The commercial lease contract is well known. In simple terms, it is the agreement whereby the owner of a property rents his premises to a company or entrepreneur, so that the latter can operate iys business, craft or industry. The commercial lease should thus not be confused with the residential lease (which allows individuals to find housing).
The existence (domiciliation…), the activity (concrete exercise of the trade…) and thus the profitability (access to a given clientele…) of a multitude of companies depend directly on this contract. This is why the legislator has progressively put in place a very protective regime for lessees.
1°) The commercial lease: a very protective contract for tenants
Among the protections offered, there is of course the duration of the lease, which cannot be less than 9 years. There is also the right to renewal, a real guarantee of continuity.
It is this protective character that explains why the “right to lease” (the fact that a tenant company benefits from such a contract) constitutes “commercial property” (“propriété commerciale”). This is because the right to lease has an intrinsic economic value. The geographical location of the building is more or less advantageous; the premises are more or less spacious; in more or less good condition… Moreover, the lessee can enjoy the premises, not only during the initial lease, but also during all subsequent renewal periods! This is why he can sell his right to the lease: for example to a company that would like to set up and operate its business in the premises, or in the context of a larger business sale.
In principle, therefore, the lessor has no choice: when the lessee has committed no fault, the lease must be renewed. The only way to regain the use of the property is to issue a notice of termination and pay an eviction indemnity to the tenant (Art. L145-14 of the French Commercial Code). The purpose of this compensation is to repair the prejudice caused to the tenant by the non-renewal of the lease. This indemnity can be colossal, as it includes “the market value of the business, determined according to the practices of the profession, increased, if necessary, by the normal costs of moving and reinstalling the business, as well as the costs and transfer duties to be paid for a business of the same value […]”.
In practice, the compensation is almost always determined by the judge on the basis of an expert report. The reason is that when compensation is requested, the parties systematically go to trial.
This “commercial property“, whose powerful and dissuasive corollary we have just recalled, must be well known by the landlords. The legal and financial risk is far too great to issue a notice imprudently. It is, moreover, the extent of the rights conferred on lessees that legitimately encourages lessors to “armor” their lease contracts, by requiring all sorts of guarantees. The latter insert the most favorable mechanisms into the thin interstices of contractual freedom that the legal reforms have not yet encumbered. One thinks, for example, of the transfer of costs and charges, the security deposit, or various sanctions and indemnities…
Does this mean that lessors, apart from these few guarantees, completely divest themselves of their property when they sign a commercial lease contract? Is the lessee’s right to renewal absolute? Is there not an “exit door” that lessors can open to drive out their defaulting co-contractor?
2°) The refusal to renew a commercial lease for serious and legitimate reasons
Actually, article L. 145-17 of the French Commercial Code only provides for two situations in which the lessor may refuse to renew the lease without paying the eviction indemnity. We will focus here on the first one, namely the justification of a serious and legitimate motive against the tenant.
Although the “serious and legitimate motive” is not legally defined, it is a question of sanctioning a manifestly wrongful behavior of the tenant, which justifies that the lease not be renewed.. The courts actually do not limit this motive to breaches of contract, nor to breaches of the commercial lease legal regime. Certain non-contractual faults may also be considered as constituting a “serious and legitimate motive“. This is the case, for example, of violence exercised by the lessee against the lessor (Cass. Civ. 3ème, March 28, 1995; Gaz. Pal. 1996 jur, p. 126), or of the commission of criminal offences (see Cass. Com., February 17, 1965 n°63-10.482: Bull. civ. III n°131, for acts of pimping).
Apart from these rather extreme cases, landlords usually invoke a failure to perform the lease contract, notably incidents of payment of the rent ( e.g. Cass. Civ. 3ème, 16 October 2007, n°06-14.789 F-D : RJDA 1/8 n°11 som.). Indeed, the obligation, for the lessee, to pay the rent in the agreed terms and conditions, is the very essence of the lease relationship under Franch law (Art. 1709 of the Civil Code).
