French Leaseback

Article L145-29 of the French Commercial Code deals with the conditions under which the tenant must return the premises in the event of eviction, and the payment of eviction compensation.

Key points to remember :

Time limit for returning the premises :

The lessee must return the premises to the lessor within three months of payment of the eviction indemnity, either directly to the lessee or to a receiver appointed for this purpose.

Appointment of receiver :

In the absence of agreement between the parties on the appointment of a receiver, the latter is appointed by the judgment ordering payment of the indemnity. Failing this, he may be appointed by a simple court order.

Payment of compensation :

The receiver pays the indemnity to the tenant as soon as the latter hands over the keys to the empty premises and provides proof of payment of taxes and rent, and provided that he or she has carried out the necessary repairs. Payment is made on the tenant’s receipt alone, unless creditors object.

Opposition by creditors :

If the tenant’s creditors object, this could delay or condition payment of the indemnity.

Conclusion

In practice, this article guarantees the lessor a degree of security with regard to the restitution of the premises and the vacating of the premises, while protecting the lessee’s rights via the eviction indemnity. The procedures provided for are designed to provide a framework for the restitution of the premises, particularly in the event of conflict or difficulty between the parties.

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Article L145-28 of the French Commercial Code sets out the conditions under which a tenant entitled to eviction compensation may be forced to vacate the premises.

Key points

Right to occupancy:

– A tenant who is entitled to an eviction indemnity cannot be forced to leave the premises before actually receiving this indemnity.

– Until such compensation is paid, the tenant has the right to remain in the premises under the conditions and clauses of the expired lease.

Occupancy indemnity :

– During this period of occupancy, the tenant must pay an occupancy indemnity. This indemnity is determined in accordance with the provisions of sections 6 and 7 of the corresponding chapter, taking into account all relevant factors.

Waiver in the case of provisional indemnity :

– By way of derogation, in the specific case mentioned in the second paragraph of article L. 145-18 (which mainly concerns refusal to renew on serious and legitimate grounds), the tenant may be required to vacate the premises as soon as a provisional indemnity has been paid.

– This provisional indemnity is set by the president of the judicial court, on the basis of an expert appraisal ordered in the forms defined by decree by the Conseil d’Etat, pursuant to article L. 145-56 of the French Commercial Code.

Practical implications :

Tenant protection:

This article offers substantial protection to the commercial tenant, guaranteeing him the right to remain on the premises until he has been compensated.

Legal proceedings:

In the event of a dispute, an expert appraisal may be ordered to determine the amount of provisional compensation, thus enabling occupancy of the premises to be terminated under certain conditions, notably in the event of refusal to renew on serious grounds.

This article illustrates the balance sought by the legislation between the tenant’s right to eviction compensation and the landlord’s right to recover his property under fair and equitable conditions.

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The ruling handed down by the Versailles Court of Appeal on March 2, 2023 concerns a dispute between Nexity Studea and Mrs [R], relating to a commercial lease for a studio flat in a student residence.

I. A studio apartment in a student residence

The ruling handed down by the Versailles Court of Appeal on March 2, 2023 is part of a classic dispute in commercial lease law, concerning the setting of eviction compensation. It pits Nexity Studea, the lessee, against Mrs. R., the lessor of a studio apartment in a student residence. This judgment is interesting in that it addresses technical issues concerning the valuation of eviction compensation, the application of calculation methods, and the qualification of the business being operated.

II. Facts and procedure

In 1999, Mrs R. entered into a commercial lease with SGRS, which subsequently became Nexity Studea, for a studio apartment in a student residence. The lease expired in 2008, and Mrs. R. gave notice of termination without compensation. Nexity Studea then contested the notice and applied to the Nanterre court for payment of an eviction indemnity. In a ruling dated May 10, 2021, the court partially upheld Nexity Studea‘s claim, setting the eviction indemnity at €14,912.57.

Unsatisfied, Nexity Studea appealed, requesting a reassessment of the compensation to €31,344.75, arguing that the legal expert and the court had incorrectly applied the calculation methods.

