french commercial lease

Rép. min. n° 9737 : JOAN 3 nov. 2018, p. 10212

Does the operator of a student or hotel residence or an accommodation facility for dependent elderly people benefit from a right of pre-emption in the event of sale by the owner of the premises operated?

If so, can the lessee continue to benefit from the right of first refusal if he or she remains in the premises after the effective date of a notice given by the lessor?

In response to this parliamentary question, the French Minister for Territorial Cohesion gave a qualified answer:

“[…] The lease contract between the owner of a property and the operator of a student or hotel residence or an accommodation facility for dependent senior citizens is commercial in nature if the lessee/operator does not simply sublet the residential units that make up the residence, but also provides the sublessees with at least three of the four services listed in article 261 D of the French General Tax Code. Because of its commercial nature, the lease agreement falls within the scope of article L. 145-46-1 of the French Commercial Code.

In application of this text, the lessee who holds the lease and operates the residence benefits from a public right of pre-emption when the owner-lessor decides to sell the premises.

In addition, when the lessor has validly issued a notice of termination in accordance with article L. 145-9 of the French Commercial Code, the lease ceases to have effect at the end of the six-month period stipulated by law, and the lessee no longer benefits from any rights under the commercial lease statute.

If the tenant remains on the premises beyond this period, he may no longer avail himself of the rights arising from the now terminated lease. Once the six-month period has expired, he can no longer claim to benefit from the right of pre-emption. The same applies if, in application of article L. 145-28 of the French Commercial Code, the evicted tenant remains on the leased premises pending payment of the eviction indemnity by the lessor.

Until payment is made, both lessor and lessee are bound by the terms and conditions of the expired lease.

However, if the right of pre-emption has not been provided for contractually, the evicted tenant cannot benefit from the right of pre-emption codified in article L. 145-46-1 of the French Commercial Code”.

Do not hesitate to ask your question to a lawyer using the contact form below.

In a ruling dated June 27, 2024 (no. 23-10.340), the French Supreme Court partially overturned a decision by the Grenoble Court of Appeal concerning a dispute between SCI Les Alpilles, the lessor, and Pro Soccer 5, the lessee, over a commercial lease and rental debts. The dispute concerns water infiltration affecting the use of the premises leased for an indoor soccer activity.

Water infiltration and rental debts

SCI Les Alpilles entered into a commercial lease with Pro Soccer 5 on May 3, 2017. As early as January 2018, the tenant reported water infiltration partially affecting its business. After partial work was carried out, the lessor issued a summons to pay based on the resolutory clause of the lease due to non-payment of rent for the third quarter of 2018. In response, Pro Soccer 5 and its director, Mr. [C], took legal action to contest the summons and claim damages. In 2021, Pro Soccer 5 went into liquidation.

Breach of delivery obligation

The Grenoble Court of Appeal found the lessor in breach of its obligation to deliver for a period of 52 weeks, based on leaks from the roof. It recognized the validity of the tenant’s plea of non-performance, as she refused to pay rent due to the disruption caused by the leaks. Consequently, the court rejected the SCI’s claims for payment of rent and charges, and ordered it to pay compensation to Pro Soccer 5 for financial loss and loss of use.

Grounds for appeal

SCI Les Alpilles appealed to the French Supreme Court, raising a number of grounds, including the following:

1. Breach of the obligation to deliver: the lessor disputed the seriousness of the seepage alleged by the lessee and maintained that these partial defects did not justify the exception of non-performance.
2. Assessment of financial loss: the SCI criticized the Court of Appeal for relying exclusively on a unilateral expert report drawn up by the tenant’s chartered accountant to assess the financial loss suffered.
3. Rejection of claims for rent: the SCI criticized the Court of Appeal for not having assessed the claim for rent and charges, despite the existence of a claim recognized in principle.

Court of Cassation ruling

In its ruling, the Court of Cassation partially overturned the Court of Appeal’s decision on several points:

Exception of non-performance

The Court criticized the Court of Appeal for failing to investigate whether the seepage actually rendered the premises unfit for the use for which they were intended, which was necessary to justify the exception of non-performance.

Assessment of financial loss

The Court recalls that a judge cannot rely exclusively on a unilateral expert appraisal to assess a loss. In so doing, the Court of Appeal violated the principle of adversarial proceedings.

Article 16 of the French Code of Civil Procedure

The Cour de cassation recalls the strict application of the adversarial principle:

“Having regard to article 16 of the French Code of Civil Procedure :

1. It follows from this text that the judge can only rely on an expert report drawn up unilaterally at the request of a party if this report has been submitted to the free discussion of the parties and is corroborated by other evidence.
2. In order to order the lessor to pay a certain sum for the financial loss suffered by the lessee, the court held that the data contained in the analysis carried out by the chartered accountant appointed by the lessor were relevant and could only be accepted, as they were not called into question by any other evidence.
3. In so ruling, the Court of Appeal, which relied exclusively on the report of an expert appraisal carried out unilaterally at the request of one of the parties, violated the aforementioned text.”

Rent and service charge debt:

The Cour de cassation considers that the Court of Appeal committed a denial of justice by refusing to assess the rent claim, even though it had recognized its existence.

