Three reported decisions of 2018 clarify how the rent of a renewed French commercial lease is set, in situations the valuer often meets. A shopping centre lease provides for a rent equal to 7 % of turnover, with a guaranteed minimum set at each renewal at rental value, and refers to the rent judge to assess it; the court of appeal annuls the clause. The Cour de cassation (the French supreme court for civil matters), on 29 November 2018, quashed: that stipulation “does not prevent, where the contract so provides, recourse to the commercial rent judge to assess, at renewal, the rental value determining the guaranteed minimum”. On 15 February 2018 it held that a settlement amendment fixing the rent during the lease “constituted a material change in the parties’ respective obligations”, which justifies uncapping at renewal “on its own”. And in an opinion of 9 March 2018, it stated that the smoothing of the increase of an uncapped rent “operates each year by a non-adjustable 10 % increase on the previous year’s rent”, the schedule being for the parties, not the judge. Three rules, three items in the valuer’s report.
The facts
In the first case, a 1999 commercial lease in a shopping centre at Saint-Quentin-en-Yvelines provides for an annual rent equal to 7 % of turnover excluding tax, not to fall below a guaranteed minimum, set at each renewal at the rental value assessed at the effective date of the renewed lease, the parties voluntarily submitting the setting of that rental value to the statutory procedure and conferring jurisdiction on the rent judge. After a notice with an offer of renewal at 1 April 2012 and a preliminary memorandum claiming a minimum of 200 800 € excluding tax, the landlord applies to the rent judge. The Versailles court of appeal, on 19 September 2017, rejects the claim and annuls the clause: the parties cannot confer on the judge a jurisdiction he holds only from the law, nor have him set a floor, rental value being, under article L. 145-33, a ceiling.
In the second, an art gallery is the tenant of two adjoining premises; the landlord starts a rent review in 2012, the tenant applies for renewal in 2013, and two amendments of 2014 end the review proceedings by readjusting the rents for the earlier period. The landlord asks that the renewed rents be set at rental value. The Paris court of appeal, on 2 December 2016, grants it.
The request for an opinion comes from the commercial rent judge of Dieppe, who asks the Court about the phasing of the increase provided for by the last paragraph of article L. 145-34: who sets the schedule, and is the annual increase necessarily 10 %?
The decision
First ruling (Cass. 3e civ., 29 November 2018, no. 17-27.798, reported): “the stipulation under which the rent of a commercial lease is computed on the basis of the tenant’s turnover, without falling below a minimum equivalent to the rental value of the premises let, does not prevent, where the contract so provides, recourse to the commercial rent judge to assess, at renewal, the rental value determining the guaranteed minimum”. Quashed, remittal to the Versailles court of appeal, differently composed.
Second ruling (Cass. 3e civ., 15 February 2018, nos. 17-11.866 and 17-11.867, reported): “the court of appeal rightly held that the contractual setting of the rent freely agreed between the parties amounted to a waiver of the judicial rent review procedure and constituted a material change in the parties’ respective obligations occurring during the lease in circumstances outside the law and justifying, on its own, uncapping”. Dismissed.
Opinion (Cass., opinion, 9 March 2018, no. 17-70.040, reported): “The phasing of the increase of the uncapped rent provided for by the last paragraph of article L. 145-34 of the Commercial Code operates each year by a non-adjustable 10 % increase on the previous year’s rent. It is not for the commercial rent judge, but for the parties, to draw up the schedule of the rents payable during the period in which the phasing of the rent increase applies.” The reasons add that the rate applies “except where the difference between the rental value still to be reached and that year’s rent is less than that rate” and that “the phasing not being a matter of public policy, the parties may agree not to apply it”.
What this changes for valuation
The guaranteed minimum of a turnover rent can be a real rental value. Shopping centre leases often combine a turnover rent and a guaranteed minimum; that minimum, where the lease says so, is set at renewal at rental value, and the rent judge may assess it if the parties so provided. A valuer instructed on such files therefore values the rental value of the premises under the criteria of article L. 145-33, weighted area, trading position, rent evidence from the gallery, without being stopped by the idea that rental value is only a ceiling. The article on turnover rent and the parties’ common intention shows the next step, when the lease is less clear about what the judge may set. The glossary describes the valeur locative de renouvellement.
