French Leaseback

Article L145-17 of the French Commercial Code sets out the conditions under which a lessor may refuse to renew a commercial lease without being obliged to pay eviction compensation to the lessee.

I. Refusal to renew without compensation

The lessor may refuse to renew the lease without having to pay compensation in two cases:

1. Serious and legitimate reason :

The reason given must relate to :

– Non-performance of an obligation by the tenant, or

– Cessation of operation of the business without a serious and legitimate reason.

The one-month period following formal notice from the lessor

The lessor can only invoke this ground if the lessee’s infringement has continued or been renewed for more than one month after formal notice to remedy it. This formal notice must meet certain conditions:

– It must be issued by extrajudicial act, meaning a bailiff.

– It must specify the reason given.

– It must reproduce the terms of the corresponding paragraph.

2. Insalubrity or danger :

The lessor may also refuse renewal without compensation if the building must be totally or partially demolished due to its insalubrious state, as recognized by the administrative authority, or if it can no longer be occupied without danger due to its condition.

II. Tenant’s right of priority

In the event of reconstruction of the building by the owner or his successor, and if the new building includes commercial premises, the tenant has a priority right to rent in the reconstructed building.

This priority right is subject to the conditions set out in articles L. 145-19 and L. 145-20 of the French Commercial Code.

III. Practical observations

Formal notice :

The formal notice is a key step in enabling the lessor to invoke a serious and legitimate reason. If this formality is not respected, the reason invoked could be declared null and void.

Priority right :

The tenant’s right of priority in the event of reconstruction protects the outgoing tenant, by giving him or her the opportunity to return to the premises.

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Article L145-48 of the French Commercial Code allows tenants to diversify their business activities within the leased premises, subject to certain specific conditions. Here are the main points to bear in mind:

1. The possibility of diversifying activities

A mandatory request from the tenant to the lessor

The tenant may request authorization to carry on one or more activities on the leased premises, other than those initially provided for in the lease. This request is based on :

– Economic conditions: This may include difficult economic circumstances or market developments requiring an adjustment of activities to maintain the company’s viability.

– Necessities of rational distribution organization: This refers to the need to reorganize or adapt the supply of goods and services in line with new market needs or the tenant’s business strategy.

2. Conditions for authorization

Authorization will only be granted if the new activities are compatible with :

– The purpose of the building or complex:

The type of building or its main use must not be compromised by the new activities.

– The character of the building:

The architectural, functional or even cultural characteristics of the building must be respected.

– Location of the building:

The immediate environment or neighborhood in which the building is located must be taken into account, in particular to ensure that new activities do not create an imbalance or nuisance in the neighborhood.

3. Restriction for commercial units:

A notable exception is provided for the first tenant of premises located in a commercial unit (i.e. a property complex with a commercial coherence defined by a construction program). This tenant may not exercise this option to diversify activities for the first nine years following occupancy. The purpose of this restriction is to preserve the commercial coherence and balance of the property complex for a decisive period.

To sum up

Article L145-48 of the French Commercial Code allows lessees to adapt their activities in line with economic and commercial developments, provided that these new activities are compatible with the leased property. However, tenants of first commercial units are subject to a nine-year restriction to guarantee the initial stability of the overall commercial project.

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French Supreme Court decision of September 10, 2014 (no. 13-13.599)

Background and Facts of the Case:

The case concerns Mr. Y, who acquired a lot in a property complex located in a safeguarded area in Lille, sold by Mr. X, a property dealer and wealth management advisor. The purpose of the purchase was to benefit from the tax provisions of article 31-I, 1° b ter of the French General Tax Code (CGI), allowing restoration work to be deducted from taxable income.

However, the tax authorities rejected this deduction on the grounds that the work undertaken was in the nature of a reconstruction or extension, which excluded the application of the tax benefit.