Citation of article 4 of the French Civil Code

“Having regard to article 4 of the French Civil Code :

1. It follows from this text that the judge may not refuse to assess the amount of a claim whose existence he acknowledges in principle.
2. In order to reject the lessor’s claim for payment of certain sums in respect of rent, charges and indemnities due as at October 10, 2020, as well as late payment indemnities, the decision states that as the lessor was unable to produce a statement of her claim, the Court of Appeal was not in a position to assess the amount of the claim retained by the first judge, and that none of the appellants’ other documents made it possible to calculate the sums still owed by the lessee.
3. In ruling in this way, by refusing to assess the amount of a loss whose existence it acknowledged in principle, the Court of Appeal violated the aforementioned text.”

The Cour de cassation refers the case back to the Chambéry Court of Appeal for reconsideration. It also dismissed Mr. [C], the head of Pro Soccer 5, whose presence was no longer required in the proceedings.

Text of the decision:

COUR DE CASSATION

RULING BY THE COUR DE CASSATION, THIRD CIVIL DIVISION, DATED JUNE 27, 2024

Société Les Alpilles, a société civile immobilière (non-trading property company) with its registered office at [Address 3], lodged appeal no. Q 23-10.340 against the judgment handed down on December 1, 2022 by the Grenoble Court of Appeal (Commercial Division), in the dispute between:

1°/ Mr [U] [C], domiciled at [Address 2],

2°/ Mr [D] [P], domiciled at [Address 1], in his capacity as liquidator of the company Pro Soccer 5, defendants to the cassation.

In support of its appeal, the plaintiff puts forward four grounds for cassation.

The case file has been sent to the public prosecutor.

On the report of Mr David, councillor, and the observations of SCP Alain Bénabent, counsel for Les Alpilles, and SCP Waquet, Farge et Hazan, counsel for Mr [C] and Mr [P], ex officio, after debates at the public hearing of May 14, 2024, in the presence of Mrs Teiller, president, Mr David, councillor-rapporteur, Mr Echard, councillor-apporteur, and Mr P. Dupuis, councillor-apporteur. David, Conseiller rapporteur, Mr. Echappé, Conseiller doyen, and Ms. Maréville, chamber clerk, the Third Civil Chamber of the Cour de cassation, composed of the aforementioned president and councillors, having deliberated in accordance with the law, delivered the present judgment.

Facts and procedure

1. According to the judgment under appeal (Grenoble, December 1, 2022), on May 3, 2017, Société Civile Immobilière Les Alpilles (the lessor) leased commercial premises to Pro Soccer 5 (the lessee) for the purpose of running an indoor soccer business.
2. On January 17, 2018, the lessee informed the lessor of repeated infiltrations from the roof affecting its commercial activity.
3. On July 25, 2018, after work had been carried out, the lessor served the lessee with a summons to pay the rent for the third quarter of 2018, in accordance with the resolutory clause in the lease.
4. On August 24, 2018, the lessee and her manager, Mr. [C], summoned the lessor to oppose the aforementioned summons and seek compensation for their damages.
5. A judgment of July 6, 2021 opened the tenant’s judicial liquidation and appointed Mr. [P] as liquidator.

Examination of the pleas

Second plea

1. Pursuant to article 1014, paragraph 2, of the Code of Civil Procedure, there is no need to give a specially reasoned decision on this plea, which is clearly not such as to lead to cassation.

But on the first plea

Statement of the plea

1. The landlady complains that the judgment held that she had failed to fulfil her obligation to deliver for a minimum of fifty-two weeks, and consequently rejected her requests that the tenant be ordered to pay her a certain sum corresponding to the rent, charges and indemnities due on October 10, 2020, declare the application of the resolutory clause and the termination of the lease, in the alternative, order the judicial termination of the lease for non-payment of rent, in any event, order the eviction of the tenant and order her to pay him an occupancy indemnity, on the other hand, order her to pay Mr. [P], in his capacity as such, certain sums in respect of the loss of enjoyment and financial loss suffered by the tenant, whereas “the exception of non-performance can only be invoked on the grounds of sufficiently serious non-performance; in the case of a lease, it presupposes that the lessee who fails to pay any rent is totally deprived of the enjoyment of the leased property ; in order to admit the exception of non-performance in favor of Pro Soccer 5, the court merely stated that SCI Les Alpilles had failed in its obligation to deliver between May 3, 2017 and November 28, 2018, given that during this period, certain leaks from the roof had, according to the lessee’s assertions, “partially” disrupted the business, “without explaining how these partial disorders were sufficiently serious and of such a nature as to justify the application of the exception of non-performance, the Court of Appeal deprived its decision of a legal basis in the light of article 1219 of the Civil Code. “

The Court’s response

In view of article 1219 of the French Civil Code:

1. According to this text, a party may refuse to perform his obligation if the other party does not perform his and if this non-performance is sufficiently serious.
2. In rejecting the landlord’s claims, the court held that it was clear from the evidence submitted that the landlord had failed in its obligation to deliver, and that, as regards the landlord’s principal obligation, the tenant had validly raised the exception of non-performance, by refusing to pay the rent and the council tax in full.
3. In so ruling, without investigating, as requested, whether the alleged infiltrations had rendered the leased premises unfit for the use for which they were intended, the court of appeal failed to provide a legal basis for its decision.

