A novlaw practical guide to Negotiating your commercial lease in France

When opening a business in France, negotiating your lease agreement is one of the first places to start looking – and it may even be the part you find the most difficult to navigate. Your commercial lease is an essential piece of the puzzle. It sets out the terms and conditions for your business’s ongoing proceedings and allows you to structure your business plan accordingly.

Our team of lawyers here at Novlaw is specialized in the intricacies of French real estate law and are available to assist you in any of the necessary formalities. Our practical guide to negotiating your commercial lease aims to offer you a straightforward understanding of all key elements to look out for when signing or negotiation your lease agreement.

Will hiring a French lawyer help me in my negotiation process?

The negotiation of a commercial lease is an important moment in setting up your new business in France. The lease agreement is a complex contract and is subject to a number of different provisions found within the French Commercial Code. The commercial lease agreement remains however a contract based primarily on the proper agreement of the parties involved. In this way, the negotiation process becomes entirely fundamental to the successful operation of your newly-founded business. Within the lease agreement there are many clauses that can be negotiated and tailored to suit your specific concerns. Seeking the assistance of a qualified lawyer can be particularly useful when entering into a new commercial lease agreement in France.

What are the different clauses I can negotiate in my commercial lease agreement?

Permitted use or “Destination du bail commercial”

Under French law and legal tradition, a permitted use clause is an essential element to negotiate between landlord and tenant. It is intended to help structure and define the kind of business operating within the premises leased. Finding the appropriate balance between both parties can protect you from future disputes with your contractual partner.

It is important to note however that the purpose of the commercial lease must comply with the various provisions within the building’s co-ownership regulations. The permitted use clause must comply with the overall purpose of the building and its tenants. The responsibility for this compliance with the co-ownership regulations rests on the landlord. However, if the tenant refuses to comply with the above-mentioned regulations, the tenant may be bound to compensate the other co-owners for any damage they may have suffered. The landlord is further obligated to ensure that the permitted use clause is in compliance with the different administrative requirements of French law.

Once the lease’s permitted use has been properly determined, the tenant is bound to honour the agreement. The tenant may not carry on an activity that does not fall within its scope.

Only a special request to lift the clause and its specificities would allow a change of activity.

NB: It is possible to find very broad permitted use clauses in commercial leases, “tous commerce” in French or all trade clauses. These clauses allow the tenant to change activities freely throughout the commercial lease agreement without having to submit a special request with the landlord. In practice however these clauses are becoming increasingly rare, as they limit the landlord’s control of their space.

The lease agreement and its permitted use clauses are also established to protect the tenant and their business. The landlord is therefore contractually obligated to supply the tenant with all necessary elements found essential to the normal use of the rented space. The premises rented by the landlord must be in proper condition to be used for the purpose specified in the lease, in accordance with article 1719 of the Civil Code. The tenant must be able to carry out the agreed upon activity in a contractually-defined space. In the case of the restaurants, it is found mandatory to provide for a functioning ventilation system capable of getting rid of odors and smoke while ensuring the proper circulation of air. The restaurant business requires these structures be built into the space. By inserting these requirements into the intended use clause, the landlord, unless otherwise stipulated, is found responsible for providing the listed equipment.

Lease term

The most common form of commercial lease agreements in France is the “3/6/9”. It is known as such due to the contractually stipulated lease terms of a minimum of 9 years with a right to renewal. Most often, the lease agreement can be terminated at end of a three-year period if appropriately requested by the tenant with 6 months prior notice.

This 9 year minimum lease term is legally binding on both parties and can be overridden only in the case of exceptional lease agreements “bail dérogatoire”. These exceptional agreements cannot exceed three years, including renewals, under penalty of being re-classified as a “3/6/9” commercial lease. Since implementing the Pinel Law it is no longer possible to contractually remove the tenant’s right to give prior notice to the landlord at the end of each three-year period.

Unless concluded over an indefinite period, there is no legal limit to the maximum term of a commercial lease. It is possible to execute a commercial lease exceeding the traditional 9 year term but it should be noted that once a commercial lease exceeds 12 years, it must be drafted by a notary and published at the Bureau des hypothèques in order to be enforceable to third parties.

While this may seem particularly beneficial to the tenant, a lease exceeding the 9 year mark may also have significant legal consequences for both parties. Once 12 years have passed and the lease is renewed, the landlord is granted the possibility to automatically de-cap the rent. Another possibility for the landlord is to enforce a strict term binding the tenant. The tenant would be stripped of the right to prior notice (after the three-year termination).

The commercial lease is not automatically terminated at the end of the terms. It stops only once in the case of the tenant’s prior notice given 6 months to the landlord. If this formality is not done; the lease continues by tacit renewal for an indefinite term. The lease is to be conducted under the same conditions.

