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Important Mandatory Law for Commercial Leases in France, Distinguishing them from Leases in Common Law Countries

Important Mandatory Law for Commercial Leases in France, Distinguishing them from Leases in Common Law Countries

Publié le : 16/01/2024 16 janvier janv. 01 2024
Actualités pour site version anglaise

As we have been advising and representing foreign clients for years concerning their commercial leases in France, we believe highlighting key mandatory statutory provisions important.
Commercial leases are agreements for premises dedicated to operating a commercial or craft business for a renewable 9-year term. They are subject to specific regulations, which make them different from business rental agreements or commercial leases in common law countries, notably the United States.

Contractual freedom for a French commercial lease is limited by mandatory rules found in articles L145-1 and following of the Commercial Code, which aim to protect the business of tenants.

A major difference: a tenant is deemed to create a business asset with the lease (called “propriété commerciale”, a sort of security of tenure) such that lease renewal cannot be refused without compensation for the value of the business, (“Fond de commerce” in French, which is specifically defined as all tangible items (equipment, stock) and intangible items (in particular clientele, trademarks, patents, lease rights) assembled by a business owner for operating purposes.  

Below are some of the key mandatory rules to keep in mind:
 
  • Duration

Commercial leases are at least 9-year term contracts (usually divided into three, 3-year periods) that will continue for an undefined term upon expiration unless a party wants to terminate or renew the contract. A renewed lease is considered a new 9-year lease, meaning that lease provisions should be reviewed and modified for law and case law changes and that all annexes required for a new lease must be updated, including the inspection of the premises and diagnostics.

However, tenants can terminate the lease in most circumstances by sending a notice by registered letter with return receipt requested at least 6 months before the end of each 3-year period (there are exceptions: leases for office use or storage, or with a term greater than 9 years, premises designed for single use, tourist residences).
 
  • Tenant’s right to lease renewal, consequences and exceptions

Tenants have the right to renew the lease if the 3 following conditions are met at the end of the lease:
1) they still own the business developed on the premises,
2) the business is regularly registered. Registration is important. It helps show the “commercial” nature of the business, making the protective commercial lease provisions applicable.
3) the business has been active during the 3 years preceding the expiry date of the lease.
If these 3 conditions are satisfied, the lease must be renewed by the landlord unless it pays compensation for the value of the business (except when the tenant has seriously violated the lease).

Litigation is common at lease renewal for landlords seeking nonrenewal or when the parties disagree on the rent amount. Advance planning helps reduce litigation risk.

The landlord can also buy the tenant out every 3 years and recover the use of its property to convert the building for its residential use, to rebuild, renovate, or rehabilitate it. In these cases, the owner must notify the tenant, using a bailiff, at least 6 months before the end of each 3-year period.

The procedural form in this area is important.
 
  • Allocation of expenses between the parties

Since 2014, contractual allocation of the obligation and costs for works on the premises between landlord and tenant is both required and limited by the law. Landlords are responsible for all structural works, but most of the rest (maintenance, compliance with regulatory standards, and certain local taxes) can contractually become a tenant obligation.

The obligation for the tenant to pay the real estate tax and the garbage collection tax must be expressly provided.
 
  • Statutory triennial rent indexation, annual indexation

The initial amount of rent is not regulated by law and can be freely fixed by the parties depending on the market value and the rights and obligations of each party. It can be annually modified with reference to the variation of an index or based on the tenant's income.

Even if the lease does not provide for an annual rent indexation, the contractual rent can be legally revised after every 3-year period. The revised rent is capped based on the variation of the legal index chosen by the parties (ILC or ILAT depending on the type of activity), unless the market value changes substantially. In this case, the rent increase (or decrease) to reach the market price is capped at 10% per year.
 
  • The landlord cannot prohibit the tenant from transferring its lease rights to the purchaser of its business.
  • The tenant's bankruptcy cannot be grounds for terminating a commercial lease.
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