On the third plea

Statement of grounds

1. The lessor complains that the judgment ordered it to pay Mr. [P], in his capacity as such, a certain sum in respect of the financial loss suffered by the lessee, on the grounds that “in order to assess a loss, a judge may not rely exclusively on a non-judicial expert appraisal carried out unilaterally at the request of a party ; in assessing the financial loss allegedly suffered by Pro Soccer 5 in the sum of 332,997.26 euros exclusive of tax, the Court of Appeal relied exclusively on the out-of-court expert report drawn up in a non-adversarial manner by the chartered accountant appointed by the lessee; in so ruling, the Court of Appeal violated article 16 of the Code of Civil Procedure, together with article 6 §1 of the Convention for the Protection of Human Rights and Fundamental Freedoms. “

The Court’s response

Having regard to article 16 of the Code of Civil Procedure:

1. It follows from this text that the judge can only rely on an expert report drawn up unilaterally at the request of a party if this report has been submitted to the free discussion of the parties and is corroborated by other evidence.
2. In order to order the lessor to pay a certain sum for the financial loss suffered by the lessee, the court held that the data contained in the analysis carried out by the chartered accountant appointed by the lessor were relevant and could only be accepted, as they were not called into question by any other evidence.
3. In so ruling, the Court of Appeal, which relied exclusively on the report of an expert appraisal carried out unilaterally at the request of one of the parties, violated the aforementioned text.

And on the fourth plea, first part

Statement of the plea

1. The lessor complains that the judgment dismissed her claim for an order that the lessee pay her certain sums in respect of rent, charges and indemnities due as of October 10, 2020, as well as late payment indemnities, on the grounds that “the judge denies justice by refusing to assess a claim whose existence he has established in principle ; that in dismissing SCI Les Alpilles’ claim for payment of the rent due on October 10, 2020, on the grounds that no statement of account had been produced enabling calculation of “the sums still owed by the Pro Soccer 5 company”, the Court of Appeal committed a denial of justice in violation of article 4 of the French Civil Code. “

The Court’s response

Considering article 4 of the Civil Code:

1. It follows from this text that the judge cannot refuse to assess the amount of a claim whose existence in principle he acknowledges.
2. In order to reject the lessor’s claim for payment of certain sums in respect of rent, charges and indemnities due as of October 10, 2020, as well as late payment indemnities, the decision states that as the lessor was unable to produce a statement of her claim, the Court of Appeal was not in a position to assess the amount of the claim retained by the first judge, and that none of the appellants’ other documents made it possible to calculate the sums still owed by the lessee.
3. In ruling in this way, by refusing to assess the amount of a loss which it had found to exist in principle, the Court of Appeal violated the aforementioned text.

Dismissal from the case

1. Pursuant to article 625 of the French Code of Civil Procedure, Mr [C] should be removed from the case, as his presence is not required before the Court of Appeal.

FOR THESE REASONS, and without it being necessary to rule on the other complaint in the fourth plea, the Court :

REVERSE AND ANNUL, except insofar as it :

– declares that Société Civile Immobilière Les Alpilles was in breach of its obligation to deliver for a minimum of 52 weeks,

– order société civile immobilière Les Alpilles to pay Mr. [P], in his capacity as liquidator of Pro Soccer 5, the sum of 68,294.70 euros (exclusive of tax) for loss of use suffered,

– order société civile immobilière Les Alpilles to reimburse M.

[P], in his capacity as liquidator of Pro Soccer 5, the invoice of 300 euros for maintenance of the gutter and repair of the silicone seal,

– order Société Civile Immobilière Les Alpilles to pay Mr. [C] 5,000 euros in damages and 1,000 euros under article 700 of the French Code of Civil Procedure,

the judgment of the Grenoble Court of Appeal of December 1, 2022;

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

Dismisses Mr [C] from the case;

Order Mr [P], in his capacity as liquidator of Pro Soccer 5, to pay the costs;

Pursuant to article 700 of the French Code of Civil Procedure, reject the claims made by Mr. [P], in his capacity as liquidator of Pro Soccer 5, and by Mr. [C], and order Mr. [P], in his capacity as liquidator of Pro Soccer 5, to pay Société Civile Immobilière Les Alpilles the sum of 3,000 euros;

That, at the request of the Public Prosecutor of the Cour de cassation, the present judgment be transmitted to be transcribed in the margin or following the partially quashed judgment;

Thus made and judged by the Court of Cassation, Third Civil Division, and delivered by the President at its public hearing on June twenty-seventh, two thousand and twenty-four.

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Assignment of lease: Failure to provide a bank guarantee required by the lease

Legality of a clause making the lessor’s agreement to the assignment conditional on the lessee providing a bank guarantee

A clause in a commercial lease may make the lessor’s agreement to an assignment subject to the provision of a bank guarantee.

Violation of this clause is grounds for termination of the lease

A tenant who assigns his commercial lease without providing the lessor with a bank guarantee runs the risk of having his commercial lease terminated by a court.

If you have any questions, please contact us using the contact form at the bottom of the page.

