Approaching the end of a commercial lease is a major strategic step for any tenant company, as well as for the owner of the premises. Controlling the day-to-day management of your commercial lease is essential if you are to anticipate this pivotal period as effectively as possible. This is the time when key issues crystallize: can the tenant stay? Under what conditions? And if renewal is refused, what are the financial consequences? French law, through the status of commercial leases, has put in place a specific mechanism to protect the value of the business being run, in particular through the "right to renewal". However, this right is not absolute, and its implementation, or refusal by the lessor, is subject to precise rules and can give rise to complex disputes, sometimes with considerable financial implications, such as the payment of eviction compensation. Understanding these mechanisms is essential if you are to anticipate and negotiate this pivotal period as effectively as possible.
The right to renewal: a French specificity
At the heart of the protective status of commercial leases is the tenant's right to renew a lease that has expired (article L. 145-8 of the French Commercial Code). This is not an automatic right to remain in the premises indefinitely at the same rent, but rather a vocation to obtain a new lease or, failing that, significant financial compensation.
Principle and public policy
The right to renewal is considered to be a public policy right. This means that the tenant cannot waive this right in advance in the initial lease (article L. 145-15 of the French Commercial Code). Any clause aimed at removing this right would be null and void. The aim is to protect the retailer's or craftsman's investment and the value of his business, which is often closely linked to its location. However, once the right has arisen (for example, after the lease has been signed), the tenant may choose to waive it freely, unambiguously and unequivocally.
The essential conditions for benefiting
To be eligible for renewal, the tenant must meet a number of conditions, assessed at the time the renewal comes into effect (date of notice or application):
- Be the owner of the business: The right to renew belongs to the owner of the business, craft or industrial premises. This implies the existence of an independent customer base linked to the tenant's business. If there is no existing goodwill belonging to the tenant, there is no right to renewal.
- Actual operation over the last 3 years : The business must have actually been operated during the three years preceding the date of expiry of the lease or its tacit extension (L. 145-8, para. 2). Seasonal operation may be sufficient if it corresponds to the nature of the business, but a prolonged cessation or abandonment of the business will result in the loss of this right, unless the tenant can provide "legitimate reasons" (serious illness preventing any indirect operation, major works making operation impossible, etc.).
- Registered with the RCS or RM : The tenant (or owner of the business) must be registered with the Registre du Commerce et des Sociétés or the Répertoire des Métiers for the activity carried out on the leased premises. This condition is often a source of disputes. Registration must be effective and correspond to the business actually carried on and authorised by the lease, at the key time of the notice of termination or renewal application. Failure to register at that time is a disqualifying factor.
- Be the holder of a lease subject to the : Obviously, the right to renewal only applies to tenants whose contracts fall under the status of commercial leases.
The procedure: anticipating the deadline
As we saw earlier, the lease does not end automatically. To trigger the lease end or renewal process, an action is required:
- The lessor's notice : The landlord must serve notice by bailiff at least six months before the end of the lease term (or for the end of a calendar quarter in the case of tacit extension). The notice may either offer to renew the lease (often by proposing a new rent) or refuse to renew it (with or without an offer of eviction compensation).
- The tenant's application for renewal : If the landlord does not give notice, the tenant who wishes to renew may make a request by bailiff's deed in the six months before the end of the term, or at any time during the tacit extension (L. 145-10). The landlord then has three months in which to respond; his silence constitutes acceptance of the request. principle renewal.
How is the rent set for a renewed lease?
One of the major sticking points at renewal is setting the new rent. The parties can reach an amicable agreement, but if the disagreement persists, the matter can be referred to the commercial rents judge (the president of the Court of First Instance).
The principle: fixing the rental value
In theory, article L. 145-33 of the French Commercial Code establishes the principle that the rent for a renewed lease must correspond to the "rental value". This value is determined on the basis of a number of legal criteria: the characteristics of the premises, its purpose (the authorised activities), the respective obligations of the parties (for example, who pays for major repairs), local commercial factors (the commercial environment of the district, its development, the attractiveness of the location) and, finally, the prices currently charged in the neighbourhood for equivalent premises.
The capping rule: limiting the increase
However, to protect tenants from sudden increases, article L. 145-34 introduces a "capping" rule. Barring exceptions, the increase in rent on renewal may not exceed the change in a benchmark index (the ILC or ILAT, depending on the activity, for recent leases; the ICC for older leases) that has occurred since the rent was set. initial the rent for the expired lease (or since the last renewal if the effective term exceeded 9 years). In practical terms, even if the rental value (the "market price") has risen sharply, the renewed rent will be limited to the change in the chosen index. So the rent does not automatically jump to the market value.
De-capping: when the rent can exceed the ceiling
There are important exceptions to the capping rule, allowing rents to be set directly at rental value, even if this represents a significant increase:
- Significant change in rental value : If, during the course of the expired lease, one of the elements defined in points 1° to 4° of Article L. 145-33 (characteristics of the premises, purpose, obligations of the parties, local commercial factors) has undergone a change noteworthy (i.e. significant and having an impact on trade), the cap is disregarded. Common examples:
- Major works that have changed the consistency or layout of the premises (carried out by the lessor, or by the lessee if the lessor has contributed to the works or if accession takes effect at the end of the expired lease).
- Authorised change of activity (despecialisation).
- Substantial changes to the commercial environment (creation of a pedestrian zone, arrival of an underground station, major development of the district, etc.).
