Today is: 18 May 2012
Commercial leases are subject to strict conditions in France, many of which do not mirror the position in English law Specialist advise should be taken in all cases to ensure that the individual circumstances of your project, whether as an entrepreneur taking premises or as an investor, are considered and tailor made solutions found.
What is a commercial lease?
Generally four elements are required:
- A lease contract
- Premises to be rented
- The tenant must run a business or activity (defined by statute) from the premises. This does not generally include professional activities or agricultural property which are not viewed as "commercial" in French law.
- Generally the tenant must be registered at the local Registre des Commerces et des Sociétés (equivalent to Companies House, but including businesses).
Main elements of a commercial lease
- The lease is subject to a number of mandatory rules. There is less flexibility on terms than in England.
- Normally the lease must be at least 9 years long and the tenant can give notice every three years. This is unlike the position in England. The tenant cannot contract out of his right to break every three years. This will affect the capital value of the lease for the landlord.
- The tenant has the right to renew the lease when it expires, or if the landlord refuses to renew the lease, the tenant has a right to an indemnity payment.
- The tenant can transfer their lease to the purchaser of their business.
- The tenant's rights are subject to fulfilling a series of conditions:
- Being registered at the local Registre des Commerces et des Sociétés (each premises must be registered).
- Running a qualifying business from the premises which are being rented.
- Comply with the conditions set out in the lease.
The rent that is payable (monthly or quarterly, in arrears or in advance) by the tenant is agreed as a market rent, however, it will automatically be revised every three years. The landlord can also require both a deposit and a premium. Normally the deposit is either 2 terms of the rent (i.e. 2 months rent if the rent is paid monthly) if the rent is paid in arrears or 1 term of the rent if the rent is paid in advance.
Setting the Rent
At the beginning of the lease there is total freedom for the landlord and tenant to agree a rent. It is important for this to be well negotiated as subsequent rent increases are regulated.
Rent Increases
The principle is that these occur three years after the rent has been fixed (e.g. when the lease is entered into or renewed, or the previous rent increase) and relate to the rental value of the property. In principle, the increase cannot exceed the French INSEE Cost of construction index. This can be found at the following site www.insee.fr. As is often the case in France, attention to administrative detail is important, for example the rent increase notice must be sent out on the correct date as the rent increase applies from the date of the notice (and not its receipt).
There are two cases where the indexed rent increase can be exceeded:
- if the landlord can show that the true rental value has increased by more than 10%;
- if the tenant has added one of more activities connected to those provided for in the lease.
You should note that the tenant can ask for a reduction of the rent where the rental value has decreased (again by more than 10%).
There are strict criteria to be borne in mind when fixing the rental value. Whilst the principle is that the increase cannot exceed the French INSEE Cost of construction index, in fact, when concluding the lease, the landlord can choose to index the rent more frequently or on the basis of a sliding scale, thereby breaking the link to the rental value of the property. Advice should be sought in order to determine if a given index can be used. When using this system, the landlord and tenant must chose an index which is allowed and has a direct link to either lease or to the activity carried out by either landlord or tenant.
The advantages for the landlord are:
- That no notice need be served as generally the clause specifies the date of the revision of the rent.
- Generally the revision is fixed more frequently, i.e. annually
However, if the rent increases or decreases by more than a quarter of the previous rent, the parties can apply to the courts for the rent to be revised by the court. In addition, the landlord can "opt back" to the default regime of using the INSEE Cost of construction index if this would be more favourable to them. This does need to be done in the same terms as given above, but does not prevent the landlord from subsequently using the sliding index.
Duration of the lease
As stated above, commercial leases are generally 9 years long and the tenant is able to give notice at three year intervals. 9 years is the minimum duration for a commercial lease although there is also the facility to use a lease of less than 2 years (known as a short lease) as a trial when the tenant first enters the premises. The short lease is subject to many conditions and if it expires without notice being given, automatically becomes a 9 year commercial lease. Landlords may want to give notice for the end of the 9 years, even if they wish to keep the tenant so that they are in a position to create a new lease. Once a commercial lease has expired it renews tacitly with no fixed notice period. 12 years after the lease was originally concluded the normal cap on rent indexing ceases to apply. Specialist advice should be sought if you are the landlord (or tenant) of a commercial lease that will shortly expire.
Other clauses
Sub letting
Unless expressly permitted in the commercial lease subletting (the whole or a part of the premises) is strictly forbidden. Where subletting is permitted, the landlord must be party to the sublease.
Location-gérance
A concept unknown in English law, this is where a person "rents" from the owner the whole of a business (i.e. clientele, goodwill, stock) to run the business at their own risk. The owner of the business may well be the tenant of a commercial lease and a location-gérance will include the right to occupy the premises. With careful drafting the tenant can be prohibited from entering into a location-gérance. Even if location-gérance is not excluded in a commercial lease it is subject to conditions.
A variety of other clauses can be included in the commercial lease to increase the landlord's control. Examples are :
- The landlord may limit the works for which they are responsible; the cost of the remainder of the works is then borne by the tenant.
- The landlord can limit the tenant's right to freely assign the lease.
The type of business carried out
This is stipulated in the lease at the outset. In principle the tenant cannot carry out any other activities. However, there are two procedures allowing the tenant to widen their activities.
If the proposed new activities are related or complementary to the business already authorised and carried out, the tenant simply has to follow the appropriate procedure in order to notify the landlord and unless the landlord objects, the tenant is authorised to carry out the additional activities. The landlord can only object to these new activities if they are not in fact related or complementary to the business already authorised.
If the proposed new activities are not related or complementary to the business which is already authorised and carried out, the procedure is far more onerous for the tenant. The tenant has to argue that the economic situation and the distribution of business require the change, they must also inform their creditors. The landlord can either agree, refuse making objections based on serious and legitimate grounds or agree subject to certain conditions.
A change to the nature of the business may have an impact on the rent at rent review and on the renewal of the lease.
Costs
There is no need to use a notaire to prepare a commercial lease. It can be drafted by any lawyer. If drawn up by a Notaire fixed fees do not apply and the notaires costs can be freely negotiated. If drafted without a notaire the lease can be registered at an appropriate tax office. If the contract is registered at the tax office, registration costs a fixed fee of €25. This helps to establish the date of the lease.
You should note that VAT may be payable on the rent, depending on the precise circumstances.This is a technical area and whether you have to register for VAT, or if you have an option to register for VAT, whether you should do so requires specialist advice.
Maintenance
In principle the responsibility and costs for maintaining the property and paying outgoing ons the proprety are divided between tenant and landlord in the lease. There are standard divisions, but there is also a large margin of contractual negotiation on this point.
Investor's buying commercial property
French commercial property has performed well over the past 18 months. Most smaller foreign investors buy hotels or retail premises. Often they buy in areas they have visited on holiday on many occasions and know the local market. Some buy properties which are used for the same purpose as their business in the UK which they feel they understand.
January 2011
Solicitor and Chartered Tax Adviser
Solicitor and Clerc de Notaire
Sykes Anderson LLP9 Devonshire Square
London EC2M 4YF
Telephone + 44 20 3178 3770
E-mail: david.anderson@sykesanderson.com
Website: www.sykesanderson.com