Mr. Y was then subject to a tax reassessment and sought compensation from Mr. X for failure to provide information, arguing that the latter had not warned him of the risk of the tax authorities refusing to grant the tax advantage.

Previous proceedings :

1. Tribunal Administratif and Cour Administrative d’Appel: The administrative courts rejected Mr. Y’s claims, ruling that he had not established that the work carried out on the building constituted conversion work within the existing built volume, a necessary condition to benefit from the tax deduction.
2. Paris Court of Appeal (November 15, 2012): This court dismissed Mr. Y.’s claims for compensation against Mr. X. In particular, the court considered that, although Mr. X had failed in his obligation to provide information, the causal link between this failure and the tax reassessment suffered by Mr. Y. had not been established.

Decision of the French Supreme Court:

The Court of Cassation overturned the decision of the Paris Court of Appeal, remitting the case to the Orleans Court of Appeal. The high court found that the Court of Appeal had failed to draw the legal conclusions from its own findings, namely:

Obligation to inform:

The Court of Appeal recognized that Mr. X had failed in his obligation to inform Mr. Y of the risk that the tax advantage might be refused by the tax authorities.

Realization of the risk:

The risk actually materialized, as Mr. Y suffered a tax reassessment.

Causal link:

Despite these elements, the Court of Appeal ruled that the causal link had not been proven, which constitutes a contradiction with its factual findings.

Legal analysis:

1°) Article 1147 of the French Civil Code:

This article is at the heart of the decision, establishing that any breach of a contractual obligation, when it causes prejudice to the other party, engages the liability of the debtor. The Cour de cassation emphasized that Mr. X’s failure to properly inform Mr. Y of the tax risks associated with the real estate transaction had indeed caused the tax loss suffered by the latter.

2°) Causal link :

The Cour de cassation criticizes the Court of Appeal for not having drawn all the consequences of the causal link between Mr. X’s fault (the failure to meet his obligation to inform) and the damage (the tax reassessment). By recognizing the existence of the risk and noting its realization, the Court of Appeal should have concluded that Mr. X was liable for the losses suffered by Mr. Y.

3°) Reinforced duty to inform:

As a wealth management advisor, Mr. X had a heightened obligation to inform Mr. Y, a neophyte in the field of real estate investment, of the risks associated with the transaction, in particular tax risks. The Cour de cassation insisted that this obligation had been disregarded, thus justifying the cassation of the judgment.

Conclusion:

The decision of the Cour de cassation reaffirms the importance of the obligation to provide information in real estate transactions, especially when they are motivated by tax advantages. In the event of a breach of this obligation, the seller or asset management advisor may be held liable if it can be shown that the breach caused damage. This decision also underlines the importance of judges drawing all the legal consequences from the facts they find, particularly in terms of causality.

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Nexity Studea: Summary of the Versailles Court of Appeal ruling of May 29, 2018 (no. 17/02845)

Background: Mr. Pasquale C., owner of a studio apartment and a parking lot in a residence, had leased these properties to Nexity Studea, a company specializing in the management of student residences. In 2011, Mr. C. served notice on Nexity Studea, refusing to renew the commercial lease and offering to pay an eviction indemnity. Nexity Studea then took the case to court, contesting the proposed compensation and claiming a much higher eviction indemnity.

Decision of the Tribunal de Grande Instance de Nanterre: The court awarded Nexity Studea an eviction indemnity of 16,643.70 euros, far short of the company’s claims, and set an occupancy indemnity of 3,915 euros per year.

Decision of the Court of Appeal: The Versailles Court of Appeal upheld the judgment of the Nanterre High Court, rejecting Nexity Studea’s claim that the eviction compensation should be set at a much higher amount, based on the overall value of its business. The Court ruled that Nexity Studea‘s business, although based on a special tax arrangement, could not justify compensation beyond the partial loss of its goodwill.

Legal commentary on compensation

This ruling highlights several crucial aspects of commercial lease law and the valuation of goodwill, particularly in the context of student residences.