Whatever the reason invoked, the lessor must carefully evaluate its seriousness and legitimacy with his counsel. The reason for this is that a notice of termination without an offer of renewal nor eviction indemnity is served at the lessee’s own risk. Even if the lessor is right, the lessee will, in such circumstances, be particularly inclined to contest this motive before the courts, if only to gain some time or regain some leverage in the negociation. The probability that the notice of termination will be subject to judicial review after being served on the tenant is therefore very high.
3°) The formal notice of termination without offer of renewal
As we have seen, landlords are frequently encouraged not to renew the lease because of the lessee’s failure to perform one of his obligations. This is why the legislator has given the lessee “one last chance” to correct the situation. Thus, according to paragraph 1 of article L.145-17 of the French Commercial Code, “if it concerns […] the non-performance of an obligation […], the violation committed by the lessee may only be invoked if it has continued or been renewed more than one month after the lessor has been given formal notice to cease it“.
This one-month period is binding, to the extent that a late regularization should have no effect on the validity of the landlord’s decision not to renew. After this period, the non-renewal without eviction indemnity is therefore confirmed, provided -always- that the reason invoked is indeed “serious and legitimate“. It is only up to the judge to verify whether the fault continued, or was renewed, more than one month after the complaint was made (Cass. Civ. 3ème, May 29, 1991, RJDA 8-9/91 n°693).
The formal notice referred to in the Commercial Code is subject to a double formalism: firstly, with regard to its content; and secondly, with regard to the process for issuing it. On pain of nullity, the formal notice must specify the motive given by the lessor and reproduce, word for word, the terms of paragraph I of article L.145-17. It must then be served by “extrajudicial act” (i.e. delivered by a bailiff).
Only in very rare cases, where the violation is totally irreversible or instantaneous, can the lessor dispense with this formal notice.
In practical terms, a single document, i.e. a letter that is both a formal notice and a notice of termination without an offer of renewal (in the event that the lessee does not regularize the situation within the time limit set), will be served. This option is indeed accepted by the courts (see Cass. Civ. 3ème, 24 March 1999, n°97-16.708, “Sté Brasserie des arts c. Roudergues“).
This double-sided act is extremely effective, provided that it is carefully drafted. After all, it is both a formal notice (to pay certain sums, to cease an infraction…) and a notice of termination (admittedly conditional, but nonetheless very official) of the contract. It must therefore respect a demanding formalism in order to produce its full effects.
In conclusion, provided the following conditions are met:
- The formal notice meets the validity conditions of article L.145-17;
- It is served on the tenant by a bailiff;
- The motive for non renewal is indeed serious and legitimate;
- The tenant does not regularize the situation within the strict deadline of one month…
…the notice without renewal is validly given and the tenant is deprived of any eviction indemnity. It is therefore a formidable “weapon“, allowing lessors to get out of a commercial lease.
However, it should not be forgotten that, like all commercial lease “congés“, this one will only produce its effects (end of the contract) 6 months later (Art. L. 145-9 of the French Commercial Code), i.e. 7 months from the date of service of the special notice. It is therefore necessary to take action early enough. When the formal notice is served less than 7 months before the scheduled expiration of the lease, the lease is temporarily extended, as per the standard provisions of the Commercial Code: “in the absence of a notice of termination or a request for renewal, the lease made in writing is tacitly extended beyond the term fixed by the contract. During the tacit extension, notice must be given at least six months in advance and for the last day of the calendar quarter” (aforementioned article).
As you will have understood, French law authorizes lessors not to renew commercial leases, without having to pay the ruinous eviction indemnity, when they can invoke a “serious and legitimate” motive not to do so. This strategic “way out” is worth considering when approaching the end of the lease and the lessee has been particularly at fault. As we practice commercial law both as advisors and before the courts, we will be able to consider, with you, the appropriateness of such an approach.