Answers and solutions : How to deal with the end of the French leaseback ?

ANSWERS AND SOLUTIONS : HOW TO DEAL WITH THE END OF THE FRENCH LEASEBACK?

Dear All, 

As requested by Seamus, please find hereafter a memorandum we prepared for you in English on How to deal with the end of the French leaseback.

Feel free to comment, send an email or give a call should you want to discuss your case. You can also watch our explainer video on the same topic published on our website (www.1862uk.com

Kind regards, 

David Sabatier

Solicitor at the Paris Bar

+33 1 53 00 22 22

sabatier@1862-legal.com

www.1862uk.com

 

HOW TO DEAL WITH THE END OF THE FRENCH LEASEBACK?

The minimum term of a French leaseback is 9 years. The management company cannot terminate the lease or ask for a rent reduction before the end of the lease.

At the end of the lease, any termination notice has to be served with a 6-month prior notice.

If the notice is served by the management company, it has to be delivered either by bailiff or by registered letter with acknowledgement of receipt. If the notice is delivered 6 months prior to the term of the lease, the termination will take effect on the date of the end of the term of the lease. If it is delivered afterwards, the termination will take effect 6 months after and for the last day of a quarter, i.e. either for the 31 March, 30 June, 30 September, or 31 December.

The management company is entitled to either the renewal of the leaseback at the end of the lease term or, if the owner wants to take back his apartment, to the payment of an eviction indemnity.

The eviction indemnity must compensate the management company for any losses and costs incurred, such as moving costs, higher rent to be paid, loss of business.

The Aix en Provence Court of Appeal recently ruled (11ème Chambre A, 17 janvier 2017, nº 15/19462) for a tourist residence operated by SNC Dolce Frégate, that for a rental value of 17,000 euros, the eviction indemnity should be set at 85,000 euros.

In this case, the judges considered that the eviction indemnity in this tourist residence was 5 times the annual market rent.

However, in this case the judge set the eviction indemnity at a very high level and most of the management companies request an eviction indemnity between 2 and 3 years based on our experience.

However, the management company is not entitled to compensation if it is in serious breach of its obligations under the lease.

Within the 3 months following the notification served by the management company to renew the lease, all owners must inform the management by bailiff whether or not it accepts to renew the lease. If an owner does not do so, he/she/it is deemed to accept to renew the lease.

In the event of refusal of the owner, the management company and the owner should agree on the amount of the eviction indemnity.

If they do not agree, then the eviction indemnity is set by the judge.

In the event of a renewal, the lease is renewed on the same terms and conditions as the previous lease, and for the duration of 9 years, unless the parties expressly provide for a longer term.

If the parties remain silent after the end of the lease, the terminated lease is tacitly extended for an undetermined period of time.

In this respect, all its provisions remain in force between the parties.

Either party is entitled to terminate the lease at any moment with a 6-month prior notice.

MODIFICATION OF THE RENT DURING THE LIFE OF THE FRENCH COMMERCIAL LEASE

As a general rule, neither the lessor nor the lessee can change the amount of the rent during the life of the lease.

However, according to mandatory provisions of the French commercial code, the rent of a commercial lease may be reviewed at the request of either party, in the following circumstances:

·        Statutory provisions: 3-year review

Articles L. 145-37 and L. 145-38 of the French commercial code provide that either party can ask for a rent review after 3 years from the date on which the rent was last set.

According to article L. 145-33 of the French commercial code, the reviewed rent must correspond to the market rental value ("valeur locative") of the premises.

However, article L. 145-38 of the French commercial code provides that increases or decreases of rent upon 3 year review are limited to the variations of the index of variation used, such as the ILC ("indice des loyers commerciaux"), over the relevant 3 year period (i.e. since the rent was last set).

The value resulting from the increase of the index of variation shall constitute a cap.

Article L. 145-38 of the French commercial code provides an exception to increases (or decreases) of rent where a change in local commercial factors has occurred since the last rent review and results in a fluctuation (increase or decrease) of more than 10% of the rental value of the premises. In this case, the rent is reviewed in order to equal the new rental value of the premises and may be lower than the rent previously in force.

 ·        Increase or decrease of the rent by more than 25 %

Note that according to article L.145-39 of the French commercial code, in the event that the rent is decreased or increased, by the effect of the indexation clause, by more than 25% in comparison with the rent previously determined through a contract or by court decision, either party could request the rent to be set (decreased or increased) at the rental value of the premises.

According to a constant case law, when the rent is composed of a minimum-rent and an additional variable component, the provisions of above-mentioned article are not applicable. 

RENEWAL OF FRENCH COMMERCIAL LEASES & SETTING THE RENT

·        The Principle

According to article L. 145-33 of the French commercial code, the rent set upon renewal of the lease shall correspond to the rental value of the premises.

However, statutes and case law provide that the increase of rent on renewal of the lease may be capped depending on the activity carried out in the premises and the duration of the lease.

Their rent is not capped on renewal of lease for premises used exclusively for one purpose (such as tourist residences), or for leases entered into force more than 9 years or effectively lasting more than 12 years.

As a result, the limitation mainly applies to 9-year leases of premises used for general business purposes.

Should the owners and the management company agree on the new rent, a new lease will be entered into.

Should the parties do not reach an agreement, the rent will be set at the rental value by the judge.

The judicial process is as follows:

  1. Each Party appoint a solicitor and an expert to draft a report on the rental value

 

  1. The solicitors send a report to the judge and the other party, detailing their arguments and calculation;

 

  1. The judge usually appoint a judicial expert who will draft a report on the rental value and try to find an amicable solution between the parties

 

  1. In case, no agreement is reached, the judge will review all reports, hear the solicitors and et the new rent.

 

David Sabatier

Solicitor at the Paris Bar

+33 1 53 00 22 22

sabatier@1862-legal.com

www.1862uk.com

Please note that this article does not create a solicitor / client relationship. No action should be taken on the basis of the recommendations made in this article without the prior review of our firm of your personal situation or the review by a French solicitor specialized in commercial lease framework. This article is submitted to the general terms and conditions of our website set out on www.1862-legal.com and www.1862uk.com.