III. Legal issues

The central issue in this judgment is the method used to value the eviction indemnity, and in particular the classification of Nexity Studea‘s business activity. Should this activity be considered to be similar to that of a property manager or hotel operator? A multiplier coefficient must be applied to determine the value of the business and, consequently, the amount of the eviction indemnity.

IV. The Court’s solution

Qualification of the business :

The Court of Appeal confirms that Nexity Studea’s business activity borrows from both that of a property manager and that of a hotel operator, falling somewhere between these two activities. The Court therefore refused to support Nexity Studea’s claim that its business was essentially hotel-related, which would have justified a higher multiplier.

Setting the eviction compensation :

The Court updated the basis for calculating the eviction indemnity by taking an average of sales from 2016 to 2018. It applied a coefficient of 2 to sales excluding VAT, resulting in an eviction indemnity of €13,677, slightly higher than that set by the court of first instance.

Compensation for replacement :

The Court rejected Nexity Studea‘s claim for compensation for reinstatement, ruling that this compensation was not due in the absence of proof that the company planned to relocate its business.

V. Critical analysis

This decision illustrates the complexity of qualifying activities carried out under commercial leases for the purposes of determining eviction compensation. By refusing to follow Nexity Studea‘s logic, the Court of Appeal’s decision demonstrates a certain rigor in applying the principles for assessing eviction compensation. The Court insists on the need not to confuse para-hotel activities with those of a traditional hotel, which has important consequences for the calculation of compensation.

However, it is regrettable that the Court did not go further into the precise criteria for deciding between the different valuation methods, leaving the door open to uncertainty in similar cases in the future.

VI. Conclusion

The Versailles Court of Appeal’s ruling confirms a cautious and balanced approach to determining eviction compensation, respecting the specific features of the rental market and the activities carried out by lessees. Although technically complex, this decision is a reminder of the importance of a detailed analysis of factual situations when applying the principles of commercial lease law.

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Article L145-17 of the French Commercial Code sets out the conditions under which a lessor may refuse to renew a commercial lease without being obliged to pay eviction compensation to the lessee.

I. Refusal to renew without compensation

The lessor may refuse to renew the lease without having to pay compensation in two cases:

1. Serious and legitimate reason :

The reason given must relate to :

– Non-performance of an obligation by the tenant, or

– Cessation of operation of the business without a serious and legitimate reason.

The one-month period following formal notice from the lessor

The lessor can only invoke this ground if the lessee’s infringement has continued or been renewed for more than one month after formal notice to remedy it. This formal notice must meet certain conditions:

– It must be issued by extrajudicial act, meaning a bailiff.

– It must specify the reason given.

– It must reproduce the terms of the corresponding paragraph.

2. Insalubrity or danger :

The lessor may also refuse renewal without compensation if the building must be totally or partially demolished due to its insalubrious state, as recognized by the administrative authority, or if it can no longer be occupied without danger due to its condition.

II. Tenant’s right of priority

In the event of reconstruction of the building by the owner or his successor, and if the new building includes commercial premises, the tenant has a priority right to rent in the reconstructed building.

This priority right is subject to the conditions set out in articles L. 145-19 and L. 145-20 of the French Commercial Code.

III. Practical observations

Formal notice :

The formal notice is a key step in enabling the lessor to invoke a serious and legitimate reason. If this formality is not respected, the reason invoked could be declared null and void.

Priority right :

The tenant’s right of priority in the event of reconstruction protects the outgoing tenant, by giving him or her the opportunity to return to the premises.

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Article L145-48 of the French Commercial Code allows tenants to diversify their business activities within the leased premises, subject to certain specific conditions. Here are the main points to bear in mind:

1. The possibility of diversifying activities

A mandatory request from the tenant to the lessor

The tenant may request authorization to carry on one or more activities on the leased premises, other than those initially provided for in the lease. This request is based on :

– Economic conditions: This may include difficult economic circumstances or market developments requiring an adjustment of activities to maintain the company’s viability.

– Necessities of rational distribution organization: This refers to the need to reorganize or adapt the supply of goods and services in line with new market needs or the tenant’s business strategy.