1. The question of the economic unit of operation:

Nexity Studea argued that the commercial leases as a whole constituted an indivisible economic unit, justifying eviction compensation based on the overall value of this goodwill. The Court rejected this approach, confirming that compensation must be limited to the partial loss specifically linked to the lots in question, irrespective of the alleged economic unity of the residence as a whole. This point clearly illustrates the limits imposed by the courts on the excessive valuation of goodwill in the context of commercial leases.

2. The hotel method:

The application of the hotel method to value eviction compensation was discussed but ultimately rejected. The Court adopted a more modest approach, refusing to base the calculation of compensation on hotel standards for properties in the student residence sector, which is often less lucrative and more specific.

3. Monovalent premises:

The monovalence of the premises, i.e. their exclusive allocation to a single use (in this case, a student residence), was recognized, but the Court ruled that this did not entitle the tenant to an exceptional valuation of the occupation indemnity (rent since the notice).

4. Tax and legal aspects:

The Court emphasized that the advantageous tax framework enjoyed by Nexity Studea, based in particular on tax exemption schemes, could not justify compensation based on tax or financial criteria not provided for in commercial lease law.

Conclusion:

This ruling underlines the need for courts to be vigilant in the face of attempts by operators of serviced residences to maximize compensation at the end of commercial leases, by insisting on strict application of the principles of goodwill valuation and measured consideration of the specific features of para-hotel activities.

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by Bruno Traesch | August 29, 2024 | Tourist and student residence | 0 comments

Goelia: legal analysis of the July 4, 2024 decision (n° 23/01675)

Failure to communicate accounts not sufficient for termination

In this case, Mr [B] [J] and Mrs [V] [H] (the appellants) had granted a commercial lease on an apartment to the company Goelia Gestion. They subsequently initiated proceedings to terminate the lease for non-payment of indexation and failure to transmit operating accounts. The proceedings were first brought before the interim relief judge of the Albertville court, who dismissed the appellants’ application to terminate the lease, ruling that the summons to pay had not been issued in good faith.

The indexation omitted by the operator was only 74 euros.

Goelia Gestion was ordered to pay a modest sum of 74.49 euros for the indexation reminder, while the appellants were ordered to pay a procedural indemnity of 500 euros.

The appellants have appealed this decision.

Legal issues

The appeal case focused mainly on two points of law:

1. Lapse of the declaration of appeal: Goelia Gestion requested that the appeal be declared null and void, arguing that the appellants had not served their pleadings within the time limit set by article 911 paragraph 1 of the French Code of Civil Procedure.
2. Admissibility of the respondent’s pleadings: The appellants argued that Goelia Gestion’s pleadings were inadmissible, as it had not constituted a lawyer within the required timeframe.

Analysis of reasons and decision

In its order of July 4, 2024, the Chambéry Court of Appeal analyzed the arguments relating to the appeal procedure in the light of articles 905-1 and 911 of the French Code of Civil Procedure.

1. Article 905-1 of the French Code of Civil Procedure: This article stipulates that, under penalty of nullity, the appellant has a period of one month from receipt of the notice to set the case for hearing to submit his pleadings to the clerk’s office. In the present case, the appellants complied with this time limit by filing their pleadings on February 8, 2024. However, article 911 paragraph 1 also requires that pleadings be served on an unincorporated respondent within one month of the expiry of the time limit for filing pleadings. The appellants failed to comply with this obligation, and their appeal lapsed.
2. Failure to serve notice of appeal: The respondent, Goelia Gestion, constituted a lawyer on February 23, 2024, before the expiry of the time limit for service, but the appellants neither served their conclusions on Goelia Gestion nor notified them to the respondent’s lawyer within the required time limit. The Court rejected the appellants’ argument, which was based on case law that was inapplicable to their case.
3. Order to pay costs and damages: Considering that the appeal had lapsed, the Court dismissed the appellants’ claims and ordered them to pay costs and procedural damages of 1,500 euros to Goelia Gestion.

