Application of commercial leases to foreigners

Loi Plinel

Since the PINEL Act of 2014, foreigners have enjoyed the right to benefit from the status of commercial leases.

Legislative confirmation of case law

The French Supreme Court has ruled out the application of this discriminatory condition (Civ. 3, November 9, 2011, n°10-30.291).

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Application of the commercial lease statute to protect tenants

The status of commercial leases

A tenant wishes to have his lease reclassified as a commercial lease in order to benefit from the status of commercial leases. In this case, the tenant was an artist, and it is not obvious whether the lease qualifies as a commercial lease.

Artist and entitlement to commercial lease status

A painter obtained the application of the status of commercial leases to his lease, because :

• he sold paintings on the commercial premises,
• he was eligible to contribute to the Maison des Artistes security fund,
• he was recognized as an author of graphic and plastic works of art,

even if the premises and the object of the commercial lease were not registered in the files of the caisse de sécurité de la maison des artistes. Cass. Civ.3, March 23, 2011, n°10-304495

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Can the landlord sue the former commercial tenant? Yes, if there is a joint and several liability clause in the commercial lease, creating a joint and several liability between the former tenant and the new tenant. There is an exception to this rule, even in the absence of a solidarity clause.

If there is no joint and several liability clause in the commercial lease

Conditions for joint and several liability of the former commercial tenant

The Court of Cassation (Cass. civ. 3, 12-07-1988, n˚ 86-15.759) has recalled that :

• the transfer of the commercial lease is in order,
• and no Solidarity Clause is stipulated in the lease transfer contract,

then: the landlord cannot claim from the assignor (who has assigned the lease) payment of rents due subsequent to the lease assignment. Clearly, in this case, the former tenant is not required to pay any debts arising after the transfer of the commercial lease.

Exception: the person assigning the lease knew that the assignment was being contested by successive lessors.

If the commercial lessee who assigns his commercial lease could not have been unaware, at the time of the assignment, that the successive lessors were contesting the legality of the lease assignment, then the former lessee must guarantee the debt even in the absence of a non-guarantee clause. (Cass. civ. 3, 24-06-1998, n˚ 96-19.042)

Drafting and understanding the content of a commercial lease is essential

The commercial lease is therefore an advantage for the lessee who assigns his commercial lease, but can be analyzed as a major loophole in the commercial lease contract. Landlords should therefore pay close attention to this point when drafting their commercial lease. In addition, the signature of a personal guarantee by the manager of the lessee company may offer an additional guarantee to the lessor.

Solidarity clause in the commercial lease

Existence of a solidarity clause between the old and new commercial lessees

Whoever transfers his commercial lease with his business will be liable for rent only until the end of a 3-year period since the law of June 20, 2014 (Pinel law).

1-month deadline for informing former tenant of first unpaid rent

Please note that the lessor must inform the former tenant of any unpaid rent within 1 month of the date on which the rent should have been paid. In practice, this rule is very restrictive for the landlord, who often gives the tenant some time to regularize the situation. The landlord must now react immediately in writing, and no longer be content with oral conversations with the tenant and guarantor.

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How to calculate eviction indemnity for a tourist hotel ?

The bottom line: judges use the average of 3 methods to calculate eviction compensation

In this case regarding eviction indemnity, the legal expert applied the sales method, the cash flow method and the EBITDA (gross operating profit) method. The court accepted the average of the three results obtained using the three accounting methods (i.e. an average value of €374,225).

Facts

On January 1, 2000, Mrs B. signed a commercial lease with S.A.R.L. Hôtel des Chênes for a property complex including a three-star hotel in PUJOLS, for a period of nine years, i.e. until December 31, 2008. On November 25, 2008, Mrs B. sold the property to SCI Pujols Bel Air, which intervened in the current proceedings. SCI Pujols Bel Air reiterated its refusal to renew the lease and offered to pay an eviction indemnity to be determined by expert appraisal. S.A.R.L. Hôtel des Chênes served SCI Pujols Bel Air with a writ of summons to set the eviction indemnity in accordance with article L415-14 of the French Commercial Code. An expert appraisal was ordered.

Claims of the parties relating to the calculation of eviction compensation

Under the terms of article L 145-17 et seq. of the French Commercial Code, the eviction indemnity includes the market value of the business, determined in accordance with professional practice, plus various expenses. To evaluate the eviction indemnity, Monsieur VIDEAU, as is customary, used three cross-checking methods:

• the method based on sales according to the usual scales applied by the profession and by the tax authorities (the Lefevre scale and the Blatter scale),
• the cash flow method,
• the EBITDA valuation method.

