Law and regulation of rental agreements in France during Covid-19

Updated on 31.03.2020

1. Is a lessee eligible for rent reduction due to a significant decline in footfall and consequently its turnover as a result of COVID-19?

Not in principle. Under the current legislation and case law - force majeure does not enable a party to a lease agreement to reduce the rent.

2. Is a lessee eligible to temporarily close its leased space - on its own initiative – and opt for rent reduction as a result of COVID-19?

Yes, in theory a lessee could temporarily close its leased space without the lessor's consent. However, please note that most French commercial lease agreements provide for an obligation on lessees to permanently maintain and operate commercial premises.

In the context of the COVID-19 pandemic, the risk that lessors would invoke a breach of the obligation to operate in case of shutdowns due to the COVID-19 seems, in our opinion, fairly low. In any case, we would recommend that lessees inform lessors about shutdowns and clearly explain that these shutdowns are linked to the COVID-19 pandemic.

If the leased space is closed at the lessee own's initiative, the lessee should not be in principle able to invoke a force majeure cause to claim a rent reduction as mentioned in 1 above.

From a landlord’s standpoint, we recommend that the latter, especially in the event of multi let buildings, includes the recommendations of the Government in relation to the epidemic (ie: handwashing, keep distances…) in order to show its willingness to comply with its contractual obligation to deliver a building ready to be used.

3. Is a lessee eligible for rent reduction in the event its leased space is closed following an order by the Government as a result of COVID-19?

Lessees might argue that the latest decisions from the French Government that are leading to the shutdowns of "non-essential" commercial premises amounts to a certain type of force majeure so-called "fait du prince". Indeed, the purpose of the lease agreement (i.e. the use of commercial premises) is no longer existent and the leased premises are no longer usable for their intended use following the Government orders. This theory has been applied in some exceptional instances in case law and where shutdowns were ordered on a permanent basis.

In the context of the COVID-19 epidemic, the shutdowns of "non-essential" commercial premises by the French Government, even on a temporary basis for now, could be deemed in our opinion as a "fait du prince". On this basis, lessees could, in our opinion, try to claim the suspension of the lease during the epidemic period and thus suspend the rent.

In addition, lessees may invoke a defence of anticipatory breach (“exception d’inexécution”) due to the failure from the landlord to make the leased space available in order to seek a rent reduction. On this, we recommend carefully reviewing the terms and conditions of each lease agreements as parties could have waived this defence in their lease agreements.

Landlords could argue that the drafting of the above mentioned Order refers to the lessee’s activities and thus it is part of the lessee’s occupational risk that such activities are (temporarily) prohibited.

The law declaring the state of health emergency as of 12 March 2020 was enacted on 23 March 2020. Under the state of emergency, which is initially set to last 2 months, significant and derogatory measures notably economic measures can be taken by the French Government. One of the first measure taken on 25 March 2020 by way of ordinance No. 2020- 316 relates to the suspension of payment of commercial rents during the period of the state of emergency. Although the scope of this measure is expected to be clarified by way of decree, it seems like this suspension of rents will apply to small businesses only.

Another ordinance (n°2020-306) provides that  during the declared sanitary state of emergency  all penalties, penalty provisions and/or termination provisions shall not apply, but can only be  effective one month after the expiry of such state of emergency. As of today, it is planned that the sanitary state of emergency terminates on 24 May 2020. To summarize, the rent remains due but the payment is suspended without any penalties.

In addition, during this period, the landlord cannot terminate the lease agreement or introduce a court debt action. However, at the current state of regulation, it seems possible for a landlord to make a seizure on the lessee’s bank account or to activate the guarantee provided by the lessee under the lease agreement (cash deposit, bank guarantee).

4. What kind of security is generally provided by a lessee in connection with a lease, a bank guarantee, a deposit or otherwise?

In most instances: cash security deposit. Please note that Article L.145-40 of the French commercial code provides that in the event that the sum of the cash security deposit exceeds the total of two terms of rent, the amount by which said sum exceed two terms of rent shall accrue interest for the account of the lessee. Usually the cash deposit is equal to 3 months of rent and the lessor may also require an additional first demand bank guarantee or a first demand bank guarantee in lieu of the cash deposit.

A lease termination at this stage would seem unlikely to be successful.

However, for lease agreements entered or renewed as of 1st October 2016, the lessee could try to invoke hardship on the ground of Article 1195 of the French Civil Code in order to renegotiate the terms and conditions of the agreement. Pursuant to Article 1195 of the French civil code, such renegotiation should take place between the parties in the first place and potentially before a court if the parties cannot find an agreement after a reasonable period. Please note however that commercial lease agreements often provide for waiver of Article 1195 of the French Civil Code.

Some scholars have expressed doubts about the validity of such waiver but as per the current case law, this legal provision is not deemed a "public order provision" meaning that parties can legally include waiver in their lease agreements.

For lease agreements entered or renewed before 1st October 2016, lessees could also try to invoke a general contractual duty on lessors to act in good faith during the performance of agreements in case of change of circumstances such as the covid-19 pandemic. Indeed, case law had admitted before the introduction of Article 1195 of the French Civil Code on hardship that contracting parties had a duty to act in good faith during the performance of agreements and that this included the renegotiation of agreements in case of substantial change of circumstances.

Benjamin Bill
Benjamin Bill
Partner
Paris
Picture of Aline Divo
Aline Divo
Partner
Paris
Pierre Popesco