In brief: Compensation for restoration of the premises by the lessee

It follows from the combination of articles 1147, 1149 and 1732 of the Civil Code, in their versions prior to order no. 2016-131 of February 10, 2016, and the principle of full compensation for loss, that when a lessee returns premises in a condition that does not comply with his legal or contractual obligations, he is in breach of contract. As a result, the lessee is obliged to compensate the lessor for any loss suffered as a result. This loss includes the cost of restoring the premises to their original condition, irrespective of whether the work has actually been carried out or the expenses incurred.

The judge, responsible for assessing this loss at the time of ruling, must take into account, where relevant, circumstances arising after the premises have been vacated, such as re-letting, sale or demolition. Consequently, the decision to reject the lessor’s claim for damages, based on the return of the premises in a poor state of repair, is justified insofar as the lessor does not demonstrate the existence of any prejudice, in particular where he sold the premises three months after their return without having carried out any work, and where he does not prove a reduction in the sale price directly linked to the breaches imputed to the lessee.

The tenant’s obligations to return the premises in good condition at the end of the lease

The June 27, 2024 ruling by the French Supreme Court (no. 22-10.298) deals with the tenant ‘s obligations regarding the return of premises in good condition at the end of the lease. The Pergopark company, owner of the premises, had sued the tenant Mr. [H] for damages, alleging that the latter had failed to meet his rental repair obligations. On appeal, the court rejected the landlord’s claim, ruling that the latter had not proved the existence of any prejudice.

The French Supreme Court upheld this rejection. Under articles 1732, 1147 and 1149 of the French Civil Code, the tenant is liable for any damage caused during his or her enjoyment of the property, unless he or she can prove that he or she was not at fault. However, the damage for which the lessor is liable must be proven, and may include the cost of restoring the premises. The Court specifies that compensation is not conditional on the actual carrying out of repairs or the disbursement of costs.

In this case, Pergopark had sold the building three months after it had been returned, without carrying out any repair work. It did not demonstrate that the tenant’s breaches had affected the sale price of the premises, which led the Court to conclude that there was no evidence of prejudice.

This ruling highlights the importance of proving prejudice for the lessor. Even if the lessee commits a breach of contract by failing to return the premises in good condition, the lessor must provide concrete evidence that this breach has caused damage. Simply selling the property after it has been returned without work, or demonstrating that the sale price has been devalued as a result of the alleged deterioration, is not sufficient to establish compensable damage.

Compensation for rental damage requires proof of loss suffered by the lessor

As a result, the Cour de cassation rejected the appeal, confirming that compensation for rental damage requires tangible proof of the loss suffered by the lessor. This decision reminds real estate professionals and practitioners of commercial lease law of the importance of properly documenting and proving the economic impact of deterioration in order to obtain compensation.

Full text of the decision

RULING BY THE COURT OF CASSATION, THIRD CIVIL DIVISION, JUNE 27, 2024

The company Pergopark, with registered office at [Address 2], represented by Mr [G] [V], domiciled at [Address 1], acting in his capacity as ad hoc representative, lodged the

appeal no. Y 22-10.298 against the decision of the Paris Court of Appeal (Pole 5, Chamber 3) of November 10, 2021, in the dispute with Mr. [T] [H], domiciled at Mr. [X], [Paris].

with Mr [X], [Address 3], defendant to the cassation.

In support of her appeal, the plaintiff puts forward a single ground of cassation.

The file has been communicated to the public prosecutor.

On the report of Mrs Aldigé, Conseiller référendaire, the observations and pleadings of SCP Marc Lévis, counsel for the company Pergopark, the observations and pleadings of

and pleadings of SARL Boré, Salve de Bruneton et Mégret, counsel for Mr [H], and the opinion of Ms Morel-Coujard, avocat général, to which SCP Marc Lévis replied.

reply, after debates at a public hearing on May 14, 2024 attended by Mrs Teiller, President, Mrs Aldigé, Conseiller référendaire rapporteur, Mr.

Echappé, Conseiller doyen, Mr. David, Mrs. Grandjean, Mrs. Grall, Mr. Bosse-Platière, Mrs. Proust, conseillers, Mrs. Schmitt, Mr. Baraké, Mrs. Gallet, Mrs. Davoine, Messrs.

Pons, Choquet, Conseiller référendaires, Mme Morel-Coujard, avocat général, and Mme Maréville, greffier de chambre,

the Third Civil Chamber of the Cour de Cassation, composed of, pursuant to article R. 431-5 of the Code de l’Organisation Judiciaire

468FB043BD1AD57CEFAD757B2215C201 , composed of the above-mentioned president and councillors, having deliberated in accordance with the law, has delivered this judgment.

Facts and proceedings

1. According to the judgment under appeal (Paris, November 10, 2021), the company Pergopark (the lessor), owner of commercial premises leased to Mr. [H] (the lessee),

after having deposited a certain sum in execution of an order to pay an eviction indemnity, objected to the payment of part of the funds

on the grounds that the premises had not been returned by the tenant in a good state of repair.

2. The tenant summoned the landlady to release the opposition and demand the return of the security deposit.

3. An order dated March 14, 2019 appointed Mr. [V] as ad hoc judicial representative of Pergopark, which was struck off the register of commerce and companies

The company was struck off the register of commerce and companies on November 28, 2017 following the conclusion of amicable liquidation proceedings.