2. Conditions for authorization

Authorization will only be granted if the new activities are compatible with :

– The purpose of the building or complex:

The type of building or its main use must not be compromised by the new activities.

– The character of the building:

The architectural, functional or even cultural characteristics of the building must be respected.

– Location of the building:

The immediate environment or neighborhood in which the building is located must be taken into account, in particular to ensure that new activities do not create an imbalance or nuisance in the neighborhood.

3. Restriction for commercial units:

A notable exception is provided for the first tenant of premises located in a commercial unit (i.e. a property complex with a commercial coherence defined by a construction program). This tenant may not exercise this option to diversify activities for the first nine years following occupancy. The purpose of this restriction is to preserve the commercial coherence and balance of the property complex for a decisive period.

To sum up

Article L145-48 of the French Commercial Code allows lessees to adapt their activities in line with economic and commercial developments, provided that these new activities are compatible with the leased property. However, tenants of first commercial units are subject to a nine-year restriction to guarantee the initial stability of the overall commercial project.

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French Supreme Court decision of September 10, 2014 (no. 13-13.599)

Background and Facts of the Case:

The case concerns Mr. Y, who acquired a lot in a property complex located in a safeguarded area in Lille, sold by Mr. X, a property dealer and wealth management advisor. The purpose of the purchase was to benefit from the tax provisions of article 31-I, 1° b ter of the French General Tax Code (CGI), allowing restoration work to be deducted from taxable income.

However, the tax authorities rejected this deduction on the grounds that the work undertaken was in the nature of a reconstruction or extension, which excluded the application of the tax benefit.

Mr. Y was then subject to a tax reassessment and sought compensation from Mr. X for failure to provide information, arguing that the latter had not warned him of the risk of the tax authorities refusing to grant the tax advantage.

Previous proceedings :

1. Tribunal Administratif and Cour Administrative d’Appel: The administrative courts rejected Mr. Y’s claims, ruling that he had not established that the work carried out on the building constituted conversion work within the existing built volume, a necessary condition to benefit from the tax deduction.
2. Paris Court of Appeal (November 15, 2012): This court dismissed Mr. Y.’s claims for compensation against Mr. X. In particular, the court considered that, although Mr. X had failed in his obligation to provide information, the causal link between this failure and the tax reassessment suffered by Mr. Y. had not been established.

Decision of the French Supreme Court:

The Court of Cassation overturned the decision of the Paris Court of Appeal, remitting the case to the Orleans Court of Appeal. The high court found that the Court of Appeal had failed to draw the legal conclusions from its own findings, namely:

Obligation to inform:

The Court of Appeal recognized that Mr. X had failed in his obligation to inform Mr. Y of the risk that the tax advantage might be refused by the tax authorities.

Realization of the risk:

The risk actually materialized, as Mr. Y suffered a tax reassessment.

Causal link:

Despite these elements, the Court of Appeal ruled that the causal link had not been proven, which constitutes a contradiction with its factual findings.

Legal analysis:

1°) Article 1147 of the French Civil Code:

This article is at the heart of the decision, establishing that any breach of a contractual obligation, when it causes prejudice to the other party, engages the liability of the debtor. The Cour de cassation emphasized that Mr. X’s failure to properly inform Mr. Y of the tax risks associated with the real estate transaction had indeed caused the tax loss suffered by the latter.

2°) Causal link :

The Cour de cassation criticizes the Court of Appeal for not having drawn all the consequences of the causal link between Mr. X’s fault (the failure to meet his obligation to inform) and the damage (the tax reassessment). By recognizing the existence of the risk and noting its realization, the Court of Appeal should have concluded that Mr. X was liable for the losses suffered by Mr. Y.

3°) Reinforced duty to inform:

As a wealth management advisor, Mr. X had a heightened obligation to inform Mr. Y, a neophyte in the field of real estate investment, of the risks associated with the transaction, in particular tax risks. The Cour de cassation insisted that this obligation had been disregarded, thus justifying the cassation of the judgment.

Conclusion:

The decision of the Cour de cassation reaffirms the importance of the obligation to provide information in real estate transactions, especially when they are motivated by tax advantages. In the event of a breach of this obligation, the seller or asset management advisor may be held liable if it can be shown that the breach caused damage. This decision also underlines the importance of judges drawing all the legal consequences from the facts they find, particularly in terms of causality.

