If you operate a commercial, industrial, or artisanal business on commercial premises (including offices, such as headquarters), you are subject to the rules governing commercial lease agreements under French law.
The latest edition of our monthly “Less Is More” newsletter highlights the key points you need to know about this topic.
Download the fact sheet below to learn more!
| QUESTION | ANSWER |
| What is a commercial lease under French law? | A commercial lease agreement refers to leases under which a registered business entity or company operates a commercial, industrial, or artisanal business on the premises.
Offices are included as long as the tenant carries out a commercial, industrial, or artisanal business activity. |
| Are the legal rules mandatory? | If a lease meets the conditions of a commercial lease, it is subject to French law governing commercial leases.
The law contains public policy provisions established primarily to protect the tenant and its business (“fonds de commerce”). |
| What is “business goodwill”? | The so-called “fonds de commerce” is specific to France.
The term“fonds de commerce” refers to the business activity conducted on the premises and includes the customer base, equipment, inventory, and service contracts. It also includes the brand name or trademark, patent rights, and the right to the leased premises (“droit au bail” ). |
| What is the term of a commercial lease? |
The lease term may not be less than 9 years, with an option to terminate early every 3 years. This is why French commercial leases are often referred to as“bail 3/6/9.” Leases with a term of more than 9 years are also permitted. In such cases, the landlord may request that the tenant waive the 3-year termination option, and specific rules may apply regarding the rent upon renewal of the lease.
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| Under what circumstances are the tenant and the landlord entitled to terminate the lease early? | Except in the case of specific leases (e.g., leases with a term exceeding 9 years, offices, factories), the tenant has the right to terminate the lease at the end of each three-year period by giving six months’ notice. In such cases, no compensation is owed to the landlord.
The landlord may also terminate the lease at the end of a three-year period, but only on specific grounds defined by law, primarily in cases such as when the demolition and reconstruction of the building is planned. The landlord must then pay compensation to the tenant (“indemnité d’éviction”) to cover the loss of the“fonds de commerce.” |
| Does the contract automatically terminate on the expiration date? |
No. The tenant has the right to renew the lease if the“business” has been effectively and continuously operated during the three years prior to the lease’s expiration date or its tacit renewal. |
| Is the contract automatically renewed on the expiration date? | No. The tenant must request a contract renewal from the landlord and may request a reduction in rent if the market rental value is lower than the current rent.
The landlord may also offer to renew the lease and may request a rent increase, provided certain conditions are met. |
| What happens if neither party requests a renewal of the lease? | If neither the landlord nor the tenant requests a renewal before the lease’s expiration date, the lease will be automatically extended under the same terms and conditions, including the rent.
During this extension period, the lease may be terminated at the end of any calendar quarter, subject to six months’ notice. |
| Is the landlord entitled to terminate the lease when the contract expires? | The landlord has the right to terminate the lease upon its expiration or to refuse the tenant’s request for renewal. Unless the termination is based on specific grounds (e.g., breach of the lease, subletting without consent, or other circumstances provided for by law, such as failure to operate a business on the premises), the landlord must pay compensation to the tenant.
Such compensation is intended to cover all damages incurred by the tenant as a result of the non-renewal of its lease. The compensation may amount to a maximum of the total value of the tenant’s business (“fonds de commerce” ). |
| How is the rent determined? | The amount of rent is freely agreed upon by the parties when negotiating the contract.
The rent may be a fixed amount or based on a percentage of revenue. The parties may also agree to combine a fixed rent with a revenue-based rent. Commercial leases often, if not always, contain an annual indexation clause linked to specific indices, such as the commercial rent index (“indice des loyers commerciaux” or“ILC”) for stores, the rent index for the service sector (“indice des loyers et activités tertiaires” or“ILAT”) for offices and facilities such as logistics centers. |
| How is the rent determined at the time of renewal? | The rent under the renewed lease is based on the market rental value.
However, provided that certain conditions are met—such as the type of business conducted on the premises and the term of the lease—the rent increase upon renewal of the lease may be capped (“plafonnement” ). For such leases, the rent increase may not exceed the change in the applicable index since the lease took effect. |
| Is the tenant required to pay for service charges and repairs? | Yes. However, the service charges that the tenant must reimburse to the landlord must be listed precisely and completely in the commercial lease. Otherwise, the tenant may dispute the charges and refuse to pay.
The charging of certain costs, particularly those related to major building repairs, is prohibited. |
| What about rent
during the COVID-19 pandemic? |
Many tenants have stopped paying rent while their stores are closed, citing the following reasons: – In the event of force majeure, – Failure by the landlord to fulfill his or her obligations, – The temporary destruction of the premises.
Some landlords have agreed to a rent reduction during the closure period, while others have remained opposed to any negotiation and have taken the matter to court. The first interim rulings have been handed down, and it is difficult to discern a clear pattern.
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| Is the tenant entitled to sublease without the landlord’s permission? | No
Unless otherwise specified in the lease or approved by the landlord, any total or partial subletting is prohibited. |
| Is the tenant entitled to transfer the lease without the landlord’s authorization? | The tenant is entitled to transfer the lease when transferring its“business assets.”
Otherwise, unless permitted by the lease agreement, the transfer requires the landlord’s prior consent. |
| Want to learn more? | Contact us! |