Obligations and responsibilities in property leasing

Property leasing is an original legal arrangement. Neither a simple lease nor pure financing, it creates a specific balance between the parties. The lessee has access to a property without any heavy initial investment, while the lessor retains the property as security.

This hybrid structure generates an arrangement of obligations and responsibilities that differs from the ordinary law governing leases or loan agreements. Ignorance of these subtleties can lead to inextricable situations.

The lessor's obligations

Obligation to deliver

The lessor must make the property available to the lessee. The Cour de cassation confirmed this obligation in a ruling dated 10 January 2012: " the lessor's failure to fulfil its obligation to deliver the premises in the condition in which it undertook to do so enables the lessee to invoke the defence of non-performance "(Cass. 3e civ., 10 January 2012, no. 11-10.013).

No particular formalities are required. The Cour de cassation admits that " the lessor's performance of the obligation to deliver the property may be validly inferred from letters from the lessee showing that, after completion of the works, the lessee had taken steps to prove that he was in possession of the property "(Cass. 3e civ., 5 June 1996, no. 94-16.952).

Exemption from the guarantee obligation

Contrary to ordinary leasing law, the lessor may be exempted from its guarantee obligation. This special feature arises from the financial nature of the contract.

The 3rd Civil Chamber of the Cour de cassation validated this exemption: ". having noted that the financial backers had only acted as financiers and that the acquisition, refurbishment and fitting-out operation had been entirely initiated by the [lessee], [...] the Court of Appeal was able to deduce that the plea of non-performance could not be applied, as the deprivation of enjoyment related to hidden defects from which the lessor was exempt under the agreement. "(Cass. 3e civ., 15 January 2003, no. 00-16.106).

However, these exemption clauses must be drafted with precision. Simple general wording such as "all maintenance and repair costs" has been deemed insufficient (CA Paris, 11 October 1989, Juris-Data no. 1989-024872).

The lessee's obligations

Payment of rent

The payment of rent is the lessee's main obligation. These rents are not simply consideration for the use of the property, but include a portion of the amortisation of the capital invested.

Failure to pay may result in termination of the contract and the application of sometimes substantial compensation. Please note: such compensation may be subject to the judge's moderating power if it is manifestly excessive (art. 1152 of the Civil Code).

Maintenance and conservation of the property

The lessee is generally responsible for all maintenance, including major repairs that would normally be the responsibility of the owner under a standard lease.

This atypical distribution must be expressly provided for in the contract. A general clause is not sufficient. To be valid, the clause must specifically mention major repairs under article 606 of the Civil Code (CA Paris, 11 October 1989).

Insurance

The lessee must take out property insurance. This obligation is particularly important as it protects both the lessee's enjoyment of the property and the lessor's guarantee.

In practice, the contract stipulates that:

• The lessee takes out the insurance at his own expense
• The lessor is listed as co-insured or additionally insured
• Compensation is paid directly to the lessor
• No substantial modification of the policy is possible without the agreement of the lessor.

Transfer of shares and guarantees to the lessee

A fundamental mechanism of property leasing is the transfer to the lessee of the actions and guarantees available to the lessor against the vendor or builders.

This transfer enables the lessee to take direct action against the seller or builders in the event of a defect in the property. It compensates for the guarantee waiver granted to the lessor.

Two legal techniques are commonly used:

• Stipulation for third parties (article 1121 of the Civil Code)
• The power of attorney

Please note: if the contract is terminated for fault on the part of the lessee, this mandate automatically lapses (Cass. com., 11 July 2006, no. 05-11.592).

Contractual arrangements for liability

The property leasing contract must contain precise provisions:

1. Termination for non-payment
   • Possible grace period
   • Formal notice procedure
   • Calculating benefits
2. What happens to the contract in the event of insolvency proceedings The opening of insolvency proceedings does not automatically result in termination of the contract (C. com., art. L. 622-13).
3. An option to terminate the contract unilaterally must be provided for (C. monét. fin., art. L. 313-9), but the conditions for exercising this option may be restricted.
4. The fate of improvements and constructions carried out by the lessee

In a recent case, a lessee invested €75,000 in extension work. The contract was silent on this point. After termination, the lessor retained the improvements without compensation. The court invalidated this situation, but only after two years of proceedings.

Pitfalls to avoid when drawing up a contract

The main pitfalls to avoid are

1. The absence of an early termination clause at the lessee's request This clause is mandatory on pain of nullity (C. monét. fin., art. L. 313-9).
2. Early termination clauses that are too costly The clause may not impose on the lessee obligations equivalent to those for the performance of the contract until its term (Cass. 3e civ., 5 May 1999, no. 97-18.576).
3. Imprecise exemption clauses They must expressly mention major repairs.
4. Failure to provide for the transfer of warranties to the lessee Without this transfer, the lessee can only sue the builders in tort, which is less favourable.
5. Lack of clarity on the fate of buildings and improvements

Drawing up a property leasing contract requires specialised legal expertise. Legal support right from the negotiation stage will help to secure the interests of both parties. Do not hesitate to consult our firm to draw up or revise your property leasing contract before it is signed.

Sources

• Monetary and Financial Code, article L. 313-7 et seq.
• Civil Code, articles 1152, 1721 and 1741
• French Commercial Code, Article L. 622-13
• Cass. 3rd civ., 10 January 2012, no. 11-10.013
• Cass. 3rd civ. 5 June 1996, no. 94-16.952
• Cass. 3e civ., 15 January 2003, no. 00-16.106 and no. 00-16.453
• Cass. com., 11 July 2006, no. 05-11.592
• Cass. 3rd civ., 5 May 1999, no. 97-18.576
• CA Paris, 11 October 1989, Juris-Data no. 1989-024872