 ‘Setting up a business in France inevitably brings up commercial lease issues to deal with. The following presentation is a guideline to broadly understand French legislation and to be aware of its specific aspects.’
Géraldine Appert is a UK solicitor and a French "Avocat". She practiced for 11 years at the Paris Bar as a French lawyer specialising in French property law and property litigation. She is also a member of the Paris Bar Property Law Committee. Now principally based in London, she also specialises in advising French companies and individuals settling in the UK.
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Commercial leases in France are regulated by the 30/09/1953 Act and now codified in the Code de Commerce whose aim is to safeguard tenants’ business/goodwill and their financial interests.
Based on the fact that location and premises are essential to attract clients, the Act lays down a specific protection of the tenants’ business premises through:
- statutory minimum duration of a 9-year tenancy
- renewal right or alternatively compensation if renewal is refused
- rent control system
Any agreement excluding or amending these major rights will be rendered void.
Unsurprisingly, to benefit from this protective legislation tenants have to comply with a number of conditions:
- Tenants must operate a business at the premises where trading with clients and customers. Accordingly, warehouses and stock areas are excluded from the scope.
- Tenants (either self-employed or commercial companies) must be registered to the Registre du Commerce et des Sociétés held by the Chamber of Commerce and Industry or to the Chambre des Métiers (another equivalent of Company House in the UK) for craft industry professions (e.g. hair dressers are artisan).
Failure to register before the end of the duration of the lease leads to extremely severe consequences since the tenant automatically loses his entitlement to renewal. Similarly, where a business is owned in partnership or in joint tenancy, all of the co-owners/partners must be registered even if they are not all active in the business.
Cannot qualify for a commercial lease:
- Non built grounds
- Rather obviously premises wholly occupied for residential purpose
- Premises rented to civil companies, union, charities, associations
- Premises rented to professions known as professions libérales such as lawyers, doctors, accountants, and architects. However, they can voluntarily and expressly choose to subject their tenancy agreement to the commercial lease regulation.
Duration of Tenancy
In order to ensure continuing business, a minimum of a nine-year tenancy is imposed on the landlord. However, tenants can terminate the lease at an earlier stage every three years provided that they serve proper notice: at least six months prior to the 3-year term. Specific forms and contents of notice are mandatory and a bailiff (huissier de Justice) must be instructed.
Example:
A lease is concluded for a 9-year duration beginning the 1st January 2006 ending the 31st December 2014.
Tenant’s notice to quit is allowed at the end of every 3-year period. Notice must be served before 30th June 2008 for the lease to end on the 31st December 2008. Similarly, notice must be served before the 30th June 2011 for the lease to end on the 31st December 2011.
As a result of a failure to comply with the time limit and required contents, (e.g. late notice served on the 1st August 2008), the legal effect of the notice would be postponed until the next 3-year term. Accordingly, the tenant will have to pay the rent and other financial charges until 31st December 2011, even if the premises are eventually rented to a new tenant.
Uses of the premises
Premises can be used for wholly commercial or for a mixture of business and residential purposes.
Before signing any tenancy agreement, it is highly advisable to check that the landlord has obtained local authority permission to use the premises for commercial purposes.
The lease will then strictly define the nature of business that tenants are allowed to carry out at the premises. Some clauses offer a wide range of activities, the wider being clause tous commerces, meaning any kind of business is permitted.
In contrast, other leases have a very restrictive clause allowing only one or limited activities (e.g. restaurant or bakery only). In such cases, complete change of business or simple additions of new activities, services and products is permissible subject to the landlord’s license. If the landlord opposes the grant of a new activity listed in the contract, the tenant can take the landlord to Court.
In all cases it is very important to make sure the business is permitted at the specific site by the règlement de copropriété, which regulates the building and its occupiers’ rights and obligations. If prohibited, a neighbour’s claim will automatically lead to business closure.
Subletting
Unless the lease expresses it clearly, the principle is that subletting is prohibited. When the landlord’s consent is granted it is mandatory that he becomes part of the subletting tenancy agreement. Failure to observe this condition can lead to forfeiture of the lease.
Selling
Tenants cannot be prohibited from selling their business as a whole, which includes the lease together with elements such as the clientele, brand, reputation, equipment. However, it is very common that tenants are not allowed to sell the lease separately without the business. This restriction limits the sphere of potential buyers therefore when negotiating it is advisable to set aside this clause.
Notice of selling must be served to the landlord in order for him to be aware of the new tenant’s details. Until notice is served, complying with mandatory forms and contents, the original tenant remains liable for the rent, tax, service charges and all covenants.
Alterations
Alterations and improvements are governed by the lease. Usually, alterations to the premises are subject to the landlord’s consent which cannot be unreasonably withheld.
Improvements only leading to minor changes are free of license (e.g. painting,
recarpeting).
Financial charges
Payment of a premium
Although not so common, some landlords will ask tenants to pay a premium, known as pas-de-porte or droit d’entrée. This amount of money can be considered as a payment of rent in advance to ease the tenant’s burden of future running costs. This interpretation enables the tenant to deduct part of it every year from the generated income. Since it is in this case an element of the rent it will also be taxable in the landlord’s income. Lastly, the premium will also be taken into account to assess the increase of rent when the tenancy is renewed.
On the other hand, the premium can be seen as compensation for loss suffered by the landlord due to the renewal right burdening his property. In this case, the tenant is not allowed to deduct it from his income. From the landlord’s perspective, the premium must be declared to the Revenue but is not taxable since it is compensation.
If payment of a premium is requested it is then necessary to clearly state in the lease which qualification (either payment of rent in advance or compensation for loss suffered by the landlord) is adopted. Since different tax implications and consequences related to the renewed rent occur, it is also highly advisable to obtain tailored legal advice to assess the financial issues.
