Three reported rulings of 2016 clarify the review of the rent under a French commercial lease (bail commercial, the statutory business lease). On 8 September 2016, the Cour de cassation (the French supreme court for civil matters) holds that after renewal, the base index of the three-yearly review (révision triennale) is that of the effective date of the renewed lease, even if the renewed rent became payable only later. On 15 December 2016, it holds that after a renewal, even one arising from the landlord’s silence on the tenant’s request, the reference rent for the review of article L. 145-39 is that of the new lease, “even if equal to the amount of the rent in force under the previous lease”. On 8 September 2016 again, concerning a plot on the Croisette let in 1928 for 99 years at 1 franc a year, on which the tenant built the Palm Beach in Cannes, the Court holds rental value to be “foreign to the economy of the emphyteutic lease contract”. Three rules on what the valuer computes in a review, and what he does not compute.
The facts
In the first case, a company renting commercial premises owned by an SCI (société civile immobilière, a French property-holding company) requests the renewal of its lease, and the commercial rent judge (juge des loyers commerciaux) is seised of the price. A ruling of 5 February 2013 holds that the lease was renewed from 1 April 2007, at an uncapped rent applicable from 23 June 2008, the landlord having been slow to propose a new rent. In the course of the proceedings, the landlord applies for the three-yearly review. The Versailles court of appeal, on 3 March 2015, takes as base index that of the second quarter of 2007. The tenant argues that the variation had to be measured from the last court fixing, effective on 23 June 2008, and relies on article L. 112-1 of the Monetary and Financial Code.
In the second, a company holding the lease granted by an SCI on 20 October 1999 makes, at the end of December 2009, a request for renewal that the landlord leaves unanswered; a new lease takes effect on 1 January 2010. The tenant argues that on 1 July 2010, through the indexation clause (clause d’échelle mobile) of the expired lease, the rent had risen by more than a quarter compared with the rent of the initial lease, and applies for its review under article L. 145-39. The Paris court of appeal, on 20 May 2015, declares the application inadmissible.
In the third, by deed of 25 January 1928, the managing agents of the association of joint owners of the Croisette let to a company a plot on the Croisette peninsula, for 99 years at 1 franc a year; the tenant builds the Palm Beach there. The landlords apply for a review of the rent and its setting at 4 200 000 € a year. The Aix-en-Provence court of appeal, on 12 March 2015, classifies the lease as an emphyteutic lease (bail emphytéotique, a long lease conferring a real right) and holds that its ground rent cannot be reviewed by the commercial rent judge. The tenant disputes the classification and argues that it is a building lease (bail à construction). The landlords rely on article L. 145-3 of the Commercial Code, which excludes the commercial lease statute for emphyteutic leases except as regards the review of the rent. Both parties appeal.
The decision
First ruling (Cass. 3e civ., 8 September 2016, no. 15-17.485, reported): the court of appeal “rightly held that the starting point of the three-year period provided for by article L. 145-38 of the Commercial Code lies at the date of renewal of the lease”, the deferral of the rent’s payment date having no bearing on that date; the plea based on article L. 112-1 of the Monetary and Financial Code is ineffective, that text being “inapplicable to the statutory three-yearly review”, and “the index to be used for computing the reviewed rent was that of the second quarter of 2007”. Dismissed.
Second ruling (Cass. 3e civ., 15 December 2016, no. 15-23.069, reported): the request for renewal had ended the 1999 lease and a new lease, taking effect on 1 January 2010, had defined a new rent; “the rent to be taken into consideration in assessing the one-quarter variation allowing the review action of article L. 145-39 of the Commercial Code to be brought was the initial rent of the lease in force at the date of the review application”, and, “in the absence of a one-quarter variation of the rent between 1 January 2010 and 1 July 2010, the review application was inadmissible”. Dismissed.
Third ruling (Cass. 3e civ., 8 September 2016, nos. 15-21.381 and 15-22.374, reported): the classification as an emphyteutic lease is confirmed, the lease placing no obligation to build on the tenant; “rental value was foreign to the economy of the emphyteutic lease contract, the consideration for the tenant’s enjoyment being, for the landlord, not the payment of the rent but the absence of renewal and the accession without indemnity, at the end of the lease, of all works and improvements made by the tenant”, so that the landlords “could not apply to the commercial rent judge for a review of the rent to bring it into line with rental value, even by invoking a favourable change in local commercial factors”. Both appeals dismissed.
