The main clauses of a commercial lease
Why is the commercial lease system advantageous?
A commercial lease provides the business owner with greater protection than short-term leases, which are limited to three years (two years for those signed or renewed before September 1, 2014). The business owner can negotiate protective clauses with the landlord.
When signing or renewing a lease, the tenant must carefully analyze certain aspects of the lease.
The business owner must specify the activity they will carry out.
The business owner and the landlord must agree on the permitted activities in the lease.
The business owner must obtain the landlord’s consent if, during the lease term, they wish to undertake a complementary or new activity, or to allocate all or part of the premises to a use other than that stipulated in the condominium regulations (in this latter case, the landlord will require the approval of the co-owners association).
The tenant must, in principle, obtain written authorization from their landlord before undertaking a new business activity. This is essential because, without it, the landlord risks seeking to enforce the termination clause in court or to obtain a judicial termination of the lease.
For example, a landlord was able to obtain the termination of a lease for non-compliance with its designated use, which was sandwich shop, pastry shop, and bread sales, when the establishment was in fact operating as a restaurant, offering hot meals, with tables and chairs, and equipped with kitchen equipment such as individual hot plates, a wok, a steam oven, and an extractor hood (CA Paris, February 8, 2019, No. 18/06936).
Adding to or Modifying the Business Activity Specified in the Lease
This must be done by extrajudicial act or by registered letter with acknowledgment of receipt. The landlord has three months to respond; otherwise, they are deemed to have acquiesced. In practice, landlords often request a rent increase to allow the addition of a new activity, as this new activity is expected to generate new revenue.
In case of dispute, the tenant must file a claim with the Tribunal de Grande instance through a lawyer.
Commercial Lease Review
A commercial lease can be reviewed every 3, 6, or 9 years, unless a clause stipulates a review at a shorter term or at any time.
A review can be requested as early as the day after the three-year term expires, either by court bailiff’s notice or registered letter with acknowledgment of receipt.
The tenant should pay close attention to the clause concerning the lease review date. They can terminate the lease after 3 years (9 years for operators of tourist residences). However, a clause in the lease may prohibit this, but only for leases exceeding 9 years, for univalent premises, for premises used exclusively as offices, and for storage facilities. The tenant must request a lease renewal from the landlord eight and a half years after its execution, via a court bailiff’s notice. They must pay close attention to this date to avoid the rent being raised to the market rental value if the lease reaches 12 years without renewal and the market rental value has increased.
Security Deposit Amount
It is usually three months’ rent (six months if the rent is paid in arrears).
The landlord must not charge VAT on this amount and must reimburse it to the tenant upon departure. In the event of the sale of the business or lease, the tenant must obtain reimbursement from the buyer.
How will the rent be determined?
Businesses must be very careful regarding the clauses relating to the rent amount, which is set by agreement between the parties.
Commercial Rent Index (ILC)
This is the reference index. The rent can be indexed to this index. This is the index that applies in the absence of a clause. A clause may stipulate its application or that of another index.
However, another index can be considered, such as the Construction Cost Index (ICC). In the absence of a specific clause in the lease, renewal is capped at the variation of the ILC (Article L145-34 of the French Commercial Code).
In an indexation clause based on an index, the period of index variation taken into account must not exceed the period between each revision (Article L112-1 of the French Monetary and Financial Code), as this creates a distortion and is therefore invalid.
Example: when an indexation clause stipulates a variation “for the first time on January 15, 2009, based on the variation of the INSEE index from the 4th quarter of 2006 to the INSEE index from the 4th quarter of 2008,” for a lease signed in January 2008, it is invalid. The reason: the period of variation between the two indices is two years, and the period between the effective date of the lease and the first revision is one year. This distortion is therefore prohibited, even if it concerns the first rent review (Cass 3, Civ 3rd, February 6, 2020, No. 18-24.599; Cass, civ 3rd, March 26, 2020, No. 19-10.223).
The judge considers that a difference of a few months between the period of index variation and the period between the lease’s effective date and the first rent review is sufficient to create a distortion rendering the clause invalid (Cass 3e civ, December 19, 2019, No. 18-23.196).
In the absence of a clause setting an index or an agreement between the parties, the rent may be increased upon lease renewal if there is a significant change in the elements mentioned below, which must have an impact on the business concerned:
– the characteristics of the premises in question;
– the intended use of the premises;
– the respective obligations of the parties;
– local market conditions (Article L145-33 of the French Commercial Code).
The resulting rent increase may not exceed 10% of the rent paid during the previous year (Article L145-34 of the French Commercial Law Code). For example, a landlord can obtain a rent increase upon lease renewal by demonstrating that the work carried out has significantly altered the characteristics and substantially improved the leased premises (consistent case law reiterated by the 3rde chamber of the Cour de cassation, September 7, 2022, No. 21-160613).
The business owner can also, and perhaps more importantly, obtain a maintenance or even a reduction in their rent upon lease renewal by proving the absence of an increase or even a decrease in these elements. In this regard, there is no legal limit on the potential rent reduction, and this absence is legal (Cass, Civ 3rd, November 12, 2020, No. 20-15.179). This is an advantageous aspect for the tenant, as they can, for example, reduce the rent by half if appropriate.
Following the health crisis, the business tenant will often find this advantageous for several reasons. For example, there is a decline in visitor numbers in tourist towns due to administrative restrictions or a decrease in rental value.
Indexation clause and revenue clause
An indexation clause or revenue clause (based on the turnover or revenue of the hotel, restaurant, or café) can also be included in the lease. This revision clause allows the landlord to increase the rent by 10% per year, but only if its current value exceeds one-quarter of the initial value.
The revenue clause allows the rent to vary according to the business’s revenue: if it increases, the rent will increase as agreed in the lease.
The indexation clause or revenue clause also allows for rent reductions due to economic crises (lower rent amounts) or a decrease in the hotel, restaurant, or café’s turnover.
However, an indexation clause that only allows for increases should be considered null and void because the tenant could not benefit from a rent reduction through indexation. In this type of clause, each party must bear the risk of a rent increase that would be unfavorable to them. Only the prohibited clause must be invalidated (Cass, civ 3rd, January 12, 2022, No. 21-11.169).
Specificity of the hotel industry (Article R145-10 of the French Commercial Law Code)
If the premises are univalent (they cannot be used for another purpose without significant and costly renovations), the rent may be subject to substantial fluctuations.
The fact that the restaurant’s clientele is closely dependent on the hotel is evidence that can demonstrate the single-purpose nature of the premises (CA Paris, January 24, 2018, Case No. 17/00017, 5th Chamber, Section 4LC).
The amount of the hotel’s rent will be calculated based on its theoretical turnover: either by the hotel method (used by the judge) associating the maximum and then actual occupancy rate of the establishment with the gross and net rental values, or by the real estate method associating the turnover with the cost of the investment for the tenant.