4. Claiming that the fact of having sold the building without carrying out any repair work did not deprive it of its right to compensation, and alleging a loss of value at the time of the sale of the building, Pergopark was not entitled to any compensation on resale, the lessor counterclaimed for damages to compensate for tenant deterioration in the amount of the cost of the repairs corresponding to the cost of restoring the premises.

Examination of the plea

Second part of the plea

5. Pursuant to article 1014, paragraph 2, of the French Code of Civil Procedure, there is no need to issue a specially reasoned decision on this grievance, which is clearly not of such a nature as to give rise to a claim for damages.

clearly not of such a nature as to entail cassation.

And on the first part of the plea

Statement of the plea

6. The landlady complains that the judgment dismissed her claim for damages, ordered her to pay a certain amount in reimbursement of the security deposit

and order the release of the opposition on the sequestered sums, whereas “the lessee is liable for any damage or loss that may occur

during his enjoyment, unless he can prove that they occurred through no fault of his own; that the mere fact of damage or loss occurring during the tenant’s

enjoyment of the leased property entitles the lessee to compensation, without the lessee being able to claim that the lessor did not suffer any prejudice as a result of such

damage or loss; however, by ruling in this case that the lessor did not prove any loss, after having noted that Mr. [H]’s

H]’s breach of his obligation to return the premises in a good state of repair, the Court of Appeal violated article 1732 of the French Civil Code.

The Court’s response

7. According to article 1732 of the French Civil Code, the tenant is liable for any damage or loss that occurs during his or her enjoyment of the premises, unless he or she can prove that such damage or loss occurred without his or her fault.

without his fault.

8. Under the terms of article 1147 of the same code, in its wording prior to that resulting from order no. 2016-131 of February 10, 2016, the debtor is

ordered, where applicable, to pay damages, either for non-performance of the obligation, or for delay in performance, whenever

the debtor does not prove that the non-performance is due to a cause beyond his control, even if there is no bad faith on his part.

9. According to article 1149 of the French Civil Code, as it stood prior to the enactment of the aforementioned ordinance, and the principle of full reparation for loss, the damages

damages due to the creditor are the loss he has made and the gain he has been deprived of, without resulting in either loss or profit for him.

10. It follows from the combination of these texts and principles that a tenant who returns the premises in a condition that does not comply with his obligations under the law or the contract is in breach of contract.

contract commits a breach of contract and must compensate the lessor for any loss suffered as a result.

11. This loss may include the cost of restoring the premises to their original condition, without compensation being conditional on repairs being carried out or expenses actually being incurred.

actual expenditure.

12. In assessing the loss at the date of the decision, the judge must take into account any circumstances arising after the premises have been vacated.

such as re-rental, sale or demolition.

13. After having, on the one hand, rightly recalled that it was up to the lessor to prove a prejudice, and on the other hand, noted that it had sold the leased premises three months after they had been returned to the lessee.

without carrying out any work, and that it did not prove any depreciation in the resale price of the premises linked to the tenant’s

that the lessor had not proved the alleged loss, so that her claim had to be rejected.

claim had to be rejected.

14. The claim is therefore unfounded.

FOR THESE REASONS, the Court :

Dismisses the appeal;

Order Mr. [V], in his capacity as ad hoc judicial representative of Pergopark, to pay the costs;

Pursuant to article 700 of the French Code of Civil Procedure, rejects the claims;

Thus made and judged by the Cour de cassation, third civil division, and delivered on June twenty-seventh, two thousand and twenty-four, by way of availability of the judgment at the court registry.

parties having been previously notified in accordance with the conditions set out in the second paragraph of article 450 of the French Code of Civil Procedure.

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Right of pre-emption and preferential agreement in favour of the lessor

Invalidity of clauses preventing the lessee from assigning his commercial lease

“Are also null and void, whatever their form, any agreements intended to prevent the tenant from transferring his lease or the rights he holds under this chapter to the purchaser of his business or company. (L145-16 Commercial Code)

The lessor’s right of first refusal on the sale of the business

A clause stipulating the lessor’s right of first refusal in the event of the sale of a business is valid.

The clause is without prejudice to the lessee’s rights under the commercial lease statute. (Cass. civ. 3, 12-07-2000, n° 98-22.000, published, n° 198)

However, this clause is only lawful on condition that the lessee can sell his business and assign his lease to the buyer of his choice, at a price of his choice. (Cass. com., 17-02-1960, n° 57-11.835, published, n° 68)

A lessor with a right of pre-emption may invoke the irregularity of the notification of the transfer of the business, even if he has requested additional information. In this case, the judges consider that the lessor did not unequivocally express his intention to waive his right of pre-emption. (Cass. com., 13-11-2003, n° 01-02.620, unpublished)

Pre-emptive agreement enables lessor to choose purchaser of business goodwill

The parties may include a preferential agreement in the lease contract, enabling the lessor to choose the purchaser of the business. (Cass. civ. 3, 12-07-1995, n° 93-11.666, published, n° 184)

The purchaser of the business is not obliged to verify the intentions of the beneficiary of a preference agreement stipulated in the lease. Thus, the lessor must prove that the transferee had been informed of his intention to avail himself of the pact in order to convict him.