Initial rent and rent review
The initial rent is fixed at a market price. It is usually paid per quarter. More unusually, rent can consist of a fixed sum together with top-up rent (a variable element based on a percentage of the income generated by the business).
Rent can be reviewed using a clause referring to a government index, notably the construction cost index published by Insee (the French National Institute of Statistics;
www.insee.fr). Parties can otherwise apply to Court at the end of every 3-year term.
Deposit
A deposit usually represents a quarter of the yearly rent or an equivalent of a 6-month rent at no interest. It will remain in the landlord’s hands until the end of the lease. As usual a deposit is to set against the possibility that tenants may damage the premises.
It is only mandatory for the landlord to provide interest if the amount of the deposit is in excess of two quarters.
The deposit is readjusted by way of the indexation clause.
Service charges
When clearly expressed in the contract, the listed service charges are to be paid by the tenant. They usually include all costs for maintenance of the building.
Repairs
The repairs and works issues are out of the scope of the Act. Therefore, it is left to the parties’ negotiation. Some clauses are very well balanced between both parties. Other will represent a real burden for tenants who will have to bear all works including major ones such as:
- Structural works of the building
- Re-facing facade of the building
- Works prescribed by local authorities
- Compliance works for hygiene, security, fire regulations
Accordingly, tenants must be very careful in subscribing to these clauses since it can significantly weigh the projected running expenses of the business. A preliminary check through the building records and general meetings can sometime give at least some warning of forthcoming works. Ask for these from the landlord, the agent or the building manager:
- Carnet d’entretien de l’immeuble (maintenance record of the building – recently introduced so it might not contain much information yet)
- Ordre du jour, convocations et procès-verbaux d’assemblées générales de l’immeuble des trois derniers exercices (record of the building’s assembly)
- Charges de copropriété des trois dernières années (service charges of the past three years)
A survey on compliance works that are likely to be imposed by the security, fire and disabled regulations as well as a survey of the building itself can also be a very good way of revealing unexpected serious defects.
Tax
Landlords can transfer to tenants the burden of every tax he should usually bear. Tenants must try to assess the amount of financial charges represented.
It is advisable to ask for all tax receipts:
- Contribution représentative du droit de bail (tenancy tax)
- Contribution sur les revenus locatifs (tenancy income tax)
- Taxe sur les bureaux (tax on offi ce rental)
- Impôts fonciers (land tax)
- Taxe de la ville (local tax)
End and renewal of the lease
At the end of the contractual term, usually nine years, the lease does not automatically end. It continues until the tenant or landlord, whoever acts first, serves a notice of renewal that also operates as an alternative offer for compensation.
Effectively, the tenant has a statutory entitlement to renew the lease. If the landlord opposes the tenant’s claim, he has to offer later compensation for loss of business/ goodwill.
When renewal is agreed by both parties
Most of the time parties agree on the principle of the renewal. Inevitably, the big issue remains the question of the new rent.
If the lease is at least nine years, but less than twelve years in existence, the Act lays down a rent control system to avoid undue and unpredictable increase of rent. This is called the system of plafonnement.
Rent increase of the renewed lease is limited if during the past nine years there has not been any major and significant changes in the area and immediate environment that could benefit the business. In that case, the rent will not exceed the price resulting from the play of the rent review index.
However, rent will be fixed at the market rental value without ceiling if the landlord can prove evidence of significant favourable economic factors, which occurred during the past lease i.e during the past nine years, and having positive impact on the business, e.g.:
- Massive new construction for offi ce and residential purpose that is likely to have brought new customers to the tenant’s business
- Launch of a new large supermarket
- New underground station or car park
- Refurbishment of the building
- Redevelopment of the area increasing market value
- Internal improvement creating surface area for clients, (if done by the tenant, improvement will only be taken into account for the second renewal).
Lastly, rent is automatically reassessed without any ceiling when the past lease has lasted more than 12 years.
In the absence of agreement Most of the time, it is likely that parties will not reach an agreement. They will therefore bring the claim to Court in order to have a new rent fixed. The judge will appoint an independent and impartial surveyor to make a valuation report based on various elements such as:
- Premises (surface, location, all specifications)
- Use and activities permitted
- Nature and extent of both parties’ rights and obligations
- Evolution and impact of economic surrounding factors on the business
- Rent of neighbouring properties
The judge is not bound to accept the survey and will finally decide on the rent. However, the judge does not have the power to amend any other clauses, terms and conditions that will remain the same as in the initial lease, i.e. duration, covenants, restrictive clauses unless both parties agree to amend the lease.
Renewal is refused by the landlord: Compensation
The landlord is entitled to refuse the renewal but in this case he must award compensation to the tenant for loss of business. This compensation covers:
- The value of the business. If the business can be moved in a similar area and into similar premises compensation consists in the loss of the commercial lease value.
- In addition, the landlord has to pay for all tax implications resulting from the change of situation.
- Moving costs
- Commercial damage and double rent
- Loss of stocks
- Improvement works not deducted
- Dismissal costs
The only situation where tenants are not entitled to compensation is where they are in persistent rent arrears or in breach of a major obligation.
Conclusion
In conclusion, the protection offered by the French legislation is very useful and helpful for tenants. Setting up a business is a long and hard commitment from which success and profit are expected. To avoid pitfalls and unwanted problems, be aware of downsides and work towards efficiency and productivity. It is therefore important to be carefully advised by a legal professional specializing in commercial leasing.
Géraldine Appert (
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) Article initially published in 'Going to France - Your life & business companion' © Chambre de Commerce Française de Grande-Bretagne 2007'.
Illustration: - From the website Promocash
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