The main eviction indemnity

Under the terms of article L 145-17 et seq. of the French Commercial Code, the eviction indemnity includes in particular the market value of the business, determined in accordance with professional practice.

Accounting methods

S.A.R.L. Hôtel des Chênes firstly criticizes the two methods calculated by Mr. B., i.e. the estimate based on financing capacity and the estimate based on gross operating surplus, on the grounds that these methods are only valid for the valuation of a company and not for the valuation of a business, which is a broader concept with a strong patrimonial and fiscal connotation. However, S.A.R.L. Hôtel des Chênes will be told that the value of a business is not the same as the value of the company operating the business. The valuation of a business cannot be made in abstracto, but must correspond to an economic reality. As the appraiser points out, the potential buyer must have the means to finance the acquisition on the basis of the actual existing business. This is why valuation methods that include financing capacity and EBITDA are essential. The expert rightly points out that when the G. consorts bought the shares in S.A.R.L. Hôtel des Chênes in March 2005, they borrowed €275,000 and contributed €150,000 to the partners’ account: if their valuation method were adopted, the debt would triple, and S.A.R.L. Hôtel des Chênes would immediately be in suspension of payments. As soon as sales fall (which is our case), the value of the business must fall accordingly.

The coefficient used

S. A.R.L. Hôtel des Chênes believes that the usual coefficient for the hotel industry is an average of 2.63, and that the lowest coefficient in the Lot et Garonne region is 2.02. The company is therefore requesting that this coefficient be applied. It therefore requests that this coefficient be applied. The expert retained a coefficient of 1.5. First of all, with regard to the coefficient usually used in the profession, it is inaccurate to say that the average is 2.63. This average is based solely on Blatter and Perbos. The reference works are Blatter and Lefèvre. However, Lefèvre 2007 suggests a valuation of between 0.80 and 3.5 times sales for 3* hotels, while Blatter mentions a coefficient of 2 to 4 times sales for tourist hotels (regardless of category). Perbos mentions a coefficient of 2 to 3.5, with no further explanation. But we don’t ask an expert to apply an average range. He is asked to apply a coefficient appropriate to the situation of the business being appraised. He concludes by pointing out that it would appear random to base a valuation on more than 1.4/1.6 times annual sales. In the light of these factors, it is appropriate to retain the upper range of Monsieur VIDEAU’s reasonable valuation, i.e. a multiplying coefficient of 1.6, which brings the amount of the valuation by sales to €431,963.

The estimate retained for the main indemnity will therefore be calculated as follows:

• Estimate based on sales: €431,963
• Estimate based on cash flow: €314,316
• Estimated gross operating surplus: €376,398

For an average value of : 374.225 €. The first decision will be reversed on this point.

Ancillary indemnities

Re-use costs

As the value of the business is slightly higher than that recommended by the expert, the re-employment costs will be slightly modified as follows:

• duties on transfers for valuable consideration of business assets :
  0 à 23 000 € = 0 %
  23.000 à 200.000 € : 3 % = 5.310 €
  200.000 à 374.225 € : 5 % = 8.711 €
  Total: €14,021
• search costs for an equivalent fund:
  374.225 € x 5 % = 18.711 €
  TOTAL re-use costs: €32,732.

Commercial disturbance

This involves compensation for the loss suffered by the evicted tenant during the period of removal and reinstallation, or, in the absence of reinstallation, during the period of cessation of operations. According to the expert, jurisprudence usually sets the compensation at three months’ net income. The expert suggests that the court should increase this indemnity, given that the notice of termination was issued with effect from January 1, 2009, i.e. more than two years ago, and that as a result of this notice of termination the tenant can no longer implement the essential modernization projects. He points out that sales are almost identical to those of 2007. However, S. A.R.L. Hôtel des Chênes has pointed out that sales rose by 13.88% in the first four months of 2011, which would suggest that the eviction procedure has had no impact on the hotel’s business. He therefore proposes to retain an indemnity equivalent to six months’ net income. The first judge retained an indemnity of four months, closer to the average indemnity, but taking into account the long period that had elapsed since the date of notice. His assessment will be retained and his decision confirmed on this point. The other heads of compensation are accepted by both parties.