(Cass. civ. 3, 29-06-2010, n° 09-68.110, Mme Jeannette Barande, épouse Gard, F-D)

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The bottom line

There’s no such thing as a “risk-free” real estate purchase, especially when it comes to tax exemption. The classic pitfalls are buying at too high a price (in order to save more tax) in medium-sized towns with no potential for university growth, and in a student residence that is poorly placed and too expensive. Unfortunately, these pitfalls are frequently encountered in practice.

Wealth advisors extol the benefits of investing in a student residence in Bordeaux, Lyon or another city.

Investing in a student residence can be a good investment, but there’s nothing obvious about it. What’s more, buying off-plan is not without its pitfalls. A rental investment in a student room is a real estate purchase like any other. In other words, the location of the property is crucial, depending on the neighborhood and the city.

The same applies to an investment in a tourist residence, in terms of the city’s tourist potential.

Investing in a student residence: the limits of tax benefits

1. The mirage of “risk-free” and “guaranteed” student residence investment

Believing you’re buying a “financial product”, a “guaranteed, risk-free investment”. The search for “tax relief” should not obscure the fact that this is a REAL ESTATE PURCHASE made by YOU ALONE. This is the only version of reality that will appear on the contracts and legal documents you sign. The fact that you didn’t carry out the economic and legal arrangements, or sign the documents in person at the notary’s office, or have never even seen the apartment purchased, doesn’t change this reality.

2. BUYING MUCH TOO EXPENSIVE IN MIDDLE-SIZED CITIES and believing that the law protects you from buying property at a price that is far too high in relation to the market price. The tax advantage must not lead to a poor property purchase in a student residence that cannot be sold later (and is sometimes difficult to rent).

3. Invest in student residences in cities with (really) strong university potential (Lyon, Bordeaux, Lille, Marseille, Nice or Montpellier) to ensure a sufficient occupancy rate (for the tenant-operator and the lessor, who will only be paid if the company makes a profit). Beware of investments in medium-sized towns already saturated with housing, where the developer approaching you will offer hundreds of units in addition to your own.

4. Don’t buy in a poorly located student residence. Despite all the “guarantees” of the salesperson canvassing you, don’t forget the golden rule of buying real estate LOCATION, LOCATION and LOCATION (“location, location, location” in English).

TIP

• Find studies on the rental market and schools and universities in the proposed city before investing in a student residence,
• Check the exact location of the student residence in the city, including distances to the main schools (e.g. with googlemap, google earth, mappy etc.).
• Check the location of the tourist residence (or service residence) and the means of access (public transport, road, airport). How many minutes’ walk from the center, for example.
• Check the figures for the number of students or tourists in the city and the different seasons.
• Look for evidence of demand for student or tourist accommodation.

FREQUENT HAZARDS AND DIFFICULTIES

• Frequent and recurring risks of rent arrears (which can last for several years).
• Attempts by the company renting the student residence to renegotiate rents downwards (as with other service residences such as tourist resorts).
• Loss of value on sale of the property, even after 10 years (!)
• Bankruptcy of the company leasing the student residence
• Major works to be financed after ten years, when rental income from the student residence is low.
• The reform of the Loi PINEL allows commercial tenants to limit the charges they have to pay: the end of the “triple net” lease.

MEDIUM- AND LONG-TERM INVESTMENT PLANNING

Commercial leases are often ignored by buyers. Salespeople selling tax-free real estate investments rarely mention them. The operator of a student (or tourist) residence is entitled to renew his commercial lease after 9 years. The landlord who intends to reclaim his apartment must pay the tenant an eviction indemnity. (This represents several tens of thousands of euros).

What’s more, after 9 years, the tenant often asks for a legal appraisal (or negotiates a rent reduction by scaring the landlords), by returning to the “rental value” (determined by an expert according to calculation methods based on the operator’s results).

Many operators offer rents for the first nine years, knowing that they will request and obtain a rent reduction 9 years later.

Exceptional expenses and work will gradually be billed to the owner-landlords, who are used to taking care of nothing and paying a modest flat-rate for expenses.

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The absence of the lessor’s consent to the assignment is grounds for termination of the lease.

A lessee who assigns his commercial lease without the lessor’s authorization, even though this is required by the commercial lease, is liable to have his commercial lease terminated by the court. Such a breach is sufficiently serious to justify termination, even without any particular prejudice to the lessor. This is the case, for example, of a clause stipulating that “the transfer may only take place in the presence of the lessor, or with him duly summoned”.

The need for judicial authorization in the event of disagreement on the part of the lessor

If the lessor disagrees, the lessee must obtain judicial authorization.

Silence and lack of opposition on the part of an uninformed landlord

In the event of silence on the part of the owners, and in the absence of any express opposition, judges consider that failure to comply with the clause in the lease requiring the lessor’s written consent to any transfer is not serious enough to justify termination. (Cass. civ. 3, 20-10-1971, n° 70-12.995, published, n° 504)

Knowledge of the assignment and collection of rent is not always sufficient, depending on the lease.