At the end of the 9-year period, the tenant is granted a right to renewal. The tenant may request the renewal of the commercial lease but is also entitled to compensation for eviction if the landlord refuses the proposal to renew. The compensation for eviction is determined according to the rental value of the business – this is most often calculated by assessing the average of the tenant’s turnover over the past 3 years.

Rent

The tenant is required to pay rent to the landlord in consideration for the rental of commercial premises. The parties may freely determine the rent when entering into a commercial lease agreement. In practice, the lease indicates the amount of rent excluding taxes and charges. The terms of payment of the rent must also be specified, i.e. the frequency and schedule of payment. The rent may be due monthly, quarterly, or even annually.

For the traditional lease agreements known as “3,6,9”, rent revision clauses can be added by the landlord or the tenant to obtain an increase or decrease of the rent at each triennial expiration date as well as at the time of the lease’s renewal. This right to revision remains however capped by law, to ensure the financial security of both parties. Once renewed, the rent must be fixed at the rental value and capped at the rates of the commercial rent index (ILC) or the index for rents for tertiary activities (ILAT).

It should be noted that having progressive annual rent or a ‘step up’ lease is a decision made amongst both parties. It is an agreement to be made between the landlord and the tenant and is entirely possible under French law. The ‘step up’ lease provides for changes in the rent price and allows parties to slowly settle into the budgetary concerns of a commercial lease.

For all the above-mentioned reasons, negotiating your rent typically requires significant attention on the behalf of involved parties. Hiring out an experience lawyer will help reduce the chances of future disputes amongst tenant and landlord.

Other costs

Lease expenses

Until the implementation of the Pinel law, the parties to a commercial lease agreement were entirely free to distribute the payment of the various lease expenses as they saw fit.

In an effort to protect the tenant, the Pinel law has strictly regulated the abusive transfer of expenses from landlord to tenant. There exists now a comprehensive list of expenses that the landlord may ask of the tenant. It is no longer possible in France to draft such leases known as “net of charges” or “triple net” or “investor” leases that see almost all expenses charged to the tenant.

The commercial lease must provide for the compensation of such rental expenses. For example, the tenant may bear the costs of water, gas and electricity as well as those related to the maintenance and current repairs (ex: meters or sanitary facilities, or the expenses of the condominium equipment).

On the other hand, a fair share of these expenses typically remain the responsibility of the landlord. Another example of this is the French regulations making it so that expenses related to major repairs to the building, such as roofing and framing, may only ever be borne by the landlord. The same applies to taxes and fees related to the ownership of the building. As of the Pinel law, these fees can no longer be passed on to the tenant. Any clause to the contrary will be deemed unenforceable.

NB: The landlord remains entitled to passing on property taxes and the additional taxes related to the lease.

Insurance

In a commercial lease, the insurance clauses are particularly important in that they determine the mutual obligations between parties. In order to protect the tenant’s business it is important to take out appropriate insurance. In the event of a claim, the tenant may be brought to take out a resulting loss of profit insurance or ‘assurance perte d’exploitation’, found primarily in commercial insurance contracts. Commercial leases typically demand specific insurance for the tenant themselves. Commercial lease agreements in France almost systematically find insurance clauses concerning natural disasters, water damage/humidity, fire, acts of vandalism, theft, etc.

With the lease agreement having been negotiated amongst parties, it is important for your lawyer to ensure that the landlord is not too demanding. The landlord should not request the addition of “superfluous” insurance that you may find excessive. The landlord is obligated to subscribe to a landlord insurance or “assurance propriété non-occupant” (PNO). It should also be noted that the landlord may want to look into the possibility of subscribing to an unpaid rent insurance to ensure a stable stream of income in the case of the tenant’s default in payment.

Within the specific framework of a commercial lease agreement, the landlord is granted the right to enforce on their tenant certain insurance policies. This typically reassures the landlord and establishes the groundwork for trust amongst the parties. The landlord will attempt to ensure the tenant is as insured as possible. This allows the landlord to limit liability in case of damage. However, opt-out clauses or “clauses de renonciation à recours” are frequently found in cases of limited liability.

NB: Insurance prices: These vary according to the size and geographical location of the premises, the activity carried out there and the number of risks covered by the insurance.

Major Repairs and Article 606 of the French Civil Code

Article 606 of the French Civil Code:

“Major repairs are those to main walls and vaults, the restoring of beams and of entire coverings; That of dams, breast walls and enclosing walls also in entirety.

All other repairs are of maintenance.”