What this changes for valuation
The three-yearly review runs from the effective date of the renewed lease. Article L. 145-38 allows a review to be requested three years after the renewed lease took effect; the variation cannot exceed that of the index since the last amicable or court fixing, unless a material change in local commercial factors (facteurs locaux de commercialité) has moved rental value by more than 10 %. The cap is computed by a rule of three: the rent of the renewed lease, multiplied by the index in force at the application, divided by the base index; the reviewed rent is the rental value within that limit. The ruling fixes that denominator at the effective date of the lease, not at the date the rent became payable; if the index has risen in the meantime, the cap is higher. The valuer therefore starts from the effective date of the renewed lease as retained by the court or the parties; it is computed from the request or the notice, as shown in the article on the lease renewed twelve years and one day after its start.
The distortion rule targets the clause, not the statutory review. Article L. 112-1 of the Monetary and Financial Code bars an indexation clause from using a period of index variation longer than the time between two reviews; the Court holds it inapplicable to the statutory review. By a ruling of 17 May 2018, cited in the article on the indexation clause deemed unwritten, it then held that, where the effective date of the reviewed rent does not coincide with the annual indexation date, the judge adapts the base index of the clause to avoid distortion: the statutory computation first, the clause’s index next.
After a renewal, the quarter is measured from the rent of the renewed lease. Article L. 145-39 allows, where there is an indexation clause, a review to be requested each time the rent has varied by more than a quarter compared with the price previously fixed; the rent is then set at rental value. After a renewal, even one arising from the landlord’s silence, with no new price agreed, the reference is the rent of the renewed lease, even if equal to the last indexed rent: the counter restarts from zero, and the drift accumulated under the expired lease can no longer be recovered this way. The ruling concerns a renewal that gave rise to a new lease; the tacit extension of the expired lease does not create one. The valuer establishes the reference rent, the indexed rent at the date of the application and the ratio between the two; between 0.75 and 1.25, review is not open. When it opens, the rental value on review is established at the date of the application under article L. 145-33, without an index cap; for leases entered into or renewed since 1 September 2014, however, the resulting increase may not exceed, for any one year, 10 % of the rent paid in the previous year (article L. 145-39, as amended by the Law of 18 June 2014). The article on the clause barring downward review shows, through a ruling of 30 March 2017, that this right cannot be waived in advance: 2016 fixes the starting point of the computation, 2017 protects its result.
Rental value is foreign to the emphyteutic lease. The emphyteutic lease confers on the tenant a real right for more than eighteen and at most ninety-nine years (article L. 451-1 of the Rural and Maritime Fishing Code), is not renewed, and the buildings revert to the landlord at the term, without indemnity unless otherwise agreed; that, not the ground rent, is the landlord’s consideration. Article L. 145-3 applies to it only the review of the rent, and the Court specifies that this review cannot aim at rental value, even in the name of local commercial factors; the ruling does not say on what other basis a review could still be made. The landlord’s value is that of the land and buildings it will receive at the term, discounted over the remaining period, plus the capitalised ground rent; the tenant’s, the present value of its net income until the term, as explained in the article on buildings sold by the emphyteutic tenant, where the 2025 ruling holds that the emphyteutic tenant’s right over the buildings ends at the term, unless otherwise agreed.
What the valuer takes from it
- After a renewal, the three-year period of article L. 145-38 and the base index of the review run from the effective date of the renewed lease, not from the date the rent became payable.
- Article L. 112-1 of the Monetary and Financial Code does not govern the statutory three-yearly review; it frames the indexation clause, whose base index is then adjusted.
- For the article L. 145-39 review, the reference rent is that of the renewed lease, even if equal to the indexed rent of the expired lease.
- The ground rent of an emphyteutic lease is not reviewed to rental value: the landlord’s consideration is the absence of renewal and accession without indemnity at the end of the lease, and it is that consideration that the valuation measures.
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 indice des loyers commerciaux, clause d’échelle mobile and valeur locative complement this article. On the same theme: Commercial rent: single-use premises and downward review and Indexation clause unwritten: the refund ignores the indexation. The decisions are available on Légifrance: no. 15-17.485, no. 15-23.069 and no. 15-21.381.
What next
A commercial rent to review after a renewal, an indexation that has let the rent drift, or an emphyteutic lease whose landlord wants to revisit the ground rent?
I establish, from the documents and the position retained by the court or the parties, the effective date of the renewed lease, the base index and the reference rent, then compute the reviewed rent or the rental value on review, or value the rights arising from an emphyteutic lease, for the landlord, the tenant or the court-ordered appraisal.
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