Understanding commercial leases: the basics for businesses

For many businesses, whether they are just starting up or well established, choosing and managing their premises is a crucial step. The commercial lease is often at the heart of this process. More than a simple rental, it is a specific contract, governed by the law and constantly evolvingThis legal framework, known as the status of commercial leases, can provide real security for your business, but it can also be a source of constraint if its mechanisms are not properly understood. This legal framework, known as the status of commercial leases, can provide real security for your business, but it can also be a source of constraints if its mechanisms are not properly understood. Understanding the basics of this status is therefore essential. The aim of this article is to explain the basics: when do the rules really apply? How long is the commitment period? How is the initial rent set? To find out more about rights and obligations during the lease, read our article on day-to-day management of your commercial lease.

When do commercial leases apply?

The protective regime for commercial leases does not automatically apply to all leases of business premises. Its application depends on a number of specific conditions being met, defined primarily by article L. 145-1 of the French Commercial Code. If these conditions are not met, the lease contract will be subject to ordinary tenancy law (Civil Code) or to other specific regimes (professional lease, rural lease, etc.), which are often less protective of the tenant.

The cumulative conditions to be checked

For a lease to be governed by commercial leases, four elements must be present at the same time:

1. The existence of a genuine lease : It must be an agreement whereby an owner (the lessor) makes a property available to another person (the lessee or tenant) for their use, in return for the payment of rent. This definition excludes other types of contract, such as sale, loan for use (commodat, which is free of charge), or a simple business domicile agreement, which does not imply exclusive and permanent enjoyment of the premises.
2. A premises or building : The lease must relate to built property, i.e. an enclosed and covered area that can accommodate customers or enable a business to be carried on. A bare plot of land is not sufficient, barring a few exceptions. Case law also specifies that the notion of "premises" implies a defined and stable space, excluding, for example, simple market stalls or wall display areas. The premises must be in the private domain; occupations in the public domain by the State or local authorities (kiosks on the public highway, spaces in a railway station, etc.) are generally governed by precarious occupation agreements and not by the status of commercial leases.
3. Operating a business : The leased premises must be used to operate a business, craft or industrial activity. The essential element of the business is the existence of its own customer base, which is attached to the tenant by virtue of his personal activity. Without an independent customer base, there is no business, and therefore no application of the status. This condition explains why certain purely civil activities (liberal professions, non-profit-making associations in principle) do not benefit directly from this status, even if they are carried on in rented premises.
4. Tenant registration : The tenant (or the owner of the business) must be registered with the Registre du Commerce et des Sociétés (RCS) if he is a trader or industrialist, or with the Répertoire des Métiers (RM) if he is a craftsman. This condition is particularly important, as it is essential in order to be able to claim the right to renew the lease at the end of its term. If the tenant is not registered at the time the renewal is requested or refused, he risks losing the benefit of the status, even if all the other conditions are met.

It should be noted that these conditions are cumulative. The absence of any one of them may result in the contract falling outside the protective status of commercial leases.

Situations where the status is excluded

Certain agreements, even if they resemble a commercial lease, are explicitly excluded from the scope of the statute:

• Short-term leases (or derogatory leases) : Article L. 145-5 of the French Commercial Code allows the parties to agree, when the lessee takes up the premises, to escape the status if the total term of the lease (or successive leases) does not exceed three years (since the Pinel law of 2014, compared with two years previously). This option is often used to test a business or a location. Please note: if the tenant remains on the premises after the expiry of this three-year period without opposition from the lessor, a new lease subject to the status automatically comes into being.
• Precarious occupation agreements : This is not a lease, but an authorisation to occupy the premises for a period of time determined by special circumstances beyond the control of the parties (e.g. pending expropriation, scheduled demolition). The precariousness must be real and justified by these objective circumstances, and not by a simple desire to escape the status. A low rental fee is often an indication, but not a sufficient condition.
• Seasonal rentals : They relate to activities carried out during a specific tourist season. Even if they are renewed from year to year, they do not fall within the scope of the statute, as the use of the premises is not continuous.
• Long-term leases : Emphyteutic leases (18 to 99 years) and construction leases (which require the lessee to build structures) give the lessee a real right over the building and are governed by specific legislation (Code rural, Code de la construction et de l'habitation), excluding the application of commercial leases (except for rent reviews under emphyteutic leases).
• Outbuildings in the public domain : As mentioned above, occupation of the public domain (streets, squares, stations, ports, airports, etc.) cannot be the subject of a commercial lease, but only of precarious and revocable administrative authorisations.

Voluntary extension: choosing the status

Even if the legal conditions are not met (for example, in the case of a liberal profession), the parties may decide by mutual agreement to voluntarily make their lease subject to the status of a commercial lease. This decision must be clear and unequivocal, and ideally explicitly stated in the contract. In this case, the entire system (duration, renewal, etc.) will apply, including its public policy provisions.

The term of the commercial lease: a specific framework

The term of the lease is a central element of the commercial leases statute, designed to offer visibility and stability to the operator.

The nine-year minimum: a protective principle

Article L. 145-4 of the French Commercial Code lays down a fundamental principle: the term of a lease may not be less than nine years. This rule is a matter of public policy, which means that any clause providing for a shorter initial term would be null and void. However, it is possible to agree a longer term (10, 12 years or more), which will have consequences for the calculation of the rent on renewal.

