendants.

Interpreting the validity of commitments made by companies in formation

This ruling illustrates the interpretation of the validity of commitments entered into by companies in formation, where the judge can sovereignly assess the intentions of the parties, even in the absence of precise wording, as long as it is clear that the deed is entered into on behalf of the company in the process of being registered.

Full text:

JUDGMENT OF THE COUR DE CASSATION, CHAMBRE COMMERCIALE, FINANCIÈRE ET ÉCONOMIQUE, DATED NOVEMBER 29, 2023

Mr [V] [P], domiciled at [Address 4], lodged appeal no. G 22-21.623 against the judgment handed down on September 8, 2022 by the Papeete Court of Appeal (Commercial Division), in the dispute between :

1°/ Holding BSP, a one-man limited liability company with its registered office at [Address 3],

2°/ Mr [T] [B], domiciled at [Address 1],

3°/ to the company Off ice notarial Dubouch-[Y], a sole proprietorship with limited liability, with registered office at [Address 2],

defendants to the appeal.

In support of his appeal, the plaintiff puts forward a plea in cassation.

The case has been referred to the Public Prosecutor.

On the report of Mr. Ponsot, counsel, the observations of SCP Alain Bénabent, counsel for Mr. [P], of Mr. Bertrand, counsel for Holding BSP and Mr. [B], of SARL Boré, Salve de Bruneton et Mégret, counsel for Off ice notarialDubouch-[Y], and the opinion of Mr. Lecaroz, avocat général, after debates at the public hearing of October 10, 2023 in which were present Mr. Vigneau, president, Mr. Vigneau, Mr. Salve de Bruneton and Mr. Mégret, counsel for Off ice notarialDubouch-[Y], and the opinion of Mr. Lecaroz, avocat général. Vigneau, President, M. Ponsot, Conseiller rapporteur, M. Mollard, Conseiller doyen, Mmes Graff-Daudret,Daubigney, Fèvre, Ducloz, MM. Alt, Calloch, Mmes Schmidt, Sabotier, conseillers, MM. Blanc, Le Masne de Chermont, MmesVigneras, Lefeuvre, Tostain, M. Maigret, conseillers référendaires, M. Lecaroz, avocat général, and Mme Fornarelli, greffier de chambre,

the commercial, financial and economic chamber of the Cour de cassation, composed, pursuant to article R. 431-5 of the code de l’organisation judiciaire, of the aforementioned president and councillors, having deliberated in accordance with the law, has given the following judgment;

Facts and procedure

1. According to the judgment under appeal (Papeete, September 8, 2022), by a private deed dated September 10 and 11, 2018, extended by an amendment dated September 24, 2018, Mr. [P] granted the limited liability company Holding BSP (the company Holding BSP) “represented by its manager, Mr. [T] [B]” a promise to sell shares in the company Hôtel Lapirogue API, operating a hotel residence located on an islet in Polynesia.

2. Holding BSP was incorporated on August 24, 2018, with Mr. [B] as manager and Holding BSP, a simplified joint-stock company wholly owned by Mr. [B], as sole shareholder. It was registered with the Trade and Companies Registry on October 1, 2018.

3. On March 18, 2019, Mr. [P]’s counsel sent a letter to the notary responsible for drawing up the deed of transfer, Mr. [Y], expressing his client’s refusal to sign the reiterative deed.

4. As the deed of sale had not been signed, Holding BSP, after unsuccessfully putting Mr. [P] on notice to perform, filed a petition with the Mixed Commercial Court on April 30, 2019, seeking an order for the forced execution of the promise to sell the shares.

Examination of the plea

Statement of the plea

5. Mr. [P] complains that the judgment orders the execution of the promise to sell shares, on the grounds that “a deed concluded by a company in the process of being registered, and therefore without legal personality, is null and void on the grounds of absolute nullity, and cannot be confirmed or ratified; in rejecting the request for nullity of the sale agreement concluded between Mr. [P] and the company Holding BSP on September 10 and 11, 2018, and amended by way of an amendment on September 24, 2018, on the grounds that the company Holding BSP was not a legal entity and that it had no legal personality, the judgment states that ‘a deed concluded by a company in the process of being registered, and therefore without legal personality, is null and void on the grounds of absolute nullity, and cannot be confirmed or ratified’.

