Leaseback: breach of contract

In the judgment handed down by the Versailles Court of Appeal on 18 December 2018, the main issue is compliance with the tenant’s financial and contractual obligations, in particular the regular payment of rent.

Unpaid rents

The lessor (landlord) has initiated proceedings due to breaches by the tenant, such as late or unpaid rent. The landlord relied on the clauses of the lease, including the resolutory clause, to request termination of the contract in the event of serious breaches. The Court also considered whether these breaches were significant enough to justify termination.

In its arguments, the landlord emphasised that compliance with the terms of the lease was essential to guarantee the economic equilibrium of the property development, in particular the timely payment of rent. Failure to comply with these obligations jeopardises the proper performance of the contract and causes financial loss.

Indexation clause

The lessor also argues that the clauses relating to indexation or rent review must be applied strictly in accordance with the contractual terms and the legal provisions in force.

In addition, the formal notice or order to pay procedure was put forward to justify the landlord’s good faith in taking steps before requesting termination. The Court therefore examined whether the lessor had correctly followed the legal procedure before seeking to terminate the lease.

The decision of the Versailles Court of Appeal, handed down by the 12th Chamber on
18 December 2018 (RG 17/01944), deals with an issue relating to a commercial lease and addresses several crucial points in commercial lease law.

In this case, the central issue concerns the performance of the contractual obligations associated with the commercial lease, in particular the financial terms, such as the payment of rent, as well as the tenant’s compliance with the customs of the property. The dispute is based in part on differing interpretations of the clauses of the lease agreement, particularly with regard to the procedures for reviewing or adjusting the rent, as well as alleged breaches by the lessee (tenant) of his obligations.

The ruling emphasises the need for both parties, lessor and lessee, to comply scrupulously with the contractual provisions as set out in the lease. This includes not only the regular payment of rent, but also the continued use of the premises in accordance with the purpose specified in the contract. In addition, the issue of non-payment of rent or other irregularities may give rise to proceedings to terminate the lease, subject to the existence of a resolutory clause.

The Court also examines the circumstances in which termination of the lease may be ordered. In this case, it analysed whether the breaches of which the tenant was accused were sufficiently serious to justify termination and whether the legal procedures, such as the issuing of orders to pay or other formal notices, had been properly complied with by the landlord.

One of the issues addressed also concerned the adjustment of rent, whether through the indexation clause or the three-yearly review. The Court of Appeal pointed out that these mechanisms, although legal, must be applied in strict compliance with the provisions of the law and the agreements, failing which they could be deemed abusive or inapplicable.

The issue of good faith in the performance of the contract is also highlighted. The Civil Code requires contracts to be performed in good faith. This means that both parties must not only respect their contractual obligations, but also act loyally and cooperatively in fulfilling the contract. Any attempt to circumvent or abuse a contractual term may be sanctioned by the courts.

In conclusion, this ruling illustrates the fundamental principles of commercial lease law, such as compliance with contractual obligations, the need for performance in good faith and the strict conditions under which termination may be ordered.
It also reiterates the importance of the parties fully understanding and negotiating the terms of their contract in order to avoid costly disputes and preserve a balanced rental relationship.
Finally, the landlord invoked the need for the tenant to perform the contract in good faith, in accordance with the provisions of the Civil Code.
In the landlord’s view, any serious breach of essential obligations, such as the payment of rent, constitutes a legitimate reason for terminating the lease and vacating the premises.

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