The reform of commercial leases

Newsletter - January 2015

The Pinel law of 18 June 2014 changed certain provisions pertaining to commercial leases, increasing protection for the tenant.

Indexation of rent

Until now, rents governed by commercial leases could be reassessed according to three indices. The most frequently used index was the construction cost index (ICC). The other indices used were the commercial rents index (ILC, for premises meant for commercial or handicraft activities), or the quarterly index of tertiary business rents (ILAT, for premises meant for tertiary activities other than commercial or handicraft activities). Parliament considered the ICC too volatile and decided to partially prohibit its use: for contracts entered into or renewed on or after 1 September 2014, the ICC can no longer be referenced.

Now, the only indices that can be selected are the ILC and the ILAT, depending on the appropriate business field. However, parties are still free to make use of the ICC to determine the reassessment of the rent at the renewal date of the lease.

Cap removed from the rent

In principle, the rent should be at least equal to the rental value of the premises being leased. However, it can occur that the rent is lower than that value:

– if there have been significant changes affecting the factors that make up the rental value, which would indicate a rise in the rental value, while the rent has not changed,
– if the parties have entered into a lease of a term in excess of nine (9) years, thus generating a waiver of the three-year principle, since in such a case the rent no longer follows the progression of the rental value.

In both these cases, the cap is automatically removed from the rent when the lease is renewed. When the cap is removed, the new law – as of 1 September 2014 – restricts any “excessive” rise, using a mechanism for smoothing increases, since the change in the rent cannot be greater than 10% of the rents paid in the previous year.

Attribution of rental charges

The Pinel law introduces new provisions concerning the attribution of charges. While until now freedom of contract meant that parties could set this attribution at will, a decree now precisely details the charges that the tenant may not be made to pay, for those contracts entered into or renewed on or after 5 November 2014:

– expenses relating to large repairs,
– expenses related to renovations being done to repair dilapidated aspects of the property,
– taxes which are legally payable by the landlord (for the land tax and the tax on office space in the greater Paris region can continue, however, to be attributed to the tenant),
– the landlord’s fees for management of the building,
– the charges, taxes and levies pertaining to vacant premises (within properties).

Any clause contrary to these provisions shall be deemed non-existent.

The other measures

The other main measures are as follows:

– leases providing a waiver to the status of commercial leases will now be valid for three years, whereas previously they were limited to two years,
– the concept of “day-by-day” occupation agreement (“convention d’occupation précaire”) that was defined solely by case law is now defined by law,
– clauses not in line with public order rules no longer lapse after two years, but rather become not subject to time limitations,
– the condition report that was voluntary becomes mandatory at the time that the tenant takes over occupancy of the premises and when the premises are returned,
– the right of first refusal of the commercial premises in favour of the tenant if the building is sold, which was optional, becomes mandatory, unless there is a clause in the lease to the contrary,
– in the event of a split-up or a universal transfer of the assets of the tenant company, the lease may not be amended and it is automatically transferred to the new beneficiary entity,
– notice of vacation of premises that was previously provided by the tenant mandatorily by way of extrajudicial instrument may now be given by registered letter with return receipt requested,
– the tenant’s right to give notice of vacation after three years is now a public order measure and can no longer be excluded via contract (except for leases of more than nine years, leases for premises solely for office use or storage use),
– the three-yearly review of rent that could be retroactive now takes effect on the date on which the review is requested,
– the status of commercial leases, which was previously applicable only to French tenants, is now applicable to foreigners.

We are entirely available if you have any further queries about the issues discussed in this newsletter or about any other accounting, tax, social security or law related topic.