The tenant's three-year termination option

Despite the minimum term of nine years, the same article L. 145-4 offers considerable flexibility to the tenant. Unless a clause in the lease expressly forbids it (which is possible, as this option is not a matter of public policy for the tenant), the tenant has the right to terminate the lease at the end of each three-year period (often referred to as a "3-6-9" lease). To do this, they must give their landlord notice of termination by bailiff's deed (or by registered letter with acknowledgement of receipt if the lease was entered into or renewed after the Pinel Act and before the Macron Act - a bailiff's deed is recommended) at least six months before the end of the three-year period.

Early termination by the lessor: limited cases

The lessor, on the other hand, does not have this three-year termination option "without cause". He can only give notice before the end of the nine-year period in very specific cases, as set out in articles L. 145-18, L. 145-21 or L. 145-24 of the French Commercial Code. These cases mainly involve repossession for the purpose of building, rebuilding or raising the building, or carrying out certain town planning works. These repossessions are subject to strict conditions and generally entitle the tenant to eviction compensation.

The end of the lease at its term: the need for a notice of termination

Unlike other types of lease, a commercial lease does not end automatically on expiry of the agreed term (9 years or more). Article L. 145-9 of the Commercial Code is clear: the lease can only be terminated by notice given at least six months in advance. If neither the lessor nor the lessee gives notice by the end of the lease term, the lease continues by "tacit extension" (not tacit renewal) for an indefinite period, subject to the same terms and conditions. Either party may then terminate the lease at any time, always giving six months' notice and aiming for the end of a calendar quarter. For a complete understanding of the issues involved in ending a lease, including renewal and eviction compensation, find out more about the mechanisms involved in ending a commercial lease.

Setting the initial rent: what are the options?

While rent reviews during the term of a lease and the setting of the rent for a new lease are highly regulated by law, determining the rent for a new lease is not. first rent, that of the initial lease, is largely a matter of contractual freedom and negotiation between the lessor and the lessee.

Initial freedom of contract

The amount of the first rent is not set by reference to the legal "rental value", unlike revised or renewed rents. It is the result of an agreement between the parties, often influenced by supply and demand in the local property market.

The fixed rent and its accessories

The simplest form is the fixed rent, payable periodically (monthly, quarterly, etc.). The main rent is usually supplemented by :

• Expenses : The parties agree how these are to be apportioned. The lease often stipulates that the tenant is responsible for charges that would normally fall to the landlord (property tax, building insurance, etc.). However, the Pinel Act has introduced greater transparency, with a compulsory list of charges in the lease (L. 145-40-2 C. com.).
• The security deposit : A sum paid by the tenant at the beginning of the lease to guarantee performance of his obligations. The amount is free, but if the sums paid in advance (including the deposit) exceed two terms of rent payable in advance, the excess bears interest in favour of the tenant (L. 145-40 C. com.).

Key money or entry fee

It is common practice, especially in sought-after locations, for the lessor to ask the lessee to pay a capital sum on conclusion of the lease, in addition to the periodic rent: the key money. Its legal nature is twofold and depends on the intention of the parties, which must be specified in the lease to avoid disputes:

• Either it is considered a rent supplement paid in advance, for example to compensate for an initially moderate periodic rent. In this case, it is taxable for the lessor and deductible for the lessee, and will be taken into account when calculating the new rent.
• Either it is analysed as a lump-sum compensationIn this case, it is not taxable immediately for the lessor (but may be on resale) and constitutes a non-deductible intangible item that cannot be amortised for the lessee. In this case, it is not immediately taxable for the lessor (but may be on resale) and constitutes a non-deductible and non-depreciable intangible item for the lessee.

Variable rent clauses

To adapt to economic changes, the parties can include clauses that vary the rent from the outset:

• The sliding scale clause (indexation) : Rent varies automatically, often annually, according to an index chosen by the parties. Since the Pinel law came into force, the legal reference indices are the Indice des Loyers Commerciaux (ILC) for commercial or craft activities, and the Indice des Loyers des Activités Tertiaires (ILAT) for other activities (offices, logistics, etc.). The former Construction Cost Index (ICC) can no longer be chosen as the sole index. The choice of index and its frequency must comply with the rules of the French Monetary and Financial Code (in particular L. 112-2).  
• The revenue clause (or variable rent) : Very common in shopping centres, this clause makes all or part of the rent dependent on the tenant's turnover. It can take several forms: rent entirely proportional to turnover, or more often a "binary rent" with a guaranteed fixed minimum (sometimes index-linked) plus a variable portion calculated on turnover above a certain threshold. The precise definition of the turnover to be used is therefore essential.

Negotiation of these initial clauses, whether in terms of duration, termination terms or rent structure, is crucial to the long-term economic equilibrium of the commercial lease.

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If you have any questions about the conditions under which commercial leases apply to your situation, or if you wish to secure the negotiation and drafting of your lease contractOur team is at your disposal for a personalised analysis.

Sources

• Commercial Code, articles L. 145-1 to L. 145-5, L. 145-9, L. 145-18, L. 145-21, L. 145-24, L. 145-40, L. 145-40-2.
• Monetary and Financial Code, article L. 112-2.
• Civil Code (general principles of leasing).