- Effective term of the expired lease exceeds 12 years : If the initial lease was for a term of more than 9 years, or if, as a result of tacit extension (absence of notice or request for renewal at the end of the 9 years), the total term has exceeded 12 years at the time of the actual renewal, the rent is de-capped.
- Specific premises : Certain types of premises are exempt from the ceiling because of their nature:
- Monovalent premises (built for a single use, such as a hotel, cinema, clinic, etc.) where the rent is set in accordance with industry practice (L. 145-36).
- Premises used exclusively as offices, for which the rent is set by reference to market prices for equivalent premises (L. 145-36 and R. 145-11).
Since the Pinel lawIf the resulting increase in rent exceeds 10% of the rent paid in the previous year, even if the ceiling is removed, this increase is spread over several years (in increments of 10% of the previous year's rent - L. 145-34, last paragraph).
What are the consequences if the lessor refuses to renew?
The lessor always retains the right to refuse to renew the lease. However, this refusal has significant financial consequences, with some exceptions.
The principle: the right to eviction compensation
If the landlord refuses to renew the lease without being able to invoke one of the legitimate grounds for refusal without compensation (see below), he must pay the evicted tenant "eviction compensation" (L. 145-14 C. com.). The purpose of this compensation is to make good all the loss suffered by the tenant as a result of losing his lease and, often, his business.
Calculating eviction compensation
The eviction compensation comprises a main compensation and accessory compensations:
- Main allowance :
- If the business is lost (the tenant cannot relocate nearby without losing his clientele), the compensation corresponds to the market value of the business (replacement indemnity). This value is generally determined in accordance with industry practice (often a percentage of average sales over the last 3 years, or capitalisation of profits).
- If the fund can be transferred without significant loss of goodwill, the main indemnity corresponds to the value of leasehold rights (assessed using the rent differential method) and travel expenses (transfer or travel allowance). It is up to the lessor to prove that the transfer is possible and that this compensation is less than the value of the business. The replacement indemnity therefore constitutes a ceiling.
- Incidental allowances : In addition to the main indemnity, whether the business is lost or moved (unless already included in the value of the business):
- Normal removal and reinstallation costs.
- The costs and transfer duties (taxes) to be paid to acquire a business of the same value.
- Compensation for commercial disruption (temporary loss of business during the search for and installation of new premises).
- Any redundancy costs for staff if relocation is not possible or leads to redundancies.
- Miscellaneous costs (temporary double rent, administrative costs, advertising costs for the new address, etc.).
The assessment of this compensation is complex and is generally carried out with the help of legal experts.
The right to occupancy
As long as the eviction compensation has not been paid in full, the tenant has the right to remain in the premises (L. 145-28 C. com.), even after the effective date of the notice to vacate. During this period, he must continue to comply with the obligations of the expired lease, and he is liable not for rent but for a occupation allowanceThis is set by the courts at the rental value (with no upper limit, but often with an allowance for insecurity).
The lessor's right to change his mind
If the eviction compensation is deemed to be too high, the lessor has one last option: the "right of repentance" (L. 145-58 C. com.). Within 15 days of the decision setting the compensation becoming final, he can change his mind and finally offer to renew the lease in order to avoid paying the compensation. This right is only available if the tenant is still in the premises and has not already rented or bought another premises in order to relocate. This repentance is irrevocable.
Cases of refusal without eviction compensation
In certain situations listed exhaustively by law, the lessor may refuse to renew the lease without having to pay eviction compensation.
Serious and legitimate grounds (L. 145-17 C. com.)
The lessor may invoke a contractual fault or reprehensible behaviour on the part of the lessee. Examples:
- Repeated and unjustified non-payment of rent or service charges.
- Serious breaches of the terms of the lease (improper transfer or subletting, unauthorised work, etc.).
- Termination of the business without a serious and legitimate reason.
- Serious personal behaviour (violence, insults to the landlord, etc.).
Please note: For non-performance of an obligation or cessation of operations to justify refusal without compensation, the lessor must mandatory have first sent a formal notice by bailiff's writ to the tenant, ordering him to cease the infringement within one month. If the tenant complies within this period, the ground can no longer be invoked. This formal notice is not required if the infringement is instantaneous and irreparable (e.g. a criminal conviction relating to the business).
Repossession to demolish an unhealthy or dangerous building (L. 145-17 C. com.)
If the building is declared unfit for habitation by the administrative authority, or if it is proven that it cannot be occupied without danger, the landlord may refuse to renew the lease without compensation. The tenant may have a priority right to rent in the rebuilt building.
repossession for residential purposes (L. 145-22 C. com.)
This right is highly restricted. It only concerns the home a mixed lease (commercial + residential), provided that this part is divisible from the commercial premises and that taking it over does not cause a serious disturbance to the operation of the business. The beneficiary (lessor or close family member) must actually live in the premises and not have any other suitable accommodation.
The end of a commercial lease is a complex time when everyone's rights and obligations must be scrupulously respected. A good knowledge of the applicable rules and a proactive approach are essential to protect your interests.
Whether you are a tenant wishing to secure the renewal of your lease or negotiate your eviction compensation, or a landlord considering a refusal to renew, our firm can advise and assist you in this delicate process. Don't hesitate to contact us for an analysis of your situation.
Sources
- Commercial Code, articles L. 145-8 to L. 145-18, L. 145-22, L. 145-28 to L. 145-30, L. 145-33 to L. 145-36, L. 145-57 to L. 145-60.
- Commercial Code, articles R. 145-3 to R. 145-11 (rental value criteria).
- Civil Code (general principles if applicable).
EN 
FR