A plot on the Croisette in Cannes, let in 1928 for 99 years at 1 franc a year, carries the Palm Beach built by the tenant; the landlords ask for the rent to be set at €4,200,000 a year. Article L. 145-3 of the French Commercial Code excludes emphyteutic leases (bail emphytéotique, a long lease conferring a real right on the tenant) from the commercial lease statute, except as regards the review of the rent: can that review aim at rental value (valeur locative)? In a reported decision of 8 September 2016, the Cour de cassation (the French supreme court for civil and commercial matters) answers in the negative: it upholds the Court of Appeal’s finding that rental value was “foreign to the economy of the emphyteutic lease contract” (translated from the French). For the valuation, the ground rent is not a market rent.
The facts
By deed of 25 January 1928, the managing agents (syndics) of the association of joint owners of the Croisette let to a company a plot on the Croisette peninsula, for 99 years at an annual rent of 1 franc. The lease gives the tenant the option of erecting any buildings, in particular a casino; it builds the Palm Beach there, a summer casino and leisure complex.
The landlords apply for a review of the rent and for it to be set at €4,200,000 a year. The commercial rent judge (juge des loyers commerciaux) stays the proceedings pending a decision on the classification of the lease. The Aix-en-Provence Court of Appeal, on 12 March 2015, classifies the contract as an emphyteutic lease and holds that its ground rent cannot be reviewed by the commercial rent judge.
Both parties appeal. The tenant argues that the contract is a building lease (bail à construction), the clause depriving the lease of effect without authorisation to operate a casino being, in its view, a termination clause that reveals an obligation to build. The landlords argue that article L. 145-3, which preserves the review of the rent, allows the rent of an emphyteutic lease of a commercial nature to be reviewed under the rules of the French commercial lease (bail commercial), including article L. 145-33, under which the reviewed rent must correspond to rental value; they also raise a priority question of constitutionality (question prioritaire de constitutionnalité).
The decision
The Third Civil Chamber dismisses both appeals (Cass. 3e civ., 8 September 2016, appeals no. 15-21.381 and 15-22.374, reported).
On the classification, it approves the Court of Appeal: the lease provided “only the option of erecting any buildings and in particular a casino” (translated from the French, as are the quotations below), and the clause on the authorisations “was not a termination clause but a condition concerning the operation of the casino and laid down no obligation to build”; the Court of Appeal “rightly deduced from this that the contract had to be classified as an emphyteutic lease”.
On the review, the Court first sets aside the constitutional argument, the priority question of constitutionality having been declared inadmissible, then states: “having found that 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, the Court of Appeal correctly deduced 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”.
The ruling does not say that the ground rent is fixed for ever: it holds that its review cannot aim at rental value and does not address any other basis of review.
What this changes for valuation
The ground rent is not a market rent. In an emphyteutic lease, the gap between the ground rent and rental value is not recovered through a review: the landlord accepted a low rent, here 1 franc a year, in exchange for the absence of renewal and the accession without indemnity, at the end of the lease, of everything the tenant built and improved. The report therefore does not base the landlord’s value on an increase the ruling rules out.
The landlord’s value lies in the term. The emphyteutic lease, granted for more than eighteen and at most ninety-nine years, confers on the tenant a real right, that is, a right in the property itself, which it can assign or mortgage (article L. 451-1 of the Rural and Maritime Fishing Code). The landlord’s position is a deferred value: the land and buildings it will receive at the term, discounted over the remaining period at a rate that reflects the risk, plus the capitalised ground rent, negligible when it is symbolic. The closer the term, the closer that value comes to full ownership. The tenant’s position is the mirror image: the present value of its net income until the term; its right over the buildings then ends, unless otherwise agreed, as held by the 2025 ruling discussed in the article on buildings sold by the emphyteutic tenant.
Local commercial factors do not serve the review. Under a commercial lease, a material change in local commercial factors (facteurs locaux de commercialité) can, subject to conditions, take the three-yearly review beyond the index variation (article L. 145-38) or justify uncapping the rent on renewal, as the article on the likely effect of local commercial factors shows. For an emphyteutic ground rent, the Court rejects the argument. The attractiveness of the site still weighs on the value of the buildings that will revert to the landlord and on the tenant’s income.
Classification first. Without an obligation to build, the contract is not a building lease within the meaning of articles L. 251-1 et seq. of the Construction and Housing Code. The regime of the ground rent and the fate of the buildings follow from the classification, which is for the judge; the report notes the clauses that determine it and, if it is disputed, values under each hypothesis.
Not to be confused with commercial lease reviews. Two other 2016 rulings clarify the base index of the three-yearly review after renewal and the reference rent for the one-quarter review of a commercial lease: those reviews lead, within their limits, towards rental value, a target excluded for an emphyteutic ground rent.
What the valuer takes from it
- The ground rent of an emphyteutic lease is not reviewed to match rental value, even in the name of a favourable change in local commercial factors.
- The landlord’s consideration is the absence of renewal and accession without indemnity at the end of the lease: the valuation measures it, discounted over the remaining term.
- A symbolic ground rent is not a shortfall; the report does not build the landlord’s value on a review the Court rules out.
- Without an obligation to build, there is no building lease: the classification, which governs the ground rent, is checked before valuing.
Further reading
The Commercial rent and leases page describes the assignment, its timescale and its fee. The guide Lease renewal in France: my landlord wants to uncap the rent and the glossary entries valeur locative, facteurs locaux de commercialité and taux d’actualisation complement this article. The two other 2016 rulings on rent review: Triennial rent review after renewal: base index at effective date and French commercial rent review: the quarter counts from renewal. On the same theme: Commercial rent uncapping in France: four ways out of the cap and Commercial rent review in France: the floor clause is unlawful. The decision is available on Légifrance.
What next
An emphyteutic lease whose landlord wants to revisit the ground rent, or long-lease rights to value?
I analyse the lease, its remaining term and what happens to the buildings at the end, then value the landlord's or the tenant's position by discounting. The report, reasoned and sourced, serves a negotiation, a partition or court proceedings.
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).