A settlement on the rent during the lease uncaps. Fixing the rent by amendment, to end review proceedings, changes the parties’ obligations outside the law; at the next renewal the rent leaves the cap and is set at rental value. For the valuer, this means that a lease whose rent was renegotiated by settlement is, at renewal, a full rental value file, not a mere index calculation. They therefore check the history of amendments before concluding that the cap applies. The article on the four ways out of the cap places this case among the others, and the one on material change in 2025 deals with the characteristics of the premises.
Smoothing is mechanical: 10 % a year, up to rental value. Once the uncapped rent is set, the increase is phased in steps of 10 % of the previous year’s rent, no more, no less, until rental value is reached; the last step is smaller if the remaining gap is under 10 %. The judge sets the rental value; the parties draw up the schedule, and may waive the phasing. When the expert report concludes on an uncapped rent, it therefore presents the smoothing schedule as an annex: first-year rent, successive increases, year in which rental value is reached. The article on smoothing and extension beyond twelve years deals with the case where smoothing does not apply. The glossary defines lissage.
What a turnover rent does not say. A variable rent pays the landlord on the business; it does not directly indicate the rental value of the premises, which is measured on the market of comparable premises. A valuer assessing the guaranteed minimum therefore does not extrapolate turnover; they compare the premises with other premises, and only check that the minimum retained remains consistent with the variable rent observed, as the article on advance rent and turnover rent recalls.
Three items in one report. Rental value of the premises, history of the changes that uncap, smoothing schedule: the renewal report deals with them in that order, because each governs the next. The guide Commercial lease renewal: my landlord wants to uncap the rent describes the documents to gather.
Before 2018, the twin rulings of 2016. The ruling of 29 November 2018 extends two reported rulings of 3 November 2016 (Cass. 3e civ., no. 15-16.826 and 15-16.827). The Aix-en-Provence court of appeal had held a turnover rent clause incompatible with the statutory regime, the renewed rent being unable to exceed the rental value, reasoning close to that of the Versailles court of appeal in 2017; the Court quashed. According to the summary published in the Bulletin, the judge then sets the guaranteed minimum according to the criteria of article L. 145-33, “in particular having regard to the tenant’s contractual obligation to pay, in addition to the minimum, a variable part”. The valuer therefore establishes the rental value of the premises by comparison, then quantifies the allowance that follows from the variable part. The article on the guaranteed minimum set at rental value in 2016 presents those rulings.
What the valuer takes from it
- A turnover rent with a guaranteed minimum at rental value may refer to the rent judge to set that minimum at renewal; the valuer then assesses a full rental value.
- A contractual setting of the rent by settlement during the lease is a material change in the parties’ obligations and uncaps on its own.
- Smoothing of the increase of an uncapped rent runs in non-adjustable 10 % increases on the previous year’s rent, up to rental value; the schedule is for the parties.
- A variable rent does not measure the rental value of the premises, which is established by comparison.
- The renewal report deals with rental value, the grounds for uncapping and the smoothing schedule.
Further reading
The Commercial rent and leases page describes the assignment, its timescale and its fee. The guide Commercial lease renewal: my landlord wants to uncap the rent and the glossary entries valeur locative de renouvellement, lissage and déplafonnement complement this article. On the same theme: Turnover rent: the judge looks for the parties’ common intention and French commercial lease beyond twelve years: no rent smoothing. The decisions are available on Légifrance: no. 17-27.798, no. 17-11.866 and opinion no. 17-70.040.
What next
A turnover rent with a guaranteed minimum, an amendment signed during the lease, or an uncapped rent to phase in?
I establish the renewal rental value of the premises, check what the lease and its amendments allow the rent judge to set, and present the smoothing schedule in 10 % steps, for the landlord, the tenant or the court-ordered appraisal.
Free quote, by email or by phone. No commitment before the quote is accepted. Fees are never linked to the value of the property (Charte de l’expertise, Title I, §2.1).
