Two reported rulings of 2017 concern two mechanisms a commercial rent valuer often handles. The first involves a campsite let under a French commercial lease: the tenant, which financed over seven million euros of improvements, asks for a 40 % allowance on the rental value of the renewed lease. The Cour de cassation (the French supreme court for civil matters), on 5 October 2017, refused: “the lease being subject to article R. 145-10 of the Commercial Code on the setting of the rent of premises built for a single use excludes the application of article R. 145-8 of the same code”. The rent of single-use premises is set “at the rental value according to the practice observed in the trade concerned”, without the correction provided for the tenant’s improvements. The second involves a clause by which the tenant waived, for the whole lease, any court setting of the rent below the contractual rent, even if rental value proved lower; on 30 March 2017 the Court quashed the ruling that had upheld it, since the waiver of review “could validly occur only once that right had accrued”. For the valuer, two points of method.
The facts
In the first case, an agricultural land group granted in 1994 a sixteen-and-a-half-year commercial lease of land used to run a campsite business. On 30 June 2010 the landlord serves a notice with an offer of renewal at a given rent, then applies to have the rent set. A final ruling of 26 November 2013 held that the lease covered property let for a single use within article R. 145-10, set a provisional rent and ordered an expert appraisal. The tenant, which financed improvements of over seven million euros during the lease, asks for a 40 % allowance on the rental value, computed according to campsite practice by the so-called hotel method adapted to campsites and based on its takings. The Montpellier court of appeal, on 8 March 2016, sets the renewal rent at 144 000 € a year with no allowance.
In the second, a commercial lease with annual indexation contains a clause under which “it has been expressly agreed, as an essential and decisive condition of this lease, without which it would not have been granted, that the tenant waives for the whole duration of this lease any court setting of the rent at a sum below the contractual rent defined above, even where rental value proves lower than the contractual rent”. The tenant applies for a downward review under article L. 145-39, which allows review where the index clause has moved the rent by more than a quarter. The Paris court of appeal, on 20 January 2016, sets the reviewed rent at the initial contractual rent: the clause leaves the tenant the right to a reduction, but only down to the agreed “floor”.
The decision
First ruling (Cass. 3e civ., 5 October 2017, no. 16-18.059, reported): “the lease being subject to article R. 145-10 of the Commercial Code on the setting of the rent of premises built for a single use excludes the application of article R. 145-8 of the same code”; having found that the lease covered property let for a single use, the court of appeal “rightly held that the rent had to be set at the rental value according to the practice observed in the trade concerned”. Dismissed.
Second ruling (Cass. 3e civ., 30 March 2017, no. 16-13.914, reported): under articles L. 145-15 and L. 145-39 of the Commercial Code, the Court quashed, “whereas the clause had the effect of defeating the readjustment of the current rent to rental value, and the tenant’s waiver of its right to obtain a review could validly occur only once that right had accrued, that is after the finding of a rent increase of more than a quarter through the index clause”. Remitted to the Paris court of appeal, differently composed.
What this changes for valuation
For single-use premises, trade practice and nothing else. A campsite, a hotel, a cinema, a clinic, premises built for a single use, are not let by reference to the rents of neighbouring shops; article R. 145-10 refers to the practice observed in the trade, that is, for outdoor hospitality as for hotels, a rent computed from the takings of the business, to which a percentage specific to the sector and category is applied. The Court says that reference is exclusive: article R. 145-8, which sets aside improvements financed by the tenant at the first renewal after they are made, is not added to it. The valuation report on single-use premises therefore applies the takings method, describing the business, the reference takings and the rate used, without a separate allowance for the tenant’s investment. The article on valuing a hotel presents that hotel method, and the glossary entry valeur locative de renouvellement places it among the others.
The tenant’s improvements count in another way. The rule does not mean the seven million euros invested have no effect on the rent. In a takings-based method, the percentage applied to turnover reflects, according to practice, who financed the equipment: a lower rate where the tenant bore the heavy investment, a higher one where the landlord delivered a complete working asset. The valuer says so and justifies it by trade practice, instead of adding an allowance from another text. The guide Selling my hotel in France, at what value? describes that practice from the operator’s side.
Downward review cannot be waived in advance. Where indexation has raised the rent by more than a quarter, the tenant may ask for it to be set at rental value, which may be below the initial contractual rent. A clause that fixes in advance a floor at the original rent deprives that right of its effect; it is contrary to the statute. A valuer instructed on a review on that basis therefore computes rental value without being stopped by a contractual floor, and flags the clause so that the judge can assess its validity. Only a waiver made after the finding of a one-quarter rise would be valid. The article on the indexation clause deemed unwritten and the refund deals with another effect of indexation on the rent.
Two rental values, two assignments. The rental value on review under article L. 145-39 is that of the date of the application, without a cap; the renewal rental value of single-use premises is that of trade practice at the renewal date. The report states which one it establishes, the valuation date and the texts applied, since the result and the ways of challenging it differ. The glossary entry clause d’échelle mobile explains the mechanism that opens review.
Practice must be evidenced. As for any single-use premises, the valuer documents trade practice: professional scales, reported decisions, practice observed on comparable businesses, and explains how the reference takings were chosen, over several years and excluding exceptional items. The article on uncapping the commercial rent recalls that single-use premises are one of the cases where the renewal rent escapes the cap.
After a renewal, the quarter is measured from the new rent. In a reported ruling of 15 December 2016 (Cass. 3e civ., no. 15-23.069), the Cour de cassation held that the reference rent for assessing the one-quarter variation of article L. 145-39 is the initial rent of the lease in force at the date of the review application. After a renewal, it is therefore the rent of the renewed lease, “even if equal to the amount of the rent in force under the previous lease”. The right to review protected by the 2017 ruling is assessed from that rent, and the increase accumulated under the expired lease no longer opens it. The article on the review of the commercial rent after renewal presents that ruling.
What the valuer takes from it
- The rent of single-use premises is set at rental value according to trade practice, and that reference excludes the article R. 145-8 allowance for the tenant’s improvements.
- The tenant’s investment weighs on the rate applied to takings, according to practice, not through a separate allowance.
- A clause barring in advance any downward review below the contractual rent is contrary to the statute; the tenant can waive review only once the right has accrued.
- The report separates rental value on review from renewal rental value, with their date and texts.
- Trade practice is documented with verifiable references.
Further reading
The Commercial rent and leases page describes the assignment, its timescale and its fee. The guides Selling my hotel in France, at what value? and Commercial lease renewal: my landlord wants to uncap the rent and the glossary entries valeur locative de renouvellement, clause d’échelle mobile and déplafonnement complement this article. On the same theme: How to value a hotel in France: 7 methods and a worked example and Indexation clause unwritten: the refund ignores the indexation. The decisions are available on Légifrance: no. 16-18.059 and no. 16-13.914.
What next
A campsite, a hotel or other single-use premises up for renewal, or an indexed rent now above rental value?
I establish the rental value according to trade practice, takings and the hotel method included, or the rental value on review, and I check what the lease clauses can or cannot be relied on for, for the landlord, the tenant or the court-ordered appraisal.
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