Conclusion

This decision highlights the importance of respecting procedural deadlines in appeal proceedings. Despite their arguments, Mr [B] [J] and Mrs [V] [H] failed to overcome the strict requirements of the French Code of Civil Procedure concerning the service of pleadings. Their appeal was declared null and void, illustrating the severity of sanctions for breaches of procedural rules, even for perceived technicalities.

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Adagio Montrouge lessor recovers covid rents

The summary order issued on July 1, 2024 by the Judicial Court of Nanterre concerns a dispute between two lessors and the company ADAGIO. The dispute stems from a commercial lease entered into on March 9, 2007 for a condominium lot in the Adagio Paris Montrouge tourist residence. The plaintiffs summoned the ADAGIO company before the interim relief judge for unpaid rent for the years 2020 and 2021, totaling 4,950.56 euros. They also claimed 6,000 euros in damages for abusive resistance, as well as 1,800 euros under article 700 of the French Code of Civil Procedure to cover legal costs.

The landlords argued that Adagio could not invoke cash flow difficulties or restrictions due to the COVID-19 pandemic as force majeure to justify the unpaid invoices. They pointed out that the general ban on receiving the public did not constitute a loss of the leased property, and did not release the operator from his obligation to pay rent. In response, ADAGIO argued that the administrative measures imposed during the health crisis made it impossible to operate the premises commercially, thus justifying the exception of non-performance and the partial loss of the leased property. ADAGIO also contested the claim of abusive resistance. After hearing the arguments of both parties, the court ruled that the administrative measures relating to the health crisis were not attributable to the lessor and did not constitute a breach of the obligation to deliver. Consequently, it rejected ADAGIO’s arguments concerning the exception of non-performance and the partial loss of the leased property. The court recognized that ADAGIO’s obligation to pay the unpaid rent was not seriously disputable, and ordered it to pay the plaintiffs €4,950.56.

4,950 € in covid rents

On July^1, 2024, the interim relief judge of the Nanterre judicial court ordered a PIERRE ET VACANCES group company to pay a lessor of the Adagio Montrouge tourist residence a total of €4,950 in unpaid covid rent.

1,200 in legal fees

The judges ordered PIERRE ET VACANCES to pay €1,200 in legal fees.

6,150 € total sentence

The operator must therefore make a total payment of €6,150.

Operator resists Court of Cassation ruling

PIERRE ET VACANCES group companies continue to refuse to pay their unpaid covid rents, despite the June 30, 2024 rulings of the French Supreme Court. The courts have been particularly hard hit since the covid years, lengthening the time it takes to hand down judgments.

The order is declared provisionally enforceable, allowing claimants to recover sums due immediately without waiting for a possible appeal.

This decision reflects the strict application of contractual obligations despite the exceptional circumstances linked to the pandemic, reaffirming that economic difficulties and administrative restrictions do not systematically justify the suspension and extinguishment of rental payment obligations.

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Adagio Marseille Saint-Charles lessors win their case

The case concerns a dispute between several owners of the Adagio Marseille Saint-Charles residence and the société par actions simplifiée PV HOLDING, now PV-CP CITY, over unpaid rents for the years 2020 and 2021, during the COVID-19 crisis.

The dispute

The plaintiffs are individual owners of the Adagio Marseille Saint-Charles residence. They claim payment of unpaid rent from PV HOLDING/PV-CP CITY, which claimed to be unable to operate the premises due to government measures related to the pandemic.

Judgment

The court ruled that PV HOLDING’s claims were unfounded, pointing out that PV-CP CITY was PV HOLDING’s successor in terms of commercial lease obligations. The court also rejected the arguments of loss of the leased property and exception of non-performance put forward by the defense.

