A fire ravages commercial premises let to a bakery. The landlord serves notice that the lease is terminated by operation of law for loss of the leased property; the tenant asks instead that the landlord reinstate the premises. The Toulouse court of appeal agrees with the tenant: absent total loss, the lease continues and the landlord owes the works. The Cour de cassation (the French supreme court for civil matters), on 8 March 2018, in a reported decision, quashed, under article 1722 of the Civil Code: “the absolute and definitive impossibility of using the leased property in accordance with its purpose, or the need to carry out works whose cost exceeds its value, must be treated as its total destruction”. The court of appeal had itself found that the building had become unfit for the business provided for in the lease. For the valuer, the ruling sets up a comparison they are often the only one able to make: the cost of the works on one side, the value of the leased property on the other.
The facts
On 1 April 2014 a fire breaks out in commercial premises owned by Toulouse Immob and let to La Boulange toulousaine. On 3 June 2014 the landlord notifies the tenant that the lease is terminated by operation of law for loss of the leased property, then sues for a declaration to that effect. The tenant counterclaims for an order that the landlord carry out reinstatement works.
The Toulouse court of appeal, on 30 November 2016, refuses to declare the termination and orders the landlord to carry out the works: absent total loss, termination by operation of law cannot be declared, the lease continues, and the landlord must, under its duty of delivery, have the premises reinstated. It nevertheless finds that the building has become unfit for the business provided for in the lease.
The decision
The third civil chamber quashed in full (Cass. 3e civ., 8 March 2018, no. 17-11.439, reported). Under article 1722 of the Civil Code, “if, during the lease, the leased property is totally destroyed by fortuitous event, the lease is terminated by operation of law”; and “the absolute and definitive impossibility of using the leased property in accordance with its purpose, or the need to carry out works whose cost exceeds its value, must be treated as its total destruction”.
“In so ruling, having found that the building had become unfit for the business provided for in the lease, the court of appeal, which did not draw the legal consequences of its own findings, breached the above provision.” Remittal to the Bordeaux court of appeal.
What this changes for valuation
Two figures, one threshold. Total loss does not require ruins. It is established in two cases: when the premises can no longer serve their purpose, absolutely and definitively; or when reinstating them would cost more than they are worth. The second test is a comparison of figures: on one side the cost of the works needed to make the premises fit for their purpose, priced by a project manager or a construction cost consultant; on the other, the value of the leased property. The property valuer establishes the second term and checks that the two figures relate to the same object, the leased premises and not the whole building, in the same reference condition. The glossary defines valeur vénale.
Which value, at which date. The value to use is that of the leased property before the damage, as let, that is, the market value of the occupied premises at the date of the damage. It includes neither the tenant’s business nor the value of the land where the premises are only part of a building, but the construction and its share of the ground. The comparables are sales of let commercial premises of similar make-up and, failing that, the capitalisation of the current rent at a market rate, a method that directly gives the value of a property to its landlord owner. The report presents both approaches and adopts the one that best fits the premises.
The cost of works is taken on the same scale. The works to compare are those that make the premises fit for their contractual purpose, no more, no less: neither an improved rebuild nor a mere clean-up. The report separates reinstatement items from improvement or new compliance items that did not exist before, because only the former enter the comparison. The article on preferring a quote to a flat-rate deduction recalls that this cost is proved by estimates, not by a percentage.
The consequences are quantified for both parties. If the threshold is crossed, the lease is terminated by operation of law: the tenant loses its leasehold right without eviction compensation, since the loss results from a fortuitous event; the landlord recovers premises to rebuild, free of any occupation. If the threshold is not crossed, the lease continues and the landlord owes the works, subject to the lease clauses on major repairs. A valuer assisting one of the parties therefore also quantifies what each loses or gains in each scenario, in particular the value of the leasehold right that disappears, described in the article on the leasehold right of the premises left.
Insurance does not change the comparison. That the landlord is indemnified by its insurer for the rebuilding does not enter the article 1722 calculation: the comparison is between the cost of the works and the value of the property, regardless of who pays for them. The report says so, because parties often invoke the insurance payout to argue that the works are feasible. The article on the occupation indemnity after a void lease deals with another case of premises unfit for their purpose.
What the valuer takes from it
- Total loss of the leased property, which terminates the lease by operation of law, includes the absolute and definitive impossibility of using it for its purpose or the need for works costing more than its value.
- The comparison is between the cost of works to restore fitness for purpose and the market value of the leased premises before the damage.
- Both figures relate to the same object and date; new improvements and compliance works are isolated.
- The landlord’s insurance payout does not enter the comparison.
- The report quantifies the consequences for each party, including the value of the leasehold right that disappears.
Further reading
The Commercial rent and leases page describes the assignment, its timescale and its fee. The guide My landlord refuses to renew my commercial lease and the glossary entries valeur vénale, droit au bail and taux de capitalisation complement this article. On the same theme: Relocated for less, the leasehold right lost still has a value and Lease annulled, premises unfit for use: no occupation indemnity. The decision is available on Légifrance.
What next
Damaged premises, a landlord pleading the loss of the leased property, and a comparison between the cost of works and the value of the premises?
I establish the market value of the premises before the damage and set it against the cost of reinstatement priced by the project manager, to say whether the threshold of total loss is reached, for the landlord, the tenant or the court.
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).
