Landlords plead significant modification of local commercial factors
Municipal authorization to operate a terrace
Summary: The July 4, 2024 ruling by the French Supreme Court (no. 23-13.515) confirms the rejection of a request to de-cap the rent on a commercial lease. The lessors claimed a significant change in local commercial factors due to a municipal authorization to operate a terrace. The Court ruled that the terrace had already existed under the previous operators, thus rejecting the argument of significant change. This ruling is a reminder of the strict requirement of proof to justify a change in the rent ceiling.
1 Facts and procedure
The judgment under appeal, handed down by the Dijon Court of Appeal on December 1, 2022, concerns a dispute between the lessors, Mrs [M] [C] and Messrs [W] and [U] [C] (acting as bare owners), and the Lauman company, lessee under a commercial lease for a restaurant-bar-brasserie.
At the end of the initial lease signed on November 1, 2002, the parties proceeded to renew the lease with effect from November 1, 2011, with the landlords requesting that the rent be set at a reduced rate on the grounds of a significant change in local market factors. This request was based on the tenant’s obtaining a municipal permit to operate a 93 m² terrace on the public domain.
Believing that this change justified an increase in the rent, the landlords took the matter to court. The Dijon Court of Appeal rejected their request, a decision against which they appealed to the French Supreme Court.
2. The landlords’ arguments
The lessors put forward two main arguments:
a) The existence of a significant change in local commercial factors
They argued that the municipal authorization granted in 2005 to operate a 93 m² terrace constituted a significant change in the operating conditions of the business, leading to an increase in the value of the goodwill and thus justifying a rent review outside the limits of the legal ceiling.
They argued that this terrace represented a significant increase in the surface area available for the operation of the restaurant, especially as the municipal fee was low.
b) The Court of Appeal’s error of assessment as to the existence of a significant modification
The landlords criticized the ruling for relying on a statement by a former waitress to the effect that the terrace already existed before the lease expired, and that it extended right up to the steps of a church.
They felt that this attestation was insufficient to reject their argument, in the absence of precise information on the actual extent of the terrace prior to 2005.
They considered that the Court of Appeal had not correctly drawn the legal conclusions from its own findings.
The Cour de cassation’s response
The Cour de cassation dismissed the appeal, recalling the following principles:
1) The principle of capping commercial rents and its exceptions
In accordance with articles L. 145-33 and L. 145-34 of the French Commercial Code, the rent for a renewed lease is, in principle, capped unless a significant change in the factors used to calculate rental value can be demonstrated. These factors include, in particular, local market factors.
The burden of proof lies with the lessor requesting the removal of the ceiling.
2) Sovereign appraisal by trial judges
The Court reiterated that the assessment of whether the modification is significant is a matter for the trial judges to decide.
The Court of Appeal rightly examined whether the extension of the terrace in 2005 constituted a significant change in local commercial factors.
It noted that, prior to 2005, Lauman already had a large terrace, extending right up to the church steps, which contradicts the claim that the 2005 municipal authorization created a significant break in the operation of the business.
3) Absence of proof of a significant change
The appeal court noted that the authorization to operate the terrace granted in 2005 did not constitute a significant change, since the terrace already existed under the previous operators.
Consequently, it rightly deduced that the conditions for de-capping had not been met.
Solution of the French Supreme Court
The appeal is dismissed.
The lessors are ordered to pay the costs.
Their claims under article 700 of the French Code of Civil Procedure are rejected.
Legal analysis
This ruling illustrates the strict evidentiary requirements imposed on landlords who invoke a significant change in local commercial factors to request a rent adjustment.
Three main conclusions can be drawn from it:
- Municipal authorization to operate a terrace on the public domain can be a factor in raising the rent, but only if it leads to a real change in the operating conditions of the business.
- The prior existence of a terrace operated by the lessee or his predecessors may neutralize the lessor’s argument in favor of de-capping.
- The Cour de cassation does not go back on the sovereign assessment of the lower courts, except in cases of manifest error or lack of legal basis.
Thus, in order to obtain a de-capping of the commercial rent, lessors must provide indisputable proof of a significant change in the commercial environment of the premises. In this case, such proof was not deemed sufficient, and the appeal was dismissed.
Full text
Facts and procedure
1. According to the judgment under appeal (Dijon, December 1, 2022), handed down on referral from the French Supreme Court (3rd Civ., October 13, 2021, appeal no. 20-12.901, published), Mrs [M] [C] and Messrs [W] and [U] [C] (the lessors) agreed, with effect from November 1, 2011, to the renewal of the commercial lease held by Lauman (the lessee), a restaurant-bar-brasserie operator, in return for the setting of a rent with a reduced ceiling.
