Le property leasing is a powerful financing tool, but its structure can take different forms depending on the needs of companies. Unlike traditional credit, leasing combines rental and purchase options in a sophisticated legal arrangement, defined by thearticle L. 313-7 of the French Monetary and Financial Code. This financing solution can be optimised by mastering its variants.
Lease-back
Mechanism and benefits
Sale and leaseback is an original transaction in which a company sells its building to a financial institution, which immediately leases it back to the company in the form of a finance lease. The decree of 11 January 1990 on economic terminology defines it as a "financing technique whereby a specialised credit institution buys an asset from a user and immediately makes it available to the user under a leasing contract".
This arrangement offers an immediate cash flow solution. The company converts a fixed asset into cash while retaining the use of the asset. This operation makes it possible to :
- Free up cash for other investments
- Keeping the business on the same premises
- Spread the financial burden over the term of the lease
- Regain ownership of the property over time via the purchase option
Legal and tax treatment
Sale and leaseback involves two separate but related legal transactions: a sale followed by a leaseback. This duality creates a special regime.
In tax terms, the treatment of capital gains on disposal deserves attention. The 1990 Finance Act introduced a mechanism for spreading the tax burden. The capital gain is added back in proportion to the rents paid, which reduces the immediate tax impact.
However, precautions must be taken. The Court of Paris has ruled that the transaction must correspond to "immediate liquidity for re-employment" (CA Paris, 27 February 1984), failing which it will be requalified.
Complex construction operations
Finance lease with construction lease
Leasing can be combined with a construction lease when the lessee owns the land. Under this arrangement, the lessee leases the land to the lessor, who then builds the buildings and leases them back to the lessee.
Article L. 251-1 of the French Construction and Housing Code defines a construction lease as "a lease under which the lessee undertakes principally to build structures on the lessor's land and to keep them in a good state of repair for the duration of the lease".
This arrangement enables the lessee to become the owner of the buildings by accession when the construction lease expires. Article L. 313-7 of the French Monetary and Financial Code explicitly recognises this transfer of ownership through "direct or indirect acquisition of ownership rights in the land on which the leased building or buildings have been erected".
Finance lease with long lease
As an alternative to a construction lease, an emphyteutic lease gives the lessor a property right in rem for a long period (18 to 99 years). This arrangement is suitable for long-term projects.
Case law recognises the effectiveness of this arrangement: "the combination of the long lease and the financial lease is one of the structural elements" allowing "the transfer by operation of law of ownership of the property built and leased to the lessee" (Cass. 3e civ., 3 November 1981).
Using an SCI
The creation of an SCI as an intermediary structure is a common arrangement. There are two main types:
- The SCI owns the land and grants a construction lease to the lessor
- The SCI is a lessee and subleases the building to the end user
This second arrangement makes it easier to transfer property rights at a later date simply by selling shares in the company, thereby avoiding high transfer taxes.
The main risk lies in the tax treatment. Excessive subletting can jeopardise tax benefits, as the tax authorities have pointed out in their doctrine (BOI-BIC-BASE-60-30-10-20).
Back-to-back leasing and subleasing
Back-to-back leasing involves the lessee subletting the building to a third party user. This practice has been validated by case law (Cass. 3e civ., 19 May 1999, no. 97-18.433).
However, beware of the legal consequences: the sub-lessee benefits from the status of commercial leases, whereas the lessee does not. The Court of Cassation has clearly established this distinction: "the sublease contract is a separate contract from the leasing contract" (Cass. 3e civ., 10 December 2002, no. 01-15.062).
This different legal systems can create tricky situations. The lessee runs the risk of having to guarantee the sublessee a right to renewal even though it does not have this right itself.
Leasing and insolvency proceedings
Effects of initiating proceedings
The opening of insolvency proceedings against the lessee does not automatically result in termination of the leasing contract (C. com., art. L. 622-13, I). Moreover, automatic termination clauses are deemed unwritten.
However, the resolutory clause acquired prior to the opening judgment remains effective. The Court of Cassation has stated that "the automatic resolutory clause for non-payment of rent in a property leasing contract does not have to be established by a decision that has the force of res judicata before the opening judgment" (Cass. com., 18 November 2014, no. 13-23.997).
Judicial administrator's options
The administrator may choose whether or not to continue to perform the contract (C. com., art. L. 622-13, II). The lessor may give the administrator formal notice to exercise this option. If no response is received within one month, the contract is terminated ipso jure.
If the administrator opts to continue the contract, he is liable. He must ensure that the debtor will be able to pay the outstanding rent.
Exercise of purchase option in the event of insolvency proceedings
Exercising the purchase option often represents the most favourable outcome for a company in difficulty. Order no. 2014-326 of 12 March 2014 facilitated this solution: article L. 641-3 of the French Commercial Code allows the official receiver to authorise the payment of sums due to put the debtor in a position to exercise the option.
However, the Court of Cassation has specified the limits of this provision: the option may only be exercised on the expiry of the term initially agreed (Cass. com., 18 March 2014, no. 12-27.297).
Specific guarantees
Property leasing often comes with additional guarantees.
Guarantees are still the most common form of security. Case law allows the guarantor to also guarantee the termination indemnity and the occupancy indemnity (Cass. 3e civ., 17 November 2004, no. 03-10.622).
The first demand guarantee, imported from international trade, provides maximum security for the lessor. However, the courts are careful to protect guarantors against ill-considered commitments. For example, the Paris Court of Appeal annulled a first-demand guarantee obtained in haste, on the grounds that it was "incompatible with leasing transactions" (Paris Court of Appeal, 27 June 1990).
These complex arrangements require rigorous legal support. The tax and legal implications vary considerably depending on the structure chosen. Expertise in business law is essential to ensure the security of these operations and prevent the risks of requalification.
Need to optimise your business property project? Contact our firm for a personalised analysis of the legal arrangements best suited to your situation.
Sources
- Monetary and Financial Code, article L. 313-7
- Commercial Code, articles L. 622-13, L. 631-14, L. 641-3
- French Construction and Housing Code, article L. 251-1
- Cass. 3rd civ. 3 November 1981, no. 79-15.671
- Cass. 3rd civ. 10 December 2002, no. 01-15.062
- Cass. 3rd civ. 19 May 1999, no. 97-18.433
- Cass. com. 18 November 2014, no. 13-23.997
- Cass. com. 18 March 2014, no. 12-27.297
- CA Paris, 27 February 1984, JurisData no. 1984-021241
- CA Paris, 27 June 1990, JurisData no. 1990-022931
- Order of 11 January 1990 on economic and financial terminology
- BOI-BIC-BASE-60-30-10-20 (Bulletin officiel des finances publiques)
- Order no. 2014-326 of 12 March 2014
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