In the jungle of commercial contracts, the property leasing occupies a unique position. Neither a traditional lease nor a traditional sale, this complex operation merits a closer look at its possible outcomes. After all, all leasing comes to an end - sometimes planned, sometimes rushed. And it is often at this point that legal complications arise.
Exercising the purchase option
The natural outcome of property leasing is the exercise of the purchase option by the lessee. Article L. 313-7, 2° of the French Monetary and Financial Code precisely defines the leasing as a transaction enabling the lessee to "become the owner of all or part of the leased property, no later than the expiry of the lease".
Terms and conditions
To exercise this option, the lessee must generally:
- Be up to date with rent and service charges
- Respect the contractual deadline for notifying your decision (usually by registered letter)
- Pay the residual value set out in the contract
Case law is strict on these conditions. In a ruling of 8 July 2014, the Court of Cassation reiterated that a lessee who had not complied with his contractual obligations could not exercise the purchase option (Cass. 3e civ., 8 July 2014, no. 11-22.274).
Sale price
The residual value is the sale price of the property. Under article L. 313-7 of the French Monetary and Financial Code, this price must take into account "at least part of the rental payments made". In practice, this value is often symbolic, sometimes set at one euro.
This apparent weakness is explained by the nature of financial leasing: the lease payments have already amortised and made the lessor's investment profitable. The Cour de cassation validates this financial approach(Cass. com., 15 Jan. 1985, no. 81-14.351).
Legal formalities
The sale resulting from the exercise of the option requires a notarial deed:
- Record the transfer of ownership
- Publish the transfer at the Land Registry Office
- Paying registration duties
The lessee generally bears the costs of the deed and registration duties, with a reduced rate of 3.60% (plus additional taxes) for leases entered into since 1991.
Early termination of a finance lease
Unlike commercial leases, the lessee has a legal right to early termination.
Lessee's right of termination
Article L. 313-9 of the French Monetary and Financial Code states: "These contracts shall stipulate the conditions under which they may be terminated at the request of the lessee, failing which they shall be null and void.
This clause is not purely formal. The Court of Cassation severely punishes its absence or ineffectiveness by invalidating the entire contract (Cass. 3e civ., 27 Apr. 1988, no. 84-13.101).
Financial terms of termination
The financial terms of early termination give rise to numerous disputes. The courts penalise clauses that make termination too onerous.
The clause is valid if it:
- Enables effective exit from the contract
- Fixes an indemnity proportionate to the lessor's loss
- Does not impose on the lessee obligations equivalent to full performance of the contract
In a ruling dated 13 July 1999 (no. 97-16.179), the Court of Cassation stated that "the right to terminate a lease must not be illusory", pointing out that a clause providing for the payment of all remaining rental payments rendered this right theoretical.
Validity of indemnity clauses
The Court of Cassation has ruled that the early termination indemnity is not a penalty clause subject to judicial moderation (Cass. 3e civ., 27 June 2001, no. 00-11.996). The judges analyse it as the price of the right to withdraw.
Termination for breach of contract
Violation of contractual obligations may lead to termination of the lease.
Resolutory clause
Contracts generally include an automatic resolutory clause in the event of..:
- Non-payment of rent after formal notice
- Breach of maintenance obligation
- Change of use of premises
The interim relief judge has jurisdiction to declare that the resolutory clause has been acquired, even in the event of the lessee's receivership, where the conditions for acquisition were met prior to the commencement of the proceedings (Cass. com., 17 Sept. 2013, no. 12-21.659).
Indemnification of the lessor
In the event of termination to the detriment of the lessee, the contract usually stipulates an indemnity comprising
- Overdue rent
- A fraction of the rent due
- Where applicable, the cost of restoring the site to its original state
Unlike compensation for voluntary termination, this compensation is subject to the judge's power to moderate if it constitutes a manifestly excessive penalty clause (Cass. com., 21 March 1995, no. 93-19.085).
Returning the premises
If the option is not exercised, the lessee must return the premises when the lease expires. Occupation without right or title after termination entitles the lessee to an occupancy indemnity, separate from the rent.
In practice, this phase gives rise to disputes over:
- The condition of the returned premises
- The amount of the occupancy indemnity
- Restoration work
If the lessee remains on the premises, eviction may be ordered in summary proceedings, with a fine.
A ruling by the Paris Court of Appeal states that the occupancy indemnity takes into account "the rental value of the premises and all the elements constituting the lessor's loss" (Paris Court of Appeal, 2 Dec. 1980).
Frequent disputes at the end of a contract
Leasing out gives rise to specific disputes:
- Challenge to the validity of the exercise of the option
- Disagreement over the exit inventory of fixtures
- Disputes over unpaid charges and taxes
- Contesting the early termination indemnity
- Disagreement on the application of the resolutory clause
These disputes require careful analysis of the clauses of the initial contract and any amendments. Many of these problems arise from poor anticipation of the terms and conditions of the lease.
Experience has shown that a thorough legal analysis at the outset of a contract can help to avoid many unpleasant surprises when it comes to its conclusion. Do not hesitate to consult our firm to secure your property leasing transactions, both when they are concluded and when they are completed.
Sources
- Monetary and Financial Code, articles L. 313-7 and L. 313-9
- Cass. 3rd civ., 8 July 2014, no. 11-22.274 and 11-22.742
- Cass. com. 15 Jan. 1985, no. 81-14.351
- Cass. 3rd civ., 27 Apr. 1988, no. 84-13.101
- Cass. 3rd civ. 13 July 1999, no. 97-16.179
- Cass. 3rd civ. 27 June 2001, no. 00-11.996
- Cass. com. 21 March 1995, no. 93-19.085
- Cass. com., 17 Sept. 2013, no. 12-21.659
- CA Paris, 2 Dec. 1980, JurisData no. 1980-001029
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