13/11/2024 10:16 Cour de cassation, civile, Chambre commerciale, 29 novembre 2023, 22-21.623, Publié au bulletin – Légifrance

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Holding BSP ‘was registered on October 1, 2018’, i.e. subsequent to the conclusion of these deeds, on the grounds that ‘the improper wording of these deeds as to the quality of the assignee is therefore without prejudice in view of the knowledge that [V] [P] had that [T] [B] was acting on behalf of a company in formation and not in the name of the latter’, the Court of Appeal ruled by improper reasoning and violated articles L. 210-6 of the French Commercial Code and 1842 of the French Civil Code.”

The Court’s response

6. It follows from articles L. 210-6 and R. 210-6 of the French Commercial Code that commercial companies have legal personality from the date of their registration in the Trade and Companies Register. Persons who have acted in the name of or on behalf of a company in formation before it has acquired legal personality are held jointly and severally and indefinitely liable for acts performed in this way, unless the company, after having been duly constituted and registered, takes over the commitments entered into. These commitments are then deemed to have been entered into by the company from the outset.

7. For many years, the Cour de cassation has ruled that only commitments expressly entered into “in the name of” (Com., May 22, 2001, pourvoi n° 98-19.742; Com., February 21, 2012, pourvoi n° 10-27.630, Bull. 2012, IV, n° 49; Com., November 13, 2013, pourvoi n° 12-26.158) or “on behalf of” (Com., June 11, 2013, pourvoi n° 11-27.356; Com, March 10, 2021, pourvoi n° 19-15.618) of the company in formation, and that acts performed “by” the company are void, even if it is clear from the particulars of the act or the circumstances that the intention of the parties was that the act be performed in its name or on its behalf (3rd Civ, October 5, 2011, pourvoi n° 09-72.855 ; Com., February 21, 2012, pourvoi n° 10-27.630, Bull. 2012, IV, n° 49 ; Com., January 19, 2022, pourvoi n° 20-13.719).

8. This jurisprudence is based on the derogatory nature of the system introduced by law, which allows legal acts entered into by a company to be deemed to have been entered into prior to its registration. It is intended to ensure legal certainty, since the presence of an express statement that the act is performed “in the name of” or “on behalf of” a company in formation protects the third-party contracting party, by drawing his attention to the possibility, in the future, on the other, the person performing the act “in the name of” or “on behalf of” the company, by making him/her aware that he/she is committing him/herself personally and will remain liable if the company does not honour the commitments thus entered into.

9. The consequence of this solution is that a deed not expressly subscribed “in the name of” or “on behalf of” a company in formation is null and void, and that neither the company nor the person intending to act on its behalf will be answerable for its execution, unlike a valid deed, but not taken over by the company, which binds the persons having acted “in the name of” or “on behalf of” it. Paradoxically, it has the effect of weakening companies when they are starting up under corporate form, rather than protecting them, without always providing adequate protection for third-party co-contractors who, in the event of annulment of the deed, find themselves without any debtor.

10. Since the requirement that the deed must expressly state that it is executed “in the name of” or “on behalf of” the company in formation, on pain of nullity, is not explicitly stated in the texts governing the fate of deeds executed during the formation period, it seems possible and desirable to give the judge the power to make a sovereign assessment, by examining all the circumstances, both intrinsic to the deed and extrinsic, whether the common intention of the parties was that the deed should be concluded in the name or on behalf of the company in formation, and that this company could then, after acquiring legal personality, decide to take over the commitments entered into.

11. In the present case, after noting that the deed of September 10 and 11, 2018 had been signed by Mr. [B] in his capacity as manager of Holding BSP, a company in the process of being registered with the Trade and Companies Registry, the judgment notes that it is clear from the correspondence produced, the content of which is not disputed, that Mr. [P] was clearly informed, before signing the deed and its amendment, that Mr. [B] was acting on behalf of a company in formation.

12. In the light of these findings, the Court of Appeal exercised its sovereign discretion in finding that, despite the improper wording of these deeds with regard to the designation of the assignee, the parties’ common intention was that the deed should be concluded in the name of or on behalf of the company in formation and that this company could then, after acquiring legal personality, decide to take over the commitments entered into, and ordered the execution of the disputed promise.

13. The plea is therefore unfounded.

FOR THESE REASONS, the Court :

DISMISSES the appeal;

13/11/2024 10:16 Cour de cassation, civile, Chambre commerciale, 29 novembre 2023, 22-21.623, Publié au bulletin – Légifrance

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Order Mr. [P] to pay the costs;

Pursuant to article 700 of the French Code of Civil Procedure, rejects Mr. [P]’s claim and orders him to pay the single-member limited liability company Holding BSP and Mr. [B] the total sum of 3,000 euros and the companyOff ice notarial Dubouch-[Y] the sum of 3,000 euros.

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