Overview of retail lease agreements in France

The law applicable to retail lease agreements is mainly the legal regime of commercial lease agreements (“statut des baux commerciaux”). This regime can be found notably in Articles L. 145-1 to L. 145-60 of the French Commercial Code.

The provisions of the Civil Code on leases that are not in contradiction with the regime of commercial lease agreements are also applicable. Those provisions can be found in Articles 1708 to 1762 of the French Civil Code.

The minimum duration is nine years and the maximum duration is 99 years. In practice, most retail leases are entered into for an initial term of nine years.

The possibilities for early termination by the landlord are extremely restricted. The landlord may terminate the lease upon expiry of each three-year period only in the circumstances listed in Articles L. 145-4 § 3, L.145-18, L.145-21,

L.145-23-1 and L.145-24 of the French Commercial Code to build or rebuild the premises or to carry out certain restoration work, for example and in consideration of an eviction indemnity.

Lease agreements usually contain automatic termination clauses to early terminate the agreement in case of breach of the provisions of the lease agreement by the tenant.

The tenant is entitled to terminate the lease at the expiry of each three-year period, subject to serving a six- months prior notice.

For retail premises, tenants can only waive their break-option right(s) if the lease is entered into for an initial term of more than nine years or if the lease pertains to premises for specific use (“locaux monovalents”).

The tenant has a right of renewal upon expiry of the lease. Should the landlord refuse to renew the lease, the landlord must pay an indemnity to the tenant (“indemnité d’éviction”) unless (a) there is a serious and legitimate cause not to renew or (b) the premises must be demolished for health and safety reasons.

The tenant is allowed to stay in the premises until the termination indemnity has been paid in full.

The rent may be revised in the following circumstances:

• Each party may request that the rent be set at the rental value every three years. However, the amount of the revised rent may not exceed the variation in the applicable index (ILAT or ILC).
• Each party may request that the rent be set at the rental value every three years if changes in the local commercial factors result in an increase in the rental value of more than 10% (the above-mentioned cap rule does not apply).
• Each party may request that the rent be set at the rental value if the operation of the indexation clause increases or decreases the rent by more than 25% with respect to the previously fixed rent (the above-mentioned cap rule does not apply).

There are no mandatory provisions regarding fitting-out works. The matter is largely left to the parties’ discretion.

The lease agreement will frequently require that prior consent be obtained from the landlord for any fitting- out works.

There are no mandatory provisions regarding the reinstatement of the premises. The matter is largely left to the parties’ discretion.

Lease agreements usually provide that any fitting-out works and generally any work carried out by the tenant to improve the premises become the property of the landlord upon expiry of the lease without any compensation, unless the landlord requires that the premises be reinstated to their original condition.

Any subleasing of the premises is prohibited, unless otherwise provided in the lease agreement or unless approved by the landlord.

The tenant may transfer the lease, unless otherwise provided in the lease agreement.

It should be noted that the tenant has the right, by law, to assign its lease to the buyer or successor of its business as a going concern (“fonds de commerce”).

Any contractual prohibition of this right contained in the lease agreement is considered void. The lease may only set forth formalities to be carried out for a valid transfer (for instance the obligation for the assignment to be in the form of a notarial deed).

Pursuant to Article 1743 of the French Civil Code, the lease is binding on the new owner provided that the lease has been executed as a notarial deed or has a certain date.

The lease agreement can provide a preferential right for the tenant.

In addition, the tenant can benefit from a statutory pre-emption right  in case of sale the premises. However, this pre-emption right will not be enforceable in several situations and notably: in the event (i) of a sale of a commercial complex, (ii) of a single sale of various commercial premises, (iii) of a sale of commercial premises to the co-owner of a commercial complex, or (iv) in case of sale to the spouse, ascendant or descendant of the landlord.

There are no mandatory rules on rental guarantees.

Usually, lease agreements provide for a rental guarantee, under the form of a cash deposit and/or a bank guarantee, for an amount that varies between 3 and 6  months of rent.

The allocation of maintenance and repair obligations was regulated by Decree n° 2014-1317 which was promulgated on 5 November 2014.

In lease agreements entered into or renewed as of 5 November 2014, the tenant cannot be charged for:

• major repairs (as set forth in Article 606 of the Civil Code) and the fees relating to those repairs, if applicable;
• wear and tear repairs and compliance works (“travaux de mise en conformité”) when such works and repairs consist in major repairs as defined above. 
• With respect to other maintenance and repair works, the parties may freely determine their respective obligations.

Usually, rent and service charges are subject to 20% VAT (the landlord usually elects for VAT).

Renewed rent

As previously mentioned, the applicable law grants the tenant the right to renew the lease. The renewal rent is capped for retail premises: the rate of variation between the initial rent and the renewal rent cannot exceed the variation in the applicable index. This cap does not apply where the leased premises are designed for a specific use (“locaux monovalents”) or where the lease is granted for office use only.

In addition, the rent is uncapped and assessed at the current market rental value of the premises in the following situations:

• where there has been a significant change in the commercial nature of the area, the features of the premises or the respective obligations of the parties under the lease;
• where the lease is entered into for a period of more than nine years;
• where the lease has continued for more than 12 years due to tacit continuation.

Furthermore, the uncapped rent of a renewed lease may not be subject to an annual increase of more than 10% of the rent paid in the previous year.

Finally, the parties may provide in the lease that the renewal rent shall correspond to the market rental value of the premises and that the above-mentioned cap is not applicable.

Service charges and taxes

Decree n° 2014-1317 as promulgated on 5 November 2014 provides a list of the service charges and taxes that cannot be charged to the tenant.

This list includes:

• taxes, including the Territorial Economic Contribution (CET), where the landlord is personally liable for payment, but these taxes may be transferred to the tenant: property tax and taxes added to property tax such as taxes relating to the use of the premises or to the building or to a service which benefits the tenant directly or indirectly;
• management fees;
• service charges, taxes and costs of works relating to vacant premises or attributable to other tenants.