According to the tenant, an indexed rent under a French commercial lease (bail commercial, the statutory business lease) had risen by more than a quarter since the lease was signed. Meanwhile, the tenant had requested renewal, the landlord had not answered, and the new lease had kept the same rent. In a reported decision of 15 December 2016, the Third Civil Chamber of the Cour de cassation (the French supreme court for civil and commercial matters) held that the one-quarter variation opening the review is measured from the initial rent of the renewed lease: the increase built up under the expired lease no longer counts.
The facts
A tenant company held the leasehold right (droit au bail) under a commercial lease granted by an SCI (société civile immobilière, a French property-holding company) on 20 October 1999. At the end of December 2009, it made a request for renewal which the landlord left unanswered (29 December according to the statement of facts in the decision, 24 December according to its reasoning).
The tenant then argued that on 1 July 2010, through the operation of the index clause (clause d’échelle mobile) of the expired lease, the rent had risen by more than a quarter compared with the price set in the initial lease, and applied for a review under article L. 145-39 of the French Commercial Code. That article opens a review where the operation of the clause makes the rent vary by more than a quarter compared with the price previously fixed.
On 20 May 2015, the Paris Court of Appeal declared the application inadmissible. The tenant appealed: since the parties had not agreed on the new rent, the rent of the expired lease, increased by successive indexations, had not been “fixed contractually” (translated from the French) and could not serve as the reference.
The decision
The Cour de cassation dismissed the appeal (Cass. 3e civ., 15 December 2016, appeal no. 15-23.069, reported in the Bulletin) and ordered the tenant to pay €3,000 to the SCI towards its legal costs (article 700 of the Code of Civil Procedure).
It took up the findings of the Court of Appeal: the request for renewal had brought the lease of 20 October 1999 to an end, and “a new lease had taken effect on 1 January 2010, defining a new rent, even if equal to the amount of the rent that was in force under the previous lease”. It approved the judges for having “rightly held that 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”. The Court of Appeal had “correctly inferred from this that, in the absence of a one-quarter variation of the rent between 1 January 2010 and 1 July 2010, the review application was inadmissible”.
Renewal therefore gives rise to a new lease with its own initial rent, even one identical to the last indexed rent; in six months, the one-quarter variation had not been reached. The decision mentions no agreement or court decision setting the renewed lease’s rent.
The timetable is consistent with two rules the decision does not cite: a landlord who does not answer within three months of the request is deemed to have accepted the principle of renewal (article L. 145-10 of the Commercial Code) and, where renewal is requested during the tacit extension (tacite prolongation) of the lease, the new lease takes effect on the first day of the calendar quarter following the request (article L. 145-12), as recalled in Commercial lease: twelve years and one day, the rent is uncapped. Taking effect on 1 January 2010 suggests that the 1999 lease was then in tacit extension, which the decision does not state (a lease expiring on 31 December 2009 would give the same date). The 2016 decision says nothing about the reference rent during a mere tacit extension, which does not create a new lease.
What this changes for valuation
The count restarts at renewal. The valuer starts from the initial rent of the lease in force at the date of the review application: after a renewal, the rent of the renewed lease at its effective date, even if it equals to the euro the expired lease’s last indexed rent.
A fictitious example. A lease granted at €20,000 a year reaches €26,000 through indexation by its expiry, an increase of 30%, and is renewed without the rent being reset. From the initial rent, the variation exceeds a quarter; from €26,000, as the decision requires, the review opens only if the indexed rent exceeds €32,500 or falls below €19,500. As long as the ratio of the indexed rents to the reference rent stays between 0.75 and 1.25, the application is inadmissible.
The level of the rent is discussed at renewal. The rent of the renewed lease corresponds to rental value (valeur locative) under article L. 145-33 of the Commercial Code, within the cap of article L. 145-34 unless the rent is uncapped (déplafonnement) (Commercial rent uncapping in France: four ways out of the cap). If the new lease keeps the current rent, as here, that rent becomes the new base for the quarter.
The three-yearly review follows other rules. The review of article L. 145-38 (révision triennale) does not require a one-quarter variation; its base index is the subject of a separate decision of 8 September 2016 (Triennial rent review after renewal: base index at effective date). The report states which review it quantifies.
When the review opens. The judge adapts the operation of the index clause to the rental value at the date of the application (article R. 145-22 of the Commercial Code); for leases entered into or renewed since 1 September 2014, the resulting increase is limited, for any one year, to 10% of the rent paid in the previous year (article L. 145-39, as amended by the Law of 18 June 2014). The decision of 30 March 2017 accepts the tenant’s waiver of the review only after an increase of more than a quarter through the operation of the index clause has been established (Commercial rent review in France: the floor clause is unlawful); the 2016 decision does not deal with waiver but, after a renewal, this quarter is counted from the renewed lease’s rent. A clause that defeats the operation of the statutory review is deemed unwritten (Commercial rent: an unlimited flat-rate rise is deemed unwritten).
What the valuer takes from it
- After a renewal that has given rise to a new lease, the one-quarter variation of article L. 145-39 is measured from the initial rent of the renewed lease.
- That rent serves as the reference even if it equals the last indexed rent of the expired lease.
- The report establishes when the renewed lease took effect, reconstructs the indexed rents since that date and computes their ratio to the reference rent.
- The level of the rent is discussed at renewal (articles L. 145-33 and L. 145-34).
- The three-yearly review under article L. 145-38 does not require a one-quarter variation.
Further reading
The Commercial rent and leases page describes the assignment, how it runs and its fee. The guide Lease renewal in France: my landlord wants to uncap the rent and the glossary entries clause d’échelle mobile, indice des loyers commerciaux and valeur locative complement this article. The two other 2016 decisions on rent review: Triennial rent review after renewal: base index at effective date and Emphyteutic long lease: rent review cannot track rental value. On the same theme: Commercial rent review in France: the floor clause is unlawful and Indexation clause unwritten: the refund ignores the indexation. The decision is available on Légifrance.
What next
An indexed rent that has drifted, and a lease renewal in between?
I establish when the renewed lease took effect, reconstruct the series of indexed rents from the reference rent and check whether the one-quarter variation has been reached. If the review is open, I establish the rental value at the date of the application, for the landlord, the tenant or the judge.
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