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The impact of the contractual clauses of commercial leases on rental value

06/08/2015

Rental value is the cornerstone of the status of commercial leases. In effect, renewal of a lease is based around this notion. Therefore, when renewing a lease, the landlord’s entire aim consists of returning to the rental value in order to have his rent revalued. In order to do so, he must prove that the base line data contributing to the formation of the rental value has been modified during the course of the lease. On the other hand, for his part, a tenant wishing to obstruct this return will invoke the rent capping rule and demonstrate that nothing has changed.

This value will be determined by the courts, which have sovereign power in this respect. In this regard, they must nevertheless take account of the provisions of the lease forming the subject of renewal, as certain contractual clauses will actually have an impact on the rental value assessment. Pursuant to the terms of article R. 145-8 paragraph 1 of Commercial Code: “From the point of view of the parties’ respective obligations, restrictions on the use of premises and the obligations normally incumbent on the landlord,which would be passed on to the tenant, without consideration, represent afactor that reduces the rental value. The same applies to obligations imposed on the tenant beyond those resulting from the law or common practice"

Therefore, in order to assess the rental value, account should be taken of restrictions on the use of premises, on the one hand, and the transfer of obligations and costs to the tenant, on the other.

Clauses affecting the use of premises

Where a lease imposes specific constraints on the tenant, such as the obligation to repay the landlord 25% of the price should there be a transfer of his right to lease (CA Paris 5, Chamber A, 27th June 2007, Administrer nov. 2007 p. 32) or a prohibition on affixing a sign or plaque (CA Paris Division 5, 3rd Chamber, 15th Sept. 2010 Jurisdata no. 2010¬ 018352), the rental value will be subject to a reduction to take account of these constraints.

Conversely, benefits accorded to the lessee will justify an increase in the rental value. The same applies where the lease includes an authorisation to sublet, to freely transfer the right to lease and even the stipulation of a particularly broad destination clause. It is considered that a building permit, the lack of a deposit1 and even the benefit of a “right to a terrace” for the tenant2 will result in an increase in the rental value of premises.

Clauses enacting a transfer of obligations or costs to the lessee

It is necessary to ask questions about the obligations and costs that the landlord should bear in principle. If they are underestimated in comparison to what they should have been, the rent for the renewed lease must take account of this. It is mainly in the area of work and repairs and in terms of the tax burden that this idea will be applied. In terms of work and repairs, the landlord’s and the lessee’s obligations are defined by Civil Code. The principle is that the tenant is only liable for tenant’s repairs and maintenance. Where the lease requires the tenant to pay for all work, including major repairs covered by article 606 of Civil Code (which applied prior to the Loi Pinel), a reduction is applied when determining the rent for the renewed lease (CA Paris 16, Ch. B, 20th Dec. 2007: Jurisdata no. 2007-354694). As regards taxes and duties, there will be a transfer of costs every time the landlord requires the lessee to pay taxes and duties, for which it is legally liable. The most frequent example is one where the lease requires the tenant to pay real estate tax. It is therefore deemed that “a reduction factor of 10% must be adopted, where a proportion of real estate tax must be paid by the tenant3».

In practice, account may be taken of transfers of costs by:

  • a direct deduction of their value from the gross
    rental value;
  • by applying a discount measured as a percentage of this value;
  • – by adjusting the basic unit price. As a result, the rental value must be adjusted to take account of the possible existence of overriding clauses of common law, whether they have an upward or downward effect. As the case may be, these clauses may therefore represent factors that reduce or increase the rental value.

However, reducing factors risk being mitigated by Loi Pinel 2014-626 of 18th June 2014 (art. L. 145-40-2 C. com.) and its implementing decree no. 2014-1317 of 3rd November 2014 (art. R. 145-35 C. com.), which lists the costs which, by their very nature, cannot be passed on to the lessee. Where a cost is deemed to be recoverable from the tenant pursuant to article L. 145-40-2 of Commercial Code, insofar as it does not appear on the list outlined in article R. 145-35 of Commercial Code, the question must be asked whether it could represent an overriding clause of common law pursuant to article R. 145-8 and give rise to a reduction in the rental value. The same applies, for example, to real estate tax, which, to date, has given rise to a reduction.

Finally, as regards the division of work between the landlord and the tenant, the Loi Pinel states that “costs that cannot be charged to the tenant include: 1. expenditure relating to major repairs outlined in article 606 of Civil Code” (C. com art R. 145-35). It is no longer possible to pass on major repairs to the lessee. This factor reducing the rental value is therefore scheduled to disappear.

Irrespective of article R. 145-8 of Commercial Code, there is a clause that has a particularly significant impact on the assessment of rental value: the accession clause. This clause organises the transfer of ownership of structures, work and improvements carried out by the tenant, to the landlord.

Depending on whether accession takes place at the “end of the lease” or the “end of use”, the results are completely different.

Accession at the end of the lease means that work carried out by the lessee becomes the property of the landlord on expiry of the lease and must, therefore, be included in the assessment of rental value.

Conversely, if the lease states that accession to work will take place at the end of use or when the lessee departs, this work cannot be taken into account when setting the rental value. In practice, the Courts will apply a reduction to the rental value (depending on the scale and value of the work) in order to offset the work carried out by the lessee.

It therefore appears that although the contract establishes the rules for the parties and even though renewal of the lease should take place with the same clauses and conditions, the commercial rent panel judge has the discretionary power to re-balance the contract by reducing or increasing the rental value under the overriding clauses of common law, which reflect the latest developments in the reform of contract law.


1.CA Paris, Division 5 chamber 3, no. 1213/023 of 21st May 2014.
2.CA Versailles 17th June 2014 no. 13/05583.
3. CA Rennes, Chamber 5, 22nd October 2014, no. 351, 13/03823

Real Estate Newsletter - Option Finance, 1st june 2015

Authors

Philippe Riglet
Partner
Paris
Picture of Sandra Kabla
Sandra Kabla