Commercial Leases - First Semester 2023 Case Laws Digest

Commercial lease law is constantly evolving, with court rulings providing particularly interesting insights into the negotiation and management of commercial leases.

Our selection of some of the High Court’s major decisions relating to commercial leases for the first half of 2023 provides an opportunity to take stock of the latest developments in commercial leases.

The decisions handed down on the classic themes of commercial lease formation, amendments and termination are full of useful information for updating the knowledge of our investor, manager, owner and user clients' teams.

First semester focuses on eminently practical subjects such as:

• The lessee's preferential right: such right is not applicable to the sale by mutual agreement of real estate assets under judicial liquidation, which is authorized by the official receiver;
• Limitation periods: the two-year limitation period applicable to an action to reclassify a contract as a commercial lease runs from the date of conclusion of the contract whose reclassification is sought; and
• Insolvency proceedings: in the event of a transfer of leasehold rights authorized by the official receiver in the context of a compulsory liquidation, the lessor is entitled to rely on the clause in the lease providing for the approval of the transferee by the lessor.

Lessee's Preferential Right

• The sale by private agreement of a real property in the framework of a judicial liquidation, upon authorization of the juge-commissaire (i.e., official receiver) (article L642-18 C. com.), is a sale by authority of justice. Therefore, the provisions of article L145-46-1 C. com. (i.e., providing for the lessee’s preferential right to purchase the premises where its business is operated), relating to the sale by an owner of his commercial or artisanal use property, are not applicable, and such sale does not give rise to the exercise of the lessee’s preferential right. (Com. 8 February 2023, No.21-23.211)
• According to article L642-18 C. com., the sale by private agreement of a real property in the framework of a judicial liquidation is a sale by authority of justice. Accordingly, the provisions of article L145-46-1 C. com., concerning the sale by an owner of a commercial or artisanal use property, are not applicable, and such a sale does not give rise to a preferential right to the lessee. (Cass. 3ème civ., 15 February 2023, No.21-16.475)
• Any property whose main activity is the manufacture or transformation of tangible goods, for which the technical equipment, materials, and tools used play a predominant role, is classified as an industrial use property under article L145-46-1 C. com. and is consequently excluded from its scope of application. (Cass. 3ème civ., 29 June 2023, No.22-16.034)

Prescription

• The list of causes for interrupting the prescription period as set forth under articles 2240, 2241 and 2244 of the French Civil Code being restrictive, the formal notice of the mémoire préalable (i.e., specific prior statement of a claim applicable to a litigation regarding the setting of the revised rent or of the rent of a renewed lease), which does not constitute a legal claim within the meaning of article 2241 of the French Civil Code, does, however, stop the running of the prescription delay in application of article 33, paragraph 1, of decree no. 53-960 of 30 September 1953 only. This text requires the mémoire préalable only in proceedings before the judge in charge of litigation regarding the setting of the rent, its formal notice does not stop the running of the prescription delay in a situation where the action in view of the setting of the revised rent or of the rent of a renewed lease is initiated as an accessory action before the judge in charge of usual litigation cases. (Cass. 3ème civ., 25 January 2023, No.21-20.009)
• Article L145-15 of the French Commercial Code, which provides that the clause breaching the right to renew a commercial lease are to be deemed non-written, is not applicable to a claim for requalification of a contract as a commercial lease. The requalification claim of a management lease into a statutory commercial lease is governed by the two-year limitation period (cf. art. L145-60 C. com.) running as from the date on which the contract has been entered into. (Cass. 3ème civ., 25 January 2023, No.21-24.394)
• The indemnity due by a lessee prior to exercising its option right provided for by article L145-57 C. com. is subject to the two-year limitation period set forth under article L145-60 C. com. (Cass. 3ème civ., 5 February 2003, No.01-16.882)

The two-year limitation period starts as from the date of notification by the lessee of the exercise of its option right. The occupation indemnity retroactively replaces the rent, in accordance with article L145-57 C. com. 

