The execution of finance leases raises specific practical difficulties. Based on a tripartite structure, it involves various linked contracts. This complexity generates a great deal of litigation, particularly concerning contractual interdependence.
The Court of Cassation has developed a body of case law on this point that is now well established. It has a profound influence on the financial leasing regime. Practitioners need to master these rules in order to secure the transaction.
The essential obligations of the parties
A finance lease creates specific obligations for each party. Understanding them is essential to avoid disputes.
Obligations of the lessor
The lessor's fundamental obligation remains the delivery of the leased property. Article 1719 of the French Civil Code requires this. This obligation is a matter of public policy. No clause can totally exclude it.
Case law confirms this principle. A ruling by the Douai Court of Appeal on 15 February 2018 states that "the lessor cannot exempt himself from delivering the leased property to the lessee". However, contractual arrangements are possible.
The contract generally includes an acceptance report. Its signature certifies that the obligation to deliver has been fulfilled. For the lessor, this document constitutes essential proof. On 18 November 2022, the Paris Court of Appeal ruled that the acceptance report signed by the lessee attested to the delivery of compliant equipment.
The lessor's other traditional obligations include maintaining the property (article 1719, 2° of the Civil Code) and guaranteeing peaceful enjoyment (article 1719, 3°). In practice, these obligations are often adapted. The lessor, acting primarily as a financier, seeks to limit its technical responsibilities.
Obligations of the tenant
Firstly, the tenant must pay the rent as agreed. This obligation, set out in article 1728 of the Civil Code, is central. Contracts set out precisely the amount and frequency of rent payments.
A second obligation concerns the intended use of the property. The hirer must use the equipment "reasonably and in accordance with the purpose" set out in the contract. They are also liable for any damage that occurs during their use, as specified in article 1732 of the French Civil Code.
Failure to comply with these obligations, particularly failure to pay, generally triggers termination of the contract. This subject is covered in detail in our article on the end of the finance lease.
Contractual arrangements
Financial leasing differs from conventional leasing in its contractual arrangements. The lessor seeks to limit its role to that of a simple financier.
No-recourse clauses are common. They exclude the lessor's liability for defects in the property. These clauses are valid because articles 1719, 1720 and 1721 of the Civil Code are not of public order, with the exception of the obligation to deliver.
In return, the lessor often gives the lessee a mandate to take action against the supplier or third parties. This transfer of responsibility allows the lessor to concentrate on the financial aspect of the operation, as explained in our general presentation of financial leasing.
Contractual interdependence: principle and case law
Contractual interdependence is the key issue in the performance of a contract. It is based on the recognition of a coherent contractual whole.
The seminal case law of 2013
A landmark ruling by the Mixed Chamber of the Court of Cassation on 17 May 2013 laid down the essential principles. According to this decision, "concomitant or successive contracts that form part of a transaction including a financial lease are interdependent".
This solution is based on two major proposals:
- The contracts involved in a finance lease are interdependent
- Clauses that are incompatible with this interdependence shall be deemed unwritten.
This case law, which has been criticised but has remained constant, has subsequently been regularly confirmed. Rulings of 7 July 2015, 2 December 2014 and 12 July 2017 have taken up and clarified this solution.
Article 1186 of the Civil Code
The 2016 reform of the law of obligations partially codified this case law. Article 1186, paragraph 2 of the Civil Code provides: "Where the performance of several contracts is necessary for the performance of the same transaction and one of them disappears, contracts whose performance is rendered impossible by that disappearance and those for which performance was a decisive condition of the other party's consent lapse".
The appeal courts consider that this article confirms previous case law. In a decision dated 27 April 2023, the Lyon Court of Appeal ruled that "in application of these texts, it is accepted that concomitant or successive contracts, which form part of a transaction including a financial lease, are interdependent".
This approach is also adopted in our complete guide to financial leasing which summarises these essential principles.
The practical consequences of interdependence
Contractual interdependence has concrete effects on the performance of contracts. It profoundly alters the initial balance intended by the parties.
Lapse by consequence
The main consequence of interdependence is nullity. As the Commercial Chamber stated on 12 July 2017, "the termination of any one of them entails the lapse, by implication, of the others".
In practical terms, if the sale or service contract is cancelled or terminated, the finance lease contract lapses. Conversely, if the lease contract is terminated, the associated contracts lapse.
This solution protects the tenant. The lessee can stop paying rent if the asset is no longer usable or if the maintenance service is no longer provided. For finance companies, it introduces an additional risk.
Conditions of nullity
A number of case law clarifications provide a framework for this lapse mechanism.
The prior annulment of a contract is essential. A judgment of 20 October 2021 stated that "the annulment of any one of them entails the lapse, by implication, of the others, without recognition of the lapse being conditional on the finding that, after the annulment of one of the contracts, performance of the others would have become objectively impossible".
Mere non-performance is not enough. In a ruling dated 11 May 2023, the Lyon Court of Appeal pointed out that 'since prior annulment is indispensable, non-performance of an interdependent contract cannot be sufficient to cause another contract to lapse'.
In a ruling dated 5 January 2022, the Court of Cassation also stated that "the annulment of the main contract is a necessary prerequisite for the consequent annulment of the finance lease contract".
These complex conditions can create tricky situations, particularly in the event of insolvency proceedings. Our article on the conclusion and validity of the finance lease contract explores these aspects in detail.
Severability clauses: validity and limits
Faced with this case law, lessors have tried to secure their contracts with severability clauses.
Contested validity
Severability clauses are designed to maintain the independence of contracts. They would allow the lessor to demand payment of rent even if the property is no longer usable or if maintenance is no longer provided.
Under the 2013 case law, these clauses are deemed unwritten. They contradict the contractual interdependence recognised by the Cour de cassation.
Article 1186 of the Civil Code has raised doubts. Some authors consider that severability clauses could now be valid. They would reflect the desire of the parties to spread the risks of the transaction.
Control of significant imbalance
If their validity were accepted, these clauses would remain subject to the control of significant imbalance. Article 1171 of the Civil Code would allow a judge to deem a clause creating a manifest imbalance in a contract of adhesion to be unwritten.
Article 1170 could also apply. A clause that deprived the essential obligation of its substance could be set aside.
In practice, the validity of severability clauses remains uncertain. Finance companies must factor this risk into their analysis. Our commercial contracts lawyers can advise you on securing your contracts in this respect.
Conclusion
The performance of finance leases has some important legal features. Contractual interdependence, enshrined in case law and partially codified, changes the economics of the transaction. It offers protection to the lessee but creates a risk for the lessor.
Securing your finance leases requires specialised legal expertise. Our firm offers you personalised support to anticipate these difficulties and optimise your financing operations.
Sources
Civil Code, articles 1170, 1171, 1186 et seq., 1719 et seq. Cour de cassation, Chambre mixte, 17 May 2013, n° 11-22.927 Cour de cassation, Chambre commerciale, 12 July 2017, n° 15-27.703 Cour de cassation, Chambre commerciale, 20 October 2021, n° 19-24.796 Cour de cassation, 1re Chambre civile, 5 January 2022, n° 20-11.713
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