Student residence: lease renewal

Student residence and commercial lease renewal

Tax-free rental investment in student residences is based on a commercial lease.

A commercial lease in a student residence is supposed to offer a high return and an attractive tax exemption. But what happens when the first 9-year lease expires? The operator, the commercial tenant, often takes advantage of the situation to offer a new lease with a lower rent. The operator’s main argument is to maintain the status quo as regards management of the student residence and condominium charges. Lessors are relieved of the management burden, which sometimes encourages them to accept drastic rent cuts. However, under the Pinel law, co-ownership charges must be paid by lessors in any case.

Principle of renewal

IN BRIEF

1. Proposal for a new lower rent by the operator (tenant)
2. Legal appraisal proposing a calculation for eviction compensation
3. Possible amicable agreement based on the legal expert’s rent proposal
4. Rent judge sets new commercial rent

The different stages of commercial lease renewal

The renewal of a commercial lease is subject to certain formalities. It is not tacit, and if there is no formal renewal, the lease contract simply continues, on the basis of the initial lease. It is therefore the old lease that continues and not a new lease that takes effect. The Rent Judge sets the rent for the new lease, if the operator wishes to renew the lease contract, often with numerous rent cuts in support, and the lessor-landlord does not wish to modify the terms of the contract. A brief is sent to the lessor, usually including an amicable expert’s report to support the claim. This report is often biased and in favor of the lessee’s interests alone. You must not give too much credit to these reports. Either the operator or the lessor can refer the matter to the Rent Tribunal and request the appointment of a legal expert. The judicial expert visits the residence and calculates the rental value (the new rent). They each use different methods and different calculation procedures, based in particular on gross margins and sales (costs and revenues). The hotel method, even when adapted to student residences, is unfavorable to the lessor-owner. It’s much fairer to consider the student residence operator as a real estate administrator. The rent judge decides on the amount of the new rent on the basis of the judicial expert’s report. However, if the owner does not agree with the downward revision of the rent, he can change his mind and opt to pay the eviction indemnity.

Consequences of non-renewal differ according to the author

If the lessee simply wishes to terminate the contract, he/she must formally signify this and the obligations on both sides cease.

Payment of eviction compensation by the lessor

If the lessor decides not to renew the commercial lease, he must pay the operator an eviction indemnity. This indemnity is intended to compensate the operator for his alleged loss, even though the residence is not 100% full and an apartment will make no difference to his sales. A ruling by the French Supreme Court (Cour de Cassation) has decided that the amount of the indemnity will be calculated on the part of the goodwill represented by the apartments whose leases have not been renewed.

How can the lessor escape eviction compensation?

Eviction indemnity waiver clause

If the operator of a student residence expressly waives his right to eviction AFTER the initial commercial lease has been signed, the landlord is no longer required to pay eviction compensation.

Gross negligence justifying the absence of eviction compensation

If the tenant-operator fails to meet his contractual obligations, the non-renewal of the commercial lease will not be accompanied by the payment of eviction compensation. However, these breaches must be of a certain seriousness. The law speaks of a serious and legitimate reason. The courts require particularly serious faults, and regularly refuse to apply this requirement to repeated breaches of the commercial lease. Commercial leases for student residences have a particular feature when it comes to apportioning charges. The vast majority of these are the responsibility of the operator. As a result, failure to maintain the leased property is more likely to be cited as a serious breach of contract. The landlord must clearly state these serious reasons in the decision not to renew, which will be notified to the operator. A typical case is that of a transfer made without the lessor’s agreement, even though a clause in the contract provided for this. Systematic late payment of rent has sometimes been considered a serious reason by case law.

In another case, if the property is declared unfit for habitation by a prefectoral decision, no eviction indemnity can be demanded. If the building is rebuilt, the landlord is under no obligation to relocate the tenant. Last but not least, physical or verbal violence also constitutes grounds for non-payment of eviction compensation in the event of non-renewal by the landlord. Renting to non-students can be a serious and legitimate reason for not paying eviction compensation to the landlord.

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