Amounts of damages constituting the eviction indemnity

The Court:

• Fixes the principal indemnity at €374,225,
• Fixes the re-employment indemnity at €32,732,
• Commercial disturbance: €10,255
• Staff redundancy costs: €3,580
• Unamortized works and improvements: €16,011
• Administrative and miscellaneous costs: €10,000

Consequently, orders SCI Pujols Bel Air to pay S.A.R.L. Hôtel des Chênes the sum of €446,803 as eviction compensation. CA Agen April 24, 2013 n° 12/01276 , ch. civile

Mandatory indices for commercial lease rents

ILC index (commercial or craft activities) or ILAT (tertiary sector)

Article L145-34 of the French Commercial Code requires the ILC or ILAT index to be used instead of the ICC index, except in the case of a sliding scale clause.

Replace the ICC with the ILC or ILAT index at the next renewal (after 9 years)

Current commercial leases may continue to apply the ICC index to the calculation of the rent review, including the triennial review of the commercial lease rent. At the end of the 9-year period, commercial leases must be renewed using the ILC or ILAT indexes.

The ILC applies to rents for premises used for commercial and craft activities.

Article L112-2 of the French Monetary and Financial Code states:

“Any clause providing for indexation to the change in the national construction cost index published by the Institut national des statistiques et des études économiques or, for commercial or craft activities defined by decree, to the change in the quarterly index of commercial rents published under conditions set by the same decree by the Institut national de la statistique et des études économiques, is deemed to be directly related to the purpose of an agreement relating to built-up property.

Any clause providing for indexation to variations in the quarterly index of rents for tertiary activities published by the Institut national de la statistique et des études économiques under conditions laid down by decree, for activities other than those referred to in the first paragraph and for activities carried out by the liberal professions, is also deemed to be directly related to the purpose of an agreement relating to a building.

The ILAT applies to tertiary activities other than commercial and craft activities: activities of the liberal professions and those carried out in logistics warehouses.

The ILC applies to commercial leases signed on or after November 7, 2008 (December 30, 2011 for the ILAT).

The ILC applies to current commercial leases, unless the parties have signed an amendment specifying the choice of another index, such as the ILAT.

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Fire: Subtenant responsability

Subtenant liability

The sub-tenant is responsible for all fire damage in the sub-let area. Under article 1733 of the French Civil Code, the tenant is presumed to be responsible for fire in the leased commercial premises.

If the tenant wishes to avoid liability, he must prove :

• the existence of a construction defect,
• that the fire was transmitted by a neighboring house,
• an act of God or force majeure.

The same reasoning applies in the case of a main commercial lease and a commercial lease sublease.

In this case (Civ. 3e, May 23, 2012, no. 11-17.183), the tenant had sublet the residential part of his premises. A fire broke out in this part of the premises. The tenant tried to limit his liability to the damage to the sublet premises only. Nevertheless, the sub-tenant was ordered to compensate the main tenant and the landlord (owner) for the entirety of their premises ravaged by the fire.

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Lawfulness of clauses waiving eviction compensation

Eviction indemnity waiver clauses in commercial leases often give rise to debate due to their potential impact on the tenant’s rights. However, their legality can be supported by sound legal principles, such as freedom of contract and the informed consent of the parties.

1. Freedom of contract and party autonomy

Freedom of contract, a fundamental principle of the law of obligations, is enshrined in article 1102 of the French Civil Code. This principle enables the parties to freely negotiate and adopt the clauses of their contract, subject to compliance with the mandatory provisions of the law. In this context, the waiver of eviction compensation clause can be considered as an expression of this freedom, as long as the tenant is fully aware of his rights and makes an informed waiver.

2. Informed consent as a guarantee

For the waiver of eviction compensation to be lawful, it is essential that the tenant’s consent be fully informed. This consent must be free, informed and not the result of a manifest imbalance of power between the parties. The validity of this clause therefore depends on the transparency of the negotiations and the tenant’s understanding of the implications.

Case law has defined the validity of such clauses by requiring that they be formulated in a clear and unequivocal manner.

3. Real and serious consideration

The legality of an eviction indemnity waiver clause may be strengthened by the presence of real and serious consideration for the lessee. For example, the lessor may offer a reduced rent, a free period, or other benefits in exchange for this waiver. This quid pro quo makes it possible to maintain a contractual balance and justify the lessee’s waiver of his right to compensation.

4. Respecting the economic logic of the parties

In certain situations, the waiver of eviction compensation may reflect an economic rationale that is well understood by both parties.