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Nexity Studea: Summary of the Versailles Court of Appeal ruling of May 29, 2018 (no. 17/02845)

Background: Mr. Pasquale C., owner of a studio apartment and a parking lot in a residence, had leased these properties to Nexity Studea, a company specializing in the management of student residences. In 2011, Mr. C. served notice on Nexity Studea, refusing to renew the commercial lease and offering to pay an eviction indemnity. Nexity Studea then took the case to court, contesting the proposed compensation and claiming a much higher eviction indemnity.

Decision of the Tribunal de Grande Instance de Nanterre: The court awarded Nexity Studea an eviction indemnity of 16,643.70 euros, far short of the company’s claims, and set an occupancy indemnity of 3,915 euros per year.

Decision of the Court of Appeal: The Versailles Court of Appeal upheld the judgment of the Nanterre High Court, rejecting Nexity Studea’s claim that the eviction compensation should be set at a much higher amount, based on the overall value of its business. The Court ruled that Nexity Studea‘s business, although based on a special tax arrangement, could not justify compensation beyond the partial loss of its goodwill.

Legal commentary on compensation

This ruling highlights several crucial aspects of commercial lease law and the valuation of goodwill, particularly in the context of student residences.

1. The question of the economic unit of operation:

Nexity Studea argued that the commercial leases as a whole constituted an indivisible economic unit, justifying eviction compensation based on the overall value of this goodwill. The Court rejected this approach, confirming that compensation must be limited to the partial loss specifically linked to the lots in question, irrespective of the alleged economic unity of the residence as a whole. This point clearly illustrates the limits imposed by the courts on the excessive valuation of goodwill in the context of commercial leases.

2. The hotel method:

The application of the hotel method to value eviction compensation was discussed but ultimately rejected. The Court adopted a more modest approach, refusing to base the calculation of compensation on hotel standards for properties in the student residence sector, which is often less lucrative and more specific.

3. Monovalent premises:

The monovalence of the premises, i.e. their exclusive allocation to a single use (in this case, a student residence), was recognized, but the Court ruled that this did not entitle the tenant to an exceptional valuation of the occupation indemnity (rent since the notice).

4. Tax and legal aspects:

The Court emphasized that the advantageous tax framework enjoyed by Nexity Studea, based in particular on tax exemption schemes, could not justify compensation based on tax or financial criteria not provided for in commercial lease law.

Conclusion:

This ruling underlines the need for courts to be vigilant in the face of attempts by operators of serviced residences to maximize compensation at the end of commercial leases, by insisting on strict application of the principles of goodwill valuation and measured consideration of the specific features of para-hotel activities.

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by Bruno Traesch | August 29, 2024 | Tourist and student residence | 0 comments

Goelia: legal analysis of the July 4, 2024 decision (n° 23/01675)

Failure to communicate accounts not sufficient for termination

In this case, Mr [B] [J] and Mrs [V] [H] (the appellants) had granted a commercial lease on an apartment to the company Goelia Gestion. They subsequently initiated proceedings to terminate the lease for non-payment of indexation and failure to transmit operating accounts. The proceedings were first brought before the interim relief judge of the Albertville court, who dismissed the appellants’ application to terminate the lease, ruling that the summons to pay had not been issued in good faith.

The indexation omitted by the operator was only 74 euros.

Goelia Gestion was ordered to pay a modest sum of 74.49 euros for the indexation reminder, while the appellants were ordered to pay a procedural indemnity of 500 euros.

The appellants have appealed this decision.

Legal issues

The appeal case focused mainly on two points of law:

1. Lapse of the declaration of appeal: Goelia Gestion requested that the appeal be declared null and void, arguing that the appellants had not served their pleadings within the time limit set by article 911 paragraph 1 of the French Code of Civil Procedure.
2. Admissibility of the respondent’s pleadings: The appellants argued that Goelia Gestion’s pleadings were inadmissible, as it had not constituted a lawyer within the required timeframe.