If the commercial lease specifies that no tolerance on the part of the lessor could create rights in favor of the lessee, the lessor, having knowledge of the assignment and of the payment of rent by the new lessee, does not accept the assignment by regularizing a posteriori his absence from the deed of assignment of the commercial lease.

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The Role of the Commercial Rents Judge in France: Key Functions and Responsibilities

The French commercial rents judge (“juge des loyers commerciaux”) plays a pivotal role in resolving disputes between lessors and lessees within the framework of commercial leases. This judge intervenes in various matters, including setting the rent upon lease renewal, reviewing rent adjustments during the lease term, and handling disputes related to eviction compensation and lease performance.

Given the economic significance of commercial leases, particularly in sectors such as tourism residences, student housing, and retail spaces, the commercial rents judge ensures contractual balance and fairness while considering legal constraints and economic realities. Below, we will explore the key responsibilities of this specialized judicial figure.

1. Setting the Rent at Lease Renewal

One of the most critical roles of the commercial rents judge is determining the rent upon the renewal of a commercial lease. Under French law, tenants benefit from a right to renew their lease, ensuring business continuity and stability. However, setting the new rent often becomes a contentious issue between landlords and tenants.

Legal Framework of Rent Renewal

French commercial lease law (notably Article L.145-33 of the French Commercial Code) stipulates that the renewed rent must reflect the rental value of the premises. In theory, this can result in either an increase or a decrease in the rent, depending on market conditions.

In cases where the parties cannot agree on the rental value, the matter is brought before the commercial rents judge, who assesses several key criteria:

Nature and purpose of the premises: The intended use of the premises significantly impacts rental value. For example, a retail store in a prime shopping district will have a different valuation than a small office in a secondary location.

Physical characteristics of the premises: Factors such as surface area, condition, accessibility, and any modifications made during the lease term are taken into account.

Economic and market conditions: Changes in the local real estate market, shifts in consumer behavior, and urban development projects can all influence rental values.

Contractual obligations of the parties: The obligations imposed on each party by the lease (e.g., maintenance duties, renovation responsibilities) can affect rent determination.

Legal Restrictions on Rent Adjustments

The general principle under French law is that rent changes must remain within a legally defined framework. Rent variations at renewal are generally capped, based on indices such as:

The Commercial Rent Index (ILC – “Indice des Loyers Commerciaux”): Primarily used for retail businesses.

The Tertiary Activities Rent Index (ILAT – “Indice des Loyers des Activités Tertiaires”): Applied to office spaces and professional activities.

However, there are exceptions allowing for more significant rent increases. For example, if the premises have undergone a substantial change in marketability factors (e.g., construction of a metro station nearby, urban redevelopment, or a surge in business activity), the judge may authorize exceeding the usual rental increase cap.

2. Judicial Review of Rent During the Lease Term

In addition to overseeing rent renewal, the commercial rents judge also has jurisdiction over rent adjustments during an ongoing lease. French law allows for a three-yearly rent review, meaning that either the landlord or the tenant may request an adjustment every three years.

Conditions for Rent Revision

For a rent revision to be valid, the requesting party must demonstrate that economic conditions justify the change. Key conditions include:

A significant change in local economic conditions (e.g., a newly built shopping center affecting business flow).

A modification in property characteristics (e.g., major renovations increasing the premises’ commercial appeal).

A disruption in the original market equilibrium (e.g., the collapse of a nearby competitor, affecting foot traffic).

Legal Limits on Rent Reviews

French law imposes strict limits on rent reviews to prevent drastic fluctuations. If the lease is indexed to the ILC or ILAT, any rent adjustment must align with the capped increases set by these indices.

However, in cases where the lease does not contain an indexation clause, or if significant structural changes affect the premises’ rental value, the commercial rents judge may allow a greater adjustment.

3. Protection of Tenants Against Eviction Without Compensation

Another essential function of the commercial rents judge is ensuring that tenants are fairly compensated if they are evicted without a valid legal basis. Under French law, a landlord cannot refuse lease renewal without compensating the tenant, unless there is a legitimate reason.

Eviction Compensation (“Indemnité d’éviction”)

If a landlord refuses to renew a commercial lease without a legally valid reason (such as major redevelopment of the premises), the tenant is entitled to eviction compensation. The commercial rents judge is responsible for determining the amount of this compensation based on:

Loss of clientele: If the tenant is forced to relocate, the loss of foot traffic and established customer base is a key consideration.

Relocation costs: Expenses related to moving the business, installing new equipment, and refurbishing new premises are factored in.

Loss of profits: If the business suffers financially due to relocation, the judge may include these damages in the compensation calculation.

Exceptions to the Right to Compensation

While commercial tenants are generally entitled to compensation, certain exceptions apply:

If the landlord can justify a serious and legitimate reason for eviction, such as persistent non-payment of rent or a contractual violation.

If the premises are set for demolition or extensive reconstruction, in which case alternative compensation mechanisms may apply.

4. Arbitration of Disputes Between Landlords and Tenants

The commercial rents judge also plays a vital role in resolving conflicts related to lease performance. Common disputes include:

Responsibility for repair and maintenance costs: Landlords and tenants frequently disagree over who should bear the costs of renovations or major repairs.