For example, the tenant may prefer to waive his right to compensation in return for an immediate benefit, or to secure the continuation of his business under favorable conditions. This contractual flexibility makes it easier to respond to market realities and the specific needs of both parties.

5. Promoting harmonious commercial relations

By allowing the parties to negotiate freely the waiver of eviction compensation, the law encourages harmonious and lasting commercial relations. Lessors may be more inclined to grant concessions to lessees, knowing that they can negotiate advantageous terms in return for waiving the indemnity. This encourages a climate of trust and cooperation that benefits both parties.

Conclusion

The legality of eviction indemnity waiver clauses is based on sound legal principles, notably freedom of contract and the informed consent of the parties. As long as such clauses are negotiated transparently, with adequate consideration and without manifest imbalance, they can be considered lawful. They offer the contractual flexibility needed to adapt commercial relations to economic realities, while respecting the legitimate interests of both parties. As a result, far from undermining the lessee’s rights, these clauses can contribute to the fluidity of contractual relations and the economic vitality of the commercial lease market.

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The legal analysis of the Aix-en-Provence Court of Appeal’s decision of April 6, 2023 (no. 20/01243) focuses on a dispute relating to a commercial lease between SAS Compagnie de Tourisme Camarguaise (lessee) and Mr. and Mrs. [T] (lessors). The case mainly concerns the validity of a notice of termination without renewal offer and without eviction compensation, issued for serious and legitimate reasons.

Background and issues

The couple [T] own an apartment in a condominium, operated by Compagnie de Tourisme Camarguaise as a tourist residence. The lease, initially granted to another company, was transferred to Compagnie de Tourisme Camarguaise in 2013. Before the lease expired in October 2016, the lessors issued a notice of termination on serious and legitimate grounds, relying on several breaches by the lessee, notably the lack of maintenance of common facilities, the removal of essential services and the non-payment of co-ownership charges.

Ruling at first instance

The Tarascon District Court ruled in favor of the landlords, considering that the alleged breaches were well-founded and sufficiently serious to justify a notice to vacate without eviction compensation. As a result, the Compagnie de Tourisme Camarguaise was ordered to vacate the premises and pay an occupancy indemnity.

Appeal and arguments of the parties

The lessee company appealed, requesting that this decision be overturned and that the lessors be ordered to pay an eviction indemnity. It contested the validity of the reasons given by the landlords for the notice to vacate, in particular by questioning the obligation to maintain the equipment and arguing that certain shortcomings were not its responsibility.

Analysis by the Court of Appeal

The Court of Appeal examined each of the grounds for dismissal put forward:

1. Maintenance of common equipment: The Court ruled that the landlords’ obligation to maintain the common facilities concerned only the common parts attached to the leased lots, and not the external facilities not under the control of the co-ownership. In the absence of an explicit clause in the lease, this ground was deemed unfounded.
2. Withdrawal of caretaking and reception services: The Court noted that the withdrawal of these services was the result of decisions taken by the association syndicale libre (ASL) of the housing estate, and not by the lessee company. This ground was also rejected.
3. Non-payment of condominium charges: This complaint was dismissed for lack of sufficient detail as to the amounts and nature of the charges allegedly unpaid.
4. Lack of maintenance of private areas: The Court noted that the evidence provided by the landlords did not relate to the relevant period, and the deterioration observed was normal wear and tear. This complaint was therefore deemed insufficient to justify the loss of the right to compensation.
5. Non-payment of rent in kind: The Court found that the complaint relating to the non-payment of rent in kind, in connection with access to the Maeva exchange, was not sufficiently well-founded to justify notice without indemnity.

Conclusion of the Court of Appeal

The Court of Appeal overturned the lower court’s judgment in all respects. It recognized that the notice issued entitled Compagnie de Tourisme Camarguaise to payment of an eviction indemnity, and ordered an expert appraisal to determine the amount of this indemnity, as well as that of the occupancy indemnity owed by the tenant. The Court also ordered the tenant company to produce the residence’s balance sheets and operating accounts for the years 2016 to 2018.

Legal implications

This decision highlights the importance of a strict interpretation of lease clauses, particularly with regard to maintenance and service obligations. It also illustrates that the modification or removal of services by third-party entities (such as an ASL) cannot be imputed directly to the lessee to justify a notice to quit without indemnity. Finally, the decision reminds us that, to be valid, the grounds for termination must be explicitly stated and sufficiently substantiated, particularly with regard to the alleged breaches.

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