Analysis of reasons and decision

In its order of July 4, 2024, the Chambéry Court of Appeal analyzed the arguments relating to the appeal procedure in the light of articles 905-1 and 911 of the French Code of Civil Procedure.

1. Article 905-1 of the French Code of Civil Procedure: This article stipulates that, under penalty of nullity, the appellant has a period of one month from receipt of the notice to set the case for hearing to submit his pleadings to the clerk’s office. In the present case, the appellants complied with this time limit by filing their pleadings on February 8, 2024. However, article 911 paragraph 1 also requires that pleadings be served on an unincorporated respondent within one month of the expiry of the time limit for filing pleadings. The appellants failed to comply with this obligation, and their appeal lapsed.
2. Failure to serve notice of appeal: The respondent, Goelia Gestion, constituted a lawyer on February 23, 2024, before the expiry of the time limit for service, but the appellants neither served their conclusions on Goelia Gestion nor notified them to the respondent’s lawyer within the required time limit. The Court rejected the appellants’ argument, which was based on case law that was inapplicable to their case.
3. Order to pay costs and damages: Considering that the appeal had lapsed, the Court dismissed the appellants’ claims and ordered them to pay costs and procedural damages of 1,500 euros to Goelia Gestion.

Conclusion

This decision highlights the importance of respecting procedural deadlines in appeal proceedings. Despite their arguments, Mr [B] [J] and Mrs [V] [H] failed to overcome the strict requirements of the French Code of Civil Procedure concerning the service of pleadings. Their appeal was declared null and void, illustrating the severity of sanctions for breaches of procedural rules, even for perceived technicalities.

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Adagio Montrouge lessor recovers covid rents

The summary order issued on July 1, 2024 by the Judicial Court of Nanterre concerns a dispute between two lessors and the company ADAGIO. The dispute stems from a commercial lease entered into on March 9, 2007 for a condominium lot in the Adagio Paris Montrouge tourist residence. The plaintiffs summoned the ADAGIO company before the interim relief judge for unpaid rent for the years 2020 and 2021, totaling 4,950.56 euros. They also claimed 6,000 euros in damages for abusive resistance, as well as 1,800 euros under article 700 of the French Code of Civil Procedure to cover legal costs.

The landlords argued that Adagio could not invoke cash flow difficulties or restrictions due to the COVID-19 pandemic as force majeure to justify the unpaid invoices. They pointed out that the general ban on receiving the public did not constitute a loss of the leased property, and did not release the operator from his obligation to pay rent. In response, ADAGIO argued that the administrative measures imposed during the health crisis made it impossible to operate the premises commercially, thus justifying the exception of non-performance and the partial loss of the leased property. ADAGIO also contested the claim of abusive resistance. After hearing the arguments of both parties, the court ruled that the administrative measures relating to the health crisis were not attributable to the lessor and did not constitute a breach of the obligation to deliver. Consequently, it rejected ADAGIO’s arguments concerning the exception of non-performance and the partial loss of the leased property. The court recognized that ADAGIO’s obligation to pay the unpaid rent was not seriously disputable, and ordered it to pay the plaintiffs €4,950.56.

4,950 € in covid rents

On July^1, 2024, the interim relief judge of the Nanterre judicial court ordered a PIERRE ET VACANCES group company to pay a lessor of the Adagio Montrouge tourist residence a total of €4,950 in unpaid covid rent.

1,200 in legal fees

The judges ordered PIERRE ET VACANCES to pay €1,200 in legal fees.

6,150 € total sentence

The operator must therefore make a total payment of €6,150.

Operator resists Court of Cassation ruling

PIERRE ET VACANCES group companies continue to refuse to pay their unpaid covid rents, despite the June 30, 2024 rulings of the French Supreme Court. The courts have been particularly hard hit since the covid years, lengthening the time it takes to hand down judgments.

The order is declared provisionally enforceable, allowing claimants to recover sums due immediately without waiting for a possible appeal.

This decision reflects the strict application of contractual obligations despite the exceptional circumstances linked to the pandemic, reaffirming that economic difficulties and administrative restrictions do not systematically justify the suspension and extinguishment of rental payment obligations.

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