If the lessee remains in the property after having exercised its option right, he is liable for a usual occupation indemnity which claim is subject to the five-year limitation period, starting on the same day. (Cass. 3ème civ., 16 March 2023, No.21-19.707)

• The two-year prescription period applicable to actions in view of the requalification of a contract into a statutory commercial lease starts as from the signing of the contract in question, even when a succession of separate short term leases. (Cass. 3ème civ., 25 May 2023, No.22-15.946)
•  A claim in view of the assessment of a statutory commercial lease, arising from the lessee's continued occupancy at the end of a short term lease, under article L145-5 C. com. is not time-barred. (Cass. 3ème civ., 25 May 2023, No.21-23.007)

Insolvency Proceedings

• In the event that the lessee is subject to a judicial liquidation pursuant to a court decision taken after the termination of the reorganization plan, the three-month waiting period that the lessor has to wait before any action for automatic termination of the lease can be initiated runs as from the date of the judgment opening the judicial liquidation. In order to assess whether the lessor has complied with the three-month waiting period, the judge must consider the date on which the lessor filed its summon for termination rather than the date on which same judge makes its decision. (Cass. 3ème civ., 18 January 2023, No.21-15.576)
• Under a judicial liquidation process, the transfer of leasehold rights, alone or even included in the business transfer, authorized by the judge, is subject to the conditions laid down in the lease at the date of the court decision on the judicial liquidation, except for the clause requiring the assignor to be jointly liable with the assignee. Consequently, the lessor may enforce the clause providing for its approval of the assignee. (Cass. 3ème civ., 19 April 2023, No.21-20.655)
• The lessee who has been divested of his rights in the context of its insolvency proceeding is not entitled to any specific right to claim for the setting of the rent of a renewed lease before the judge in charge of such claim. (Cass. 3ème civ., 14 June 2023, No.21-11.588)

Inventory

• The lack of an inventory does not prevent the lessor from invoking the provisions of article 1722 of the French Civil Code, according to which the burden of proof lies with the lessee (the lessee is liable for any damage or loss that occurs during his occupancy, unless it can prove that such damage or loss occurred without its fault). (Cass. 3ème civ., 25 January 2023, No.21-22.311)
• The claim of the lessor aiming at the sharing of the costs of the inventory drawn up by the bailiff appointed by the lessor only (which decided to carry out the exit inventory after the lessee's departure on expiry of the notice period and despite the lessee's timely requests), shall be rejected. (Cass. 3ème civ., 15 February 2023, No.21-24.024)

Covid-19 and Rent Payment Obligation

• In light of the measures taken during the COVID-19 crisis, a claim for the enforcement of a first-demand guarantee (qualifying as a sûreté personnelle) granted to secure rents shall be stopped as being an obvious illicit disturbance. (Cass. 3ème civ., 25 January 2023, No.22-10.648)
• The effect of the temporary and general measure forbidding public access, implemented in the context of the Covid-19 crisis, being unrelated to the contractual destination of the leased property, cannot qualify as a loss of said property, within the meaning of article 1722 C. civ. (i.e., giving rise to a clam for a decreased rent or lease termination). (Cass. 3ème civ., 16 March 2023, No.21-24.414)

Uncapping of the Rent

• The Court of appeal, in the context of an action aiming at the setting of the revised rent or the rent of a renewed lease, can only decide within the limits of the former judge's powers, and therefore has no authority to rule on the spreading of the uncapped rent increase. (Cass. 3ème civ., 25 January 2023, No.21-21.943)

Works and Rent Charges

• The lease providing for items on service charges, even underrated, without any info on the real amount of such charges may not qualify as grounds likely to evidence an error from the lessee when the lease has been entered into. (Cass. 3ème civ., 15 February 2023, No.21-23.166)
• Under the terms of article 1134 of the French Civil Code, the lessor who is as a matter of principle responsible for all repairs other than rental repairs to the structure and solidity of the leased premises may, by means of a clear and precise clause, transfer such liability to the lessee.