Calculation and allocation of rental charges: Differences in interpretation of lease provisions often lead to disputes regarding shared expenses.

Breach of contract: Issues such as subletting without permission or unauthorized changes to the premises may require judicial intervention.

Interpreting Lease Contracts

When disputes arise, the judge must interpret lease provisions in light of statutory laws and case law precedents. Key principles include:

Good faith performance: Both parties must respect the spirit of the lease and avoid abusive behavior.

Proportionality of obligations: Any financial burdens imposed on the tenant (e.g., service charges) must be proportionate to the actual costs incurred by the landlord.

Market practices and fairness: The judge considers established commercial norms and fairness principles when making rulings.

Conclusion: The Critical Role of the Commercial Rents Judge

The commercial rents judge is a cornerstone of the French legal system concerning commercial leases. By ensuring fair rent-setting mechanisms, overseeing rent revisions, protecting tenants from unjust eviction, and arbitrating lease-related disputes, this judicial figure plays a crucial role in maintaining market stability.

For businesses, understanding the role of the commercial rents judge is essential for navigating lease negotiations, dispute resolution, and long-term tenancy planning. Whether a landlord seeking to adjust rent or a tenant facing eviction, seeking legal expertise in commercial lease matters can be crucial in securing favorable outcomes.

If you have questions about commercial lease disputes or need assistance with rent adjustments, you can contact a legal expert for personalized advice.

A The debtor of the eviction indemnity

The debtor of the eviction indemnity is the party who issued the notice without an offer of renewal. Thus, in the event of sale of the building after the notice has been given, the debtor of the indemnity is the former owner.

Unless otherwise agreed in the deed of sale. In the event of dismemberment of ownership, the owner’s purchaser, upon renewal of the commercial lease, is not necessarily jointly and severally liable with the usufructuary skeleton of the eviction indemnity debtor.

B The creditor of the eviction indemnity

The creditor of the eviction indemnity is the lessee or assignee who has acquired the business subsequent to the notice of termination, as the transfer of the business entails the transfer of the eviction indemnity due to the transferor and of the right of the latter to remain on the premises under article L. 145-28 of the French Commercial Code.

C Payment of eviction compensation, a prerequisite for restitution of the premises

The law provides protection for the lessee right up to the last stage of the parties’ relationship. They provide for a protective chronology, authorizing the lessee to hand over the keys to the lessor after payment of the eviction indemnity.

D Payment to the lessee or a receiver

Payment may be made to the evicted lessee or to a receiver. Although payment into the hands of the lessee is the simplest option, it is rare in practice, since guarantees in the hands of the receiver will provide the lessor with guarantees when it comes to obtaining restitution of the premises, which payment into the hands of the lessee does not offer.

E Appointment of a receiver

Agreement or disagreement of the parties. The receiver may be appointed by mutual agreement of the parties or by a judge.

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II Enforcement of payment of eviction indemnity** A Debtor of eviction indemnity** A Debtor of eviction indemnity** A Debtor of eviction indemnity

**A Debtor of the eviction indemnity** (in French)
1268 The obligation to pay eviction compensation is incumbent on the party who issued the notice to vacate without a proposal for renewal. Thus, if the property is transferred after the notice has been issued, the obligation to pay the indemnity rests with the previous owner (Cass. 3e civ,
April 5, 2011, n° 10-18.241 : JurisData n° 2011-018848; 2011, n° 300, p.
E Chavanac). This obligation may be modified by a stipulation to the contrary in the deed of sale (Cass. 3e civ., 29 nov. 2005, n°
04-17.723; JurisData n° 2005-031059; – Cass. 3e civ., March 5, 2008, n°
06-19.237; JurisData n° 2008-043005; JCP E 2008, 1137, obs. R. Marty).
In the event of dismemberment of ownership, the new buyer is not necessarily jointly and severally liable with the usufructuary of the property for payment of the eviction indemnity (Cass. 3e civ., 16 déc. 2019, n°
18-26.182; Publi.Loyers et copr. 2020, comm. 22, note E. Chavanac; JCP N 2020, 1126, note D.

**B Creditor of the eviction indemnity** (in French)
1269 The beneficiary of the eviction indemnity is the tenant or the transferee who has acquired the business subsequent to the notice.
The transfer of a business entails the transfer of the eviction indemnity due by the assignor, as well as the right to maintain occupancy of the premises under article L. 145-28 of the French Commercial Code (Cass. 3e civ., April 6, 2005, no. 01-12.719; Bull. civ. 2005, III, no. 84).

**C Precondition of payment of eviction indemnity for restitution of premises**.
1270 Sequence of events. Legislation structures tenant protection right up to the terminal phase of the parties’ interactions, establishing a protective sequence authorizing the tenant to return the keys to the lessor after payment of the eviction indemnity.

**D Payment to the evicted tenant or to a receiver** (in French)
1272 Payment may be made either directly to the evicted tenant or to a receiver. Although direct payment to the tenant is the simplest mechanism, it is rarely used in practice, as the use of a receiver offers additional assurances to the lessor for the recovery of the premises, which direct payment does not guarantee.

**E Appointment of a sequestrator**
1273 Agreement or disagreement of the parties. A receiver may be appointed by mutual agreement between the parties or by court order.

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