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French commercial leases: a new and unwelcome complexity

On June 18 2014, a new statute called the "Pinel Law", changing part of the provisions relative to commercial leases, was finally entered into force.

Its main objective is to improve tenants' rights and increase protection against landlords in order to have a better balance in economic relations.

The law has altered a significant part of the provisions in the French commercial code on commercial leases but the most important issues concern the reforms on rent, charges and taxes.

The new provisions do indeed protect the tenant but their complexity will sometimes lead to inevitable law suits, therefore questioning its real effectiveness and balance.

Rent evolution slowed down

French law provides for an indexation of rent when the lease is renewed and an indexation of the revised rent (in French law revisions of rents are possible every three years).

In addition, parties very frequently insert in their leases a clause relative to an annual indexation of the rent.

These indexations were generally based on the Construction Cost Index and if applicable the Commercial Rents Index or the Tertiary Activities Rents Index.

The new Pinel law has removed the faculty to choose the common index, the Construction Cost Index now leaving a choice between either the Commercial Rents Index (for example, when rented premises are for commercial activities) and the Tertiary Activities Rents Index (for example, rented office space exclusively).

The Commercial Rents Index and the Tertiary Activities Rents Index are lower indexes than the Construction Cost Index, thus leading to less expensive rents.

However, the annual indexation has not been altered. Therefore it is still possible to choose the Construction Cost Index for an annually indexed rent. This is rather incoherent with respect to the law's objectives, and could lead to complications in practice as the parties can choose different indexes for different indexations of the rent.

The law has also provided that the evolution of the renewal rent will not be able to increase more than 10% of the last paid rent during the previous year.

The 10% limit applies to rent increases when the rent is uncapped and when the lease is renewed, except for leases which exceed 12 years, leases for "single-used" premises, and leases for office space exclusively.

This limit also applies to revised rents in compliance with the French commercial code (articles L. 145-38 and L. 145-39).

Rents are lowered and their evolution slowed down in order to facilitate small companies especially to either face their commitments towards their landlord or find a suitable and affordable location, but these measures can frighten potential investors.

An imposed distribution of service charges and taxes

The new Pinel law has decided to limit the parties' contractual liberty by imposing a mandatory appendix to the lease containing a precise and limitative inventory of service charges and taxes and their distribution between the landlord and tenant.

Pursuant to the decree published on November 3 2014, are now borne by the landlord:

  • "Expenses relative to major works and reparations falling under article 606 of the French Civil Code, and fees relative to these works";
  • "Expenses relative to wear and tear or compliance works to French regulations, as long as these works can be considered as major works under the definition of the article 606 of the French Civil Code above-mentioned";
  • "Taxes and fees for which the owner of the building is legally liable, including the territorial economic contribution (the "CET")";
  • "Property management fees related to rents", thus excluding technical management fees and strata assets and co-ownership management fees.

However, can be borne by the tenant according to the decree:

  • "the property tax and additional property taxes";
  • "any other tax, service charges and fee relative to the use of the premises or the building or to a service that benefit directly or indirectly to the lessee", which could include therefore maintenance charges (related to water, electricity, heating, gaz, lifts…);
  • "Expenses related to embellishment works which amount exceeds the cost of identical replacement".

Nevertheless, the wording of the decree is far from being precise leading to inevitable conflicts between landlord and tenant relative to the distribution of service charges and taxes.

The decree was supposed to give a specific list of service charges and taxes and their distribution, and not large categories that could embody so many taxes and service charges for example, the category "taxes for which the owner of the building is legally liable" except "any other tax, service charges and fee relative to the use of the premises or the building or to a service that benefit directly or indirectly to the lessee".

Some taxes for example can easily fall under these categories, such as the waste disposal and treatment tax that is legally borne by the landlord but can be considered as a service benefitting the tenant directly and therefore can be borne by the Tenant pursuant to the provisions of the new law.

However, other fees can be difficult to categorize, like insurance premiums. After the decree, will insurance premiums be paid by the landlord or the tenant? Can they be considered as a fee for which the owner of the building is legally held liable or can it be argued that since it is not mentioned in the decree, they can be paid by the tenant?

Many questions will definitely arise from this rather imprecise list and we will be in the dark for a long time waiting for court decisions to decipher it.

Conclusion

The Pinel law's objective to bring more balance in economic relations between the landlord and the tenant by improving the protection of the tenant in the French commercial code can be welcome considering the economic difficulties of small companies. However, it is regrettable that it had to be done with such complexity…