The provision requiring the lessee to contribute to common-area and collective-utility expenses, including repairs and replacements of equipment in the shopping center, does not constitute a clear and precise clause requiring the lessee to pay for repairs to the shopping center's roof. (Cass. 3ème civ., 16 March 2023, No.21-25.107)

• Should the lessor fail to meet its delivery obligation, the lessee may, on the one hand, obtain compensation for the consequences of the lessor's failure to carry out the work for which he is responsible, and on the other hand, either obtain specific performance, or be authorized to carry out the work and obtain payment of the necessary sums in advance.

The cost of restoring the property to its original condition does not constitute damages that can be compensated for but an advance on the work to be carried out, rather than a debt due to the liquidation proceedings.

Failure by the lessor to deliver the property causes the lessee a loss of chance to operate the business as contemplated under the lease, which cannot be evaluated at the price paid to acquire the leasehold rights (loss unrelated to the lost chance to carry out a profitable activity). (Cass. 3ème civ., 6 April 2023, Nos.19-14.118 and 19-14.119)

• In order to authorize the lessee to suspend payment of rent and taxes for a given period, the judge must determine whether the lessors have actually carried out the repairs necessary to cure the non-performance of their contractual obligations. (Cass. 3ème civ., 8 June 2023, No.21-19.608)
• A provision under which the lessee is to bear the cost of façade restoration of the building, without any stipulation concerning the work required by the administrative authority, does not allow the lessor to recharge such costs when the façade restoration works are required by the administrative authority. (Cass. 3ème civ., 15 juin 2023, No.21-19.396)

Change of Permitted Use

• The assignment of leasehold right under the terms of article L145-51 of the French Commercial Code, notwithstanding de-specialization, does not preclude the lessor from taking an action aiming at the setting of the rent for the renewed lease on the grounds of a change of permitted use that occurred during the expired lease.

Neither the failure of the lessors to exercise their preferential right of repurchase, nor the absence of legal opposition to the change of permitted use, can be deemed as a waiver of the right to claim for the setting of the rent of the renewed lease. (Cass. 3ème civ., 15 February 2023, No.21-25.849)

Termination Notice and Termination Clause

• A formal termination notice sent by registered letter with acknowledgement of receipt on the last day of the period allowed for such notice is valid if presented by the postal services to the authorized recipient—regardless of the date of actual receipt by the recipient. (Cass. 3ème civ., 16 March 2023, No.21-22.240)
• The automatic termination of a lease under article L145-41 C. com. shall be enforceable only in case of a breach of contract actually covered by the termination clause. (Cass. 3ème civ., 8 June 2023, No.21-19.099 and 22-11.885)
• In the case of an inventory showing that the ground floor of the workshop is partitioned and that part of it is open to the public for exhibition and sale in breach with the destination clause of the lease while the framing activity is maintained, the lessor does not provide evidence of material breaches supporting the termination of the lease. (Cass. 3ème civ., 8 June 2023, No.22-14.491)

Occupation and Eviction Indemnity

• Statutory occupation indemnity must be equal to the lease value determined on the basis of the criteria set out in article L145-33 C. com, instead of the indexed base rent. (Cass. 3ème civ., 8 June 2023, No.22-11.663)
• An action against a termination notice with denial of a commercial lease renewal with an offer to pay the statutory eviction indemnity does not preclude a request for the appointment of a court expert report prior to any trial, intended to gather the evidence needed to evaluate and set the eviction and occupation indemnities. (Cass. 3ème civ., 6 April 2023, No.22-10.475)
• Failure to allow a tenant to pursue a commercial activity in the premises until payment of the eviction indemnity, in disregard of the lessee's right to remain in the premises, causes a loss that is up to the judge to assess. The evicted lessee is entitled to an eviction indemnity equal to the loss caused by the failure to renew the lease and, until payment of said indemnity, may remain in the premises under the terms and conditions of the expired lease (cf. art. L145-14 and L145-28 C. com.). (Cass. 3ème civ., 25 January 2023, No.21-19.089)