2. They then summoned the tenant to fix the rent for the renewed lease at the rental value.
Examination of the plea
The third and fourth grounds of appeal
3. Pursuant to article 1014, paragraph 2, of the Code of Civil Procedure, there is no need to issue a specially reasoned decision on these complaints, which are clearly not such as to lead to cassation.
First and second grounds of appeal
Statement of the plea
4. The lessors object to the decision rejecting their request for the setting of an uncapped rent, on the grounds that:
“1°/ that a municipal authorization allowing a restaurant-bar-brasserie to extend its terrace onto the public domain is likely to constitute a significant change in local commercial factors, and therefore a significant change in the rent.
local commercial factors, and therefore grounds for removing the ceiling on the rent increase for the lease of which the restaurant owner is the lessee; that in the case in point, after having noted that it was common ground that during the expired lease, Lauman had obtained from the commune of [Locality 4] an authorization to occupy the public domain, issued on May 19, 2005, corresponding to a terrace with a surface area of 93 m² which, according to the legal expert, could be considered exceptional both in terms of its surface area and the low price of the fees paid, and that the Lauman company did not provide proof of any prior written authorization from the municipality for the operation of such a terrace, the appeal court could not then assert that there was no reason to adjust the rent in the absence of any change in local commercial factors, on the pretext that a statement by a former waitress (Mrs. [H]) employed in 2003-2004 in the establishments that preceded the one operated by the Lauman company indicated that they had a terrace “extending right up to the church steps [5]”, which was insufficient to establish that the extension of the terrace’s surface area during the expired lease was limited to a mere 15 m², in the absence of any reference to an objective element specifying this surface area, which would enable the judge to verify it, to ascertain the surface area in square meters occupied by the terrace of these establishments and to compare it with the existing one; that in so ruling, the Court of Appeal failed to enable the Cour de cassation to exercise its review powers, thereby depriving its decision of a legal basis under articles L. 145-33, L. 145-34 and R. 145-6 of the French Commercial Code;
2°/ that a significant change in local commercial factors gives rise to a right to de-cap the rent of the renewed lease when it occurs during the term of the expired lease; it is common ground that the expired lease took effect on November 1, 2002, and it follows from the judgment’s own findings that Mrs [H]’s attestation that the terrace extended right up to the steps of the church [5] concerned the period from 2003 onwards, i.e. the period covered by the disputed lease; that in asserting that the lessee benefited “prior to the expired lease” from a large terrace extending as far as the church steps [5] in order to rule out the existence of a significant extension of the terrace, and consequently a significant change in the local commercial factors, during the expired lease, the appeal court failed to draw the legal conclusions from its own findings and thus violated articles L. 145-33, L. 145-34 and R. 145-6 of the French Commercial Code.
The Court’s response
5. Pursuant to articles L. 145-33 and L. 145-34 of the French Commercial Code, it is up to the lessor, when applying for the de-capping of the price of the renewed lease, to establish the existence, during the course of the lease to be renewed, of a significant change in the elements used to calculate the rental value mentioned in 1° to 4° of article L. 145-33.
6. Whether or not the change is significant is a matter for the court to decide.
7. The Court of Appeal first rightly held that a municipal authorization to extend the operation of a terrace onto the public domain contributed to the development of commercial activity, so that it was necessary to investigate whether this situation could have modified the local commercial factors constituting grounds for de-capping.
8. It then noted that the lessee had obtained from the municipality of [Locality 4] an authorization to occupy the public domain, issued on May 19, 2005, corresponding to a terrace with a surface area of 93 m², divided into a part in line with the establishment and a part against the church [5], and that although the lessee did not provide proof of any previous written authorization from the municipality for the operation of such a terrace, and in particular of a surface area of 71 m² between 1989 and 1999, increased to 79 m² between 1999 and 2005, the testimony of a former waitress employed by the previous operators between 2003 and 2004 showed that these establishments had a terrace extending right up to the church steps [5], which contradicted the landlords’ contention that the terrace between 1989 and 2005 consisted only of a few tables and chairs located under an awning in front of the commercial premises.
9. The Court therefore found that the tenant, who had enjoyed a large terrace prior to the expired lease, had not benefited from a significant extension of the terrace in 2005, and deduced that, since the lessors had not provided evidence of a significant change in the local commercial factors, the claim for the setting of a price below the ceiling had to be rejected.
10. The plea is therefore unfounded.
FOR THESE REASONS, the Court :
DISMISSES the appeal;
Order Mrs [M] [C] and Messrs [W] and [U] [C] to pay the costs;
In application of article 700 of the French Code of Civil Procedure, dismisses the claims; Thus made and judged by the Court of Cassation, Third Civil Division, and delivered by the President at its public hearing on July 4, 2004.ECLI:FR:CCASS:2024:C300392
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