The Pinel law has regulated on different aspects of the French commercial lease agreement. Major repairs are one of them and were written into the French Civil Code in article 606 cited above. Article 606 now exists as a comprehensive list of what constitutes a major repair under French law. The parties to a commercial lease agreement can in be relieved from the conditions of this article.

In this way, the tenant must not agree to bear the costs of such major repairs. If a clause holding the tenant responsible for such costs is inserted within a commercial lease agreement it will be void and considered unwritten. However, the tenant will continue to be held responsible for the day-to-day maintenance of the leased premises (ex: plumbing and electrical). The landlord is bound to a strict list of obligations towards the tenant. Major repairs are typically understood as relating to repairs regarding the disrepair of property and general soundness of the building structure.

It is quite common to find included within a commercial lease agreement a clause specifically for the repair of property to the condition in which it was rented. In practice, this clause provides for either

– A repair to the premises’ initial state

– Or leave all the additional elements – conditioned by the landlord’s approval

Sale or Transfer of a Business or Leasehold Right

It is essential to distinguish between the transfer of a business “cession de fonds de commerce” and the transfer of a leasehold right “cession de droit au bail”. The transfer of a business concerns the transfer of the entire business, i.e. both the tangible elements (tools, business furniture, stock) and the intangible elements (clientele, leasehold rights).

On the other hand, the transfer of the right to the lease or only concerns the commercial lease concluded with the landlord, there is no takeover of the business. This is most often the case when the lease is taken over not to continue an activity, but to start a new one.

On special requests from the tenants to the landlords and changing the permitted use of premises

When it comes to transferring the right to a lease, you may be brought to submit a special request to your landlord to change the permitted use of the premises. This is called a “mécanisme de déspécialisation” in France and can be of two kinds:

It can either be characterized by the inclusion of a related activity to those already provided for in the lease
Or be characterized by a radical change of activity. This second kind of request may lead to the de-capping of rent by the landlord.

The differences between a transfer of business and a transfer of the right to a lease are not insignificant. The landlord is entitled to prohibit the transfer of a lease but remains unable to prohibit that of a business in itself.

In fact, the landlord cannot prohibit the transfer of goodwill as it is considered that this would infringe too much on the tenant’s right of ownership over his goodwill. It is possible however to make the transfer conditional on the prior authorization of the landlord by obtaining. In practice this is often the case in French real estate proceedings. The landlord may not refuse his approval if the transferee’s situation is identical to that of the initial tenant. Refusing a transfer in such a situation would bring about an abuse of the landlord’s rights.

Subletting is another clause to pay close attention to. Personal occupation clauses or “clauses d’occupation personnelle” can be found in certain leases where the tenant is forbidden from leasing or subleasing the business and premises to a third party. Subletting is found default prohibited if the opposite is not expressly provided for in the commercial lease.

A final piece of advice on the matter: filing for the sale or transfer of business may seem like the perfect solution to avoiding your landlord’s refusal of your special request, but disguising your transfer of leasehold rights under a different name will only bring about the termination of your agreement and your subsequent eviction. When you are evicted in this way, no compensation package is provided for the tenant

Compensation for Eviction

With the tenant’s right of renewal in mind, we find that the latter may have a claim for an eviction compensation package in the event they are evicted from the leased premises. Under French law, all cases where the landlord wishes to terminate the commercial lease will have attached a compensation package paid to the tenant for the inconveniences caused by such a decision. This payment is calculated according to the value of the business. It is based on a percentage depending on the sector of activity that is then applied to the business’ turnover rates. The loss of clientele will also be compensated for with the eviction compensation increased if the clientele appears attached to the location itself. This is most often the case in France for bakeries and restaurants.

This compensation package is also used to cover the tenant’s expenses in regards to the costs of moving and layoffs.

In practice, the sum of the compensation package is decided between parties. In the case of a dispute however it is always possible to refer the matter to a commercial judge specialized in rent litigation.

The eviction compensation is typically paid by the landlord to the tenant. However, in certain cases the landlords can find themselves exempted, in particular when:

The tenant is not properly registered with the Trade and Companies Register (RCS) ;
The landlord can supply a serious reason for evicting his tenant generally characterized by the non-compliance with a contractual obligation, provided that it continued after the prior notice (LRAR) by the landlord to the tenant.
If the building in which the premises are located is no longer suitable for occupation (for safety or state reasons);
In case of repossession by the landlord to live there themselves. This right of first refusal can be transferred to the landlord’s spouse and family.

Having taken into consideration the variety of different elements to look out for when negotiating your commercial lease agreement in France, we highly recommend you contact a specialized lawyer. Our team here at Novlaw is proud to assist you in all the necessary steps required to ensure a successful drafting of your future commercial lease agreements in France.

For further information contact us at: contact@novlaw.fr or directly at b.robelin@novlaw.fr