End of finance leases and corporate crisis situations

The unwinding of a finance lease contract deserves particular attention. This phase involves complex legal issues, particularly if the lessee is in financial difficulty. The contract may be terminated under normal conditions, on the scheduled expiry date, or early. Each scenario has its own specific consequences.

Business crises amplify these difficulties. If insolvency proceedings are instituted against the lessee, the contractual regime is radically altered. The lessor then has to navigate between his status as creditor and that of owner. Understanding these mechanisms is crucial to securing your position.

Early termination of the contract

Early termination is a frequent method of ending a lease. It occurs mainly when the tenant defaults.

Termination for non-payment of rent

Non-payment of rent generally triggers termination. Contracts always include an automatic termination clause. This allows the lessor to terminate the contract without recourse to a judge.

The agreements set out precisely the conditions for activating this clause. They often require prior notice and a deadline for rectifying the situation. Scrupulous compliance with this procedure conditions the validity of the termination.

Case law ensures strict application of contractual stipulations. A ruling by the Paris Court of Appeal on 16 March 2023 invalidated a termination based on an irregular formal notice. This ruling underlines the importance of formalism in this area.

Penalty clauses and termination indemnities

Termination is almost always accompanied by compensation. The amount is generally equivalent to the outstanding rent, sometimes increased by a percentage. This sum compensates the lessor for the loss it has suffered, as it loses its margin and recovers a devalued property.

These indemnities give rise to a great deal of litigation. Their legal nature is no longer debated: they are penalty clauses. This classification opens the way to judicial moderation if the amount proves to be manifestly excessive.

Contractual practice sometimes attempts to circumvent this risk. Some agreements provide that only the surcharge (often 10%) constitutes a penalty clause. The courts are not convinced by this distinction. In a ruling handed down on 4 May 2023, the Bourges Court of Appeal described the entire indemnity as a penalty clause, including the outstanding rent.

Judicial review of excessive compensation

The courts are actively exercising their power of restraint. Numerous rulings have reduced compensation deemed disproportionate. In a ruling dated 28 June 2023, the Bordeaux Court of Appeal reduced an indemnity that "increased the total amount of rent due on the date of termination by 61%".

However, this moderating power is not systematic. Judges compare the compensation to the loss actually suffered. They take a number of factors into account: the cost of acquiring the asset, the financial costs, the loss of margin and the possible recovery of the equipment.

For an in-depth analysis of the contractual interdependence that can affect termination, see our article on performance of the finance lease.

Normal termination at the end of the contract

If there are no problems, the contract simply expires at the end of the term. The tenant then has two options.

Ordinary term and irrevocability

Finance leases are characterised by a fixed and irrevocable term. This period, generally less than five years, often corresponds to the economic useful life of the asset.

Irrevocability protects the lessor. It guarantees the amortisation of his investment. As the Colmar Court of Appeal recently pointed out in a ruling dated 12 April 2023, the lessee cannot withdraw from the lease before the end of its term.

The duration of the contract is determined by economic and tax considerations. It allows us to optimise the accounting treatment of the transaction, as explained in our general presentation of financial leasing.

Restitution of the property: procedures and issues

Return is the normal end of the contract. The lessee returns the equipment in the condition specified in the agreement. This obligation applies even if the equipment is no longer of economic use.

The contracts set out the precise terms and conditions of return. The property must generally be returned with all its accessories, in a normal state of repair. The place of return is often specified, usually the premises designated by the lessor.

These formalities are of considerable practical importance. Delays or damage may result in additional compensation. The lessor, acting as financier, may delegate this takeover to the original supplier.

Contract extension: conditions and effects

Extension is an alternative to restitution. The lessee keeps the property in return for the continuation of the contract, usually for a shorter period.

Contracts often provide for tacit renewal. If there is no indication to the contrary within the required period, the tenancy continues automatically. This extension maintains all the obligations of the parties, including the obligation to pay the rent.

The length of this extension varies from agreement to agreement. It may be a few months or a year. The rent generally remains the same, even if the property has lost value.

Impact of insolvency proceedings on financial leasing

The opening of insolvency proceedings against the lessee radically transforms the contractual regime. The lessor must then comply with the mandatory rules of insolvency law.

Current contract" status

The classification as a "current contract" determines the application of the specific rules. A finance lease that has not been terminated prior to the opening of the accounts falls into this category.