Reasons for the decision

1 Partial loss of the leased property (article 1722 of the French Civil Code)

The court rejected the argument that the impossibility of operating the premises due to government measures constituted a partial loss of the leased property. It was specified that the loss must be definitive, which was not the case here since use of the premises was temporarily suspended but not destroyed.

2 Exception of non-performance (article 1219 of the French Civil Code)

PV-CP CITY cannot invoke the exception of non-performance, since the restrictive measures were external and independent of the lessors, and the premises were still available for use.

Lack of proof of a partial contribution to exclude PV HOLDING from liability

The court ordered PV-CP CITY to pay the rent arrears, specifying the amounts due to each plaintiff, and rejected the claims of PV HOLDING, which had not proved that it had been exonerated by a partial contribution agreement.

56,328 € in covid rents

On April 11, 2024, the Marseilles Magistrates’ Court ordered a PIERRE ET VACANCES company to pay a total of €56,328 in unpaid covid rents to the lessors of the Adagio Marseilles Saint-Charles tourist residence.

11,040 in legal fees

The judges ordered PIERRE ET VACANCES to pay €11,040 in legal fees (23 lessors x €480).

67,368 in total condemnation

The operator must make a total payment of €67,368.

Provisional enforcement

In accordance with article 514 of the French Code of Civil Procedure, the decision is enforceable on a provisional basis.

Abusive resistance by the operator

It is difficult to understand the obstinacy of PIERRE ET VACANCES group companies in the matter of covid rents since the Court of Cassation rulings of June 30, 2024. Court dockets have been clogged since the covid years.

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Adagio Paris Tour Eiffel: lessors join forces

The lessors of the Adagio Paris Tour Eiffel tourist residence have formed a group to prepare for commercial lease renewals in 2025-2026, with the PIERRE ET VACANCES group ( Pv Cp City after Pv Holding and Residences Resorts France).

At the time of the last renewal, a majority of lessors defended their interests before the Commercial Rents Judge.

Many lessors who renewed their leases directly with the operator joined our group to obtain a better commercial rent.

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How much costs the eviction ?

Residence Nexity Studea Clichy: The judgment handed down on July 1, 2024 by the Nanterre judicial court concerns a dispute between NEXITY STUDEA and a lessor.

Summary of facts and decision: eviction compensation for the Nexity Studea Clichy residence.

Background to the Nexity Studea Clichy residence

In 2008, Mr B M leased premises to LAMY RESIDENCES (now NEXITY STUDEA) for a student residence. 2010 M. A purchased the premises in 2010. In 2017, Mr. A refused to renew the lease and proposed an eviction indemnity. The parties have not reached agreement on the amount of this indemnity for the Résidence Nexity Studea Clichy apartment.

Legal proceedings: expert appraisal and main proceedings

NEXITY STUDEA sued Mr. A for payment of the eviction indemnity. In 2021, the court confirmed that NEXITY STUDEA was entitled to eviction compensation and ordered an expert appraisal to determine the amount. The expert, Ms. BACOT-REAUME, estimated the eviction indemnity at 15,549 euros and the annual occupancy indemnity at 5,500 euros.

Claims by the operator of the student residence and the lessor of the Nexity Studea residence

– NEXITY STUDEA claimed 34,045.83 euros in eviction compensation.

– Mr. A requested judicial termination of the lease or eviction compensation set at 13,479.30 euros for the apartment in the student residence in Clichy.

Court ruling on eviction compensation

The court rejected the request for judicial termination of the lease on the student residence property.

– It set the eviction compensation at 13,549 euros, including :

– 12,673 euros for the main indemnity,

– 180 euros for the commercial disturbance,

– 696 euros for unamortized work.

It rejected the claims for ancillary compensation that were not supported by sufficient evidence.

– The occupancy indemnity payable by NEXITY STUDEA was set at 5,396 euros per year, from October 1, 2017, until the premises are vacated.

– Costs, including expert fees, will be borne equally by each party.

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