Article L. 622-13 of the French Commercial Code sets out an essential principle: the opening of insolvency proceedings does not automatically terminate the contract. The Chambéry Court of Appeal made this clear in a ruling dated 20 October 2020: "the mere opening of insolvency proceedings does not result in the termination of current contracts, and therefore of finance leases".

This principle applies even if the contract contains a clause to the contrary. Such stipulations are deemed unwritten, as confirmed by the Pau Court of Appeal in a ruling dated 11 September 2014.

Powers of the court-appointed administrator

The administrator has a fundamental option. He can demand that the contract continue or terminate it. This choice is made on the basis of the interests of the company and the chances of recovery.

If the administrator opts for continuation, the contract continues as normal. Rents paid after the opening judgment are given preferential treatment. Article L. 622-17 of the Commercial Code provides for payment on the due date.

A decision not to continue automatically terminates the contract. What happens to the indemnities provided for depends on the wording of the contract. A ruling by the Court of Cassation on 15 May 2019 stated that a clause referring solely to termination on the lessor's decision was inapplicable to this situation.

To understand the conditions for the initial validity of the contract, see our article on the conclusion and validity of the finance lease contract.

Termination and compensation

The treatment of termination indemnities gives rise to specific difficulties. The Court of Cassation has accepted the validity of penalty clauses in this context, but subject to certain conditions.

According to a judgment of 15 May 2019, the provisions of Article L. 622-13 of the Commercial Code "do not preclude the stipulation of a clause determining the amount of compensation intended to make good the loss caused to the lessor in the event of termination of the contract".

However, this indemnity does not apply automatically. If the clause refers only to termination at the lessor's initiative, it does not cover termination resulting from the administrator's decision.

In addition, finance leases may be assigned as part of a sale plan. Article L. 642-7 of the French Commercial Code allows the court to designate contracts that are "necessary to maintain the business".

The landlord's position in relation to the tenant's difficulties

The lessor's position is characteristically dual. He combines the status of creditor and owner, with distinct prerogatives.

The lessor as creditor

As a creditor, the lessor is subject to collective discipline. They must declare their claims within the deadlines set out in article L. 622-24 of the French Commercial Code.

This declaration concerns unpaid rent and termination indemnities. Failure to do so renders the claim unenforceable in the proceedings. The negligent lessor thus loses any chance of payment.

Claims arising after the opening of the insolvency proceedings are favourable if the contract is continued. They benefit from the preferential right under article L. 622-17 and are paid when due.

As a creditor, you need to take specific steps. Our team ofcommercial contracts lawyers can help you protect your rights to the full in these complex proceedings.

The lessor as owner

Ownership of the leased property is a considerable asset. It enables the lessor to reclaim the property if the contract is not continued.

This claim follows a specific procedure. Article L. 624-9 of the French Commercial Code imposes a time limit of three months from publication of the opening judgment. The Toulouse Court of Appeal emphasised the importance of this time limit in a ruling dated 4 January 2023.

There is an exception for claims brought before the commencement of proceedings. According to a ruling by the Paris Court of Appeal on 3 December 2021, such claims "need only be pursued against the liquidator", with no time limit.

Action to reclaim the property

The claim has important procedural features. It is exercised by petition to the official receiver or by declaration to the court registry.

The success of this action depends on a number of factors. The lessor must prove ownership of the identified property. Case law strictly regulates the time limits and formalities.

The claim results in the physical repossession of the asset. This may prove complex if the equipment is integrated with other equipment or is difficult to access. The lessor should anticipate these difficulties in the initial drafting of the contract.

Conclusion

The end of a finance lease contract reveals the full complexity of this mechanism. Whether it occurs normally or in advance, it calls for particular legal vigilance. Business crisis situations add an extra layer of difficulty.

If you are facing a complicated contractual settlement or insolvency proceedings involving a finance lease, our firm can offer you tailor-made support. Contact our lawyers for an in-depth analysis of your situation and strategies tailored to your specific issues.

Sources

Commercial Code, articles L. 622-13, L. 622-17, L. 622-24, L. 624-9, L. 642-7 Civil Code, articles 1231-5 et seq. Court of Cassation, Commercial Chamber, 15 May 2019, no. 18-14.352 Court of Cassation, Commercial Chamber, 29 June 2022, no. 21-11.674