Commercial Leases/Business Goodwill

For several years, it has been common for the provisions of the European Convention on Human Rights and Fundamental Freedoms to be invoked before national courts. Litigation concerning commercial leases is no exception and has significantly contributed to its implementation through  the Court of Cassation's review of its conformity with the Convention.
The question thus arose regarding the potenti …

Compliance of the status with the provisions of the ECHR

The commercial lease is one of the essential elements of the business assets. It is among the intangible elements, such as clientele and goodwill, the sign, the trade name, the domain name, as well as patents and licenses, alongside tangible elements like equipment and tools. The concept of “lease” is defined in Article 1709 of the Civil Code, which states that “the lease of things is a contract by which one of the parties undertakes to allow the other to enjoy a thing for a certain time, and for a certain price which the latter undertakes to pay.” Thus, the commercial lease, strictly speaking, is a contract by which the property owner, called the lessor, provides a merchant, called the lessee, with the enjoyment of premises in which the latter operates their business assets.

Initially, this type of contract was subject to the ordinary law regime on leases set out in Articles 1713 et seq. of the Civil Code. However, these rules quickly proved unsuitable for commercial leases. Indeed, being subject to the complete freedom of the parties, the lease did not grant the tenant any right to renewal or compensation in the event of contractual termination. The lessor could terminate the contract at the expiration of the fixed term without the need to give notice (Article 1737 Civil Code), or at any time if the contract was for an indefinite period, which necessarily resulted in material and legal insecurity for the merchant and hindered the operation of their business. To ensure the sustainability of their establishment, tenant protection became essential. Taking this specific need into account, the legislator gradually established, by the Law of 17 March 1909 , and then by the Law of 30 June 1926 , a special regime, derogating from ordinary civil law. However, it was not until the adoption of Decree No 53-960 of 30 September 1953  that a true specific status for commercial leases, protecting the interests of the merchant, was established. Today, all the rules governing the status of commercial leases are set out in Articles L. 145-1 to L. 145-60 and R. 145-1 to R. 145-38 of the Commercial Code, supplemented by the supplementary provisions of Articles 1709 et seq. of the Civil Code, leaving ample room for contractual freedom.

The status of commercial leases is, pursuant to Article L. 145-1, I, of the Commercial Code, applicable “to leases of buildings or premises in which a business is operated, whether this business belongs to a merchant or an industrialist registered in the trade and companies register, or to the head of a company in the crafts and artisan sector registered in the national business register, whether or not engaging in commercial acts.”

The law governing commercial leases has been the subject of several legislative reforms in recent years. The most significant modification results from Law No 2014-626 of 18 June 2014 , known as the Pinel Law, which established “fairer indexation rules and modalities more suited to small businesses in commerce and crafts,” and introduced a right of preference for the benefit of the merchant in the event of the sale of their premises. Its implementing decree of 3 November 2014  specifies, among other things, “the date of notice given by registered letter with acknowledgment of receipt,” as well as “the landlord's obligations regarding tenant information,” and provides a list “of charges, works, taxes, and fees related to private and common areas that cannot be charged to the tenant.” More recently, Law No 2015-990 of 6 August 2015 , known as the Macron Law, reinforced the formal requirements related to notices and renewal requests. Finally, Decree No 2019-1333 of 11 December 2019 , which came into force on 1 January 2020, made it mandatory to have a lawyer for all disputes related to commercial leases or attached to the setting of the price of the revised or renewed lease.

Since the adoption of Decree No 53-960 of 30 September 1953, the status of commercial leases has greatly favored the development of commerce, as well as real estate markets. This practice, which encompasses very diverse realities, has enabled the growth of business centers, shopping centers, and shopping galleries. However, while this economic sector has experienced rapid and flourishing growth, this has not been the case for small businesses in city centers, especially in medium-sized cities, for which access to “commercial property” represents a high cost, if only through the payment to the property owner of an entry fee, also known as “pas-de-porte,” upon the conclusion of the commercial lease in exchange for their availability and the obtaining of attached legal guarantees. In an attempt to curb the closure of local shops and preserve commercial diversity, Law No 2005-882 of 2 August 2005  established a new right of preemption for municipalities on artisanal businesses, commercial businesses, and commercial leases, operated within a perimeter for the protection of local trade and artisans.

Law of 17 March 1909 on the Sale and Pledge of Business Assets, OJ of 19 March 1909.

Law of 30 June 1926 governing the relations between tenants and landlords regarding the renewal of leases for buildings or premises for commercial or industrial use, OJ of 1 July 1926.

Decree No 53-960 of 30 September 1953 governing the relations between landlords and tenants regarding the renewal of leases for buildings or premises used for commercial, industrial, or artisanal purposes, OJ of 1 October 1953.

Law No 2014-626 of 18 June 2014 on Craftsmanship, Commerce, and Very Small Enterprises, OJ of 19 June 2014, Title I, Art. 1 to 21.

Decree No 2014-1317 of 3 November 2014 relating to the commercial lease, OJ of 5 November 2014.

Law No 2015-990 of 6 August 2015 for growth, activity, and equal economic opportunities, OJ of 7 August 2015, Art. 207.

Decree No 2019-1333 of 11 December 2019 reforming civil procedure, OJ of 12 December 2019, Art. 7, amending Articles R. 145-26, R. 145-27, R. 145-29, and R. 145-31 of the Commercial Code.

Act No 2005-882 of 2 August 2005 in favor of small and medium-sized enterprises, JO of 3 August 2005, Art. 58, amending Article L. 145-2 of the Commercial Code, and creating Articles L. 214-1 et seq. of the Urban Planning Code.

Establishment of a Status for Commercial Leases

The status of commercial leases, designed to effectively protect merchants and their business assets, is somewhat rigid. Comprising numerous mandatory public policy provisions, the status of commercial leases grants the tenant an essential advantage, that of “commercial property,” from which it is impossible to derogate. This status grants the lessee the right to obtain lease renewal upon expiration (Article L. 145-8 Commercial Code) and, in case of refusal, the right to receive compensation for eviction (Article L. 145-14 Commercial Code), of a particularly high amount, to deter the lessor from terminating the lease. This rigidity is also reflected in the imposition of a minimum lease term of nine years, to ensure the merchant's business stability. However, the status of commercial leases does not constitute an absolute barrier to contractual freedom. Indeed, the parties always have the option to escape the status and enter into a derogatory lease for a maximum term of three years (Article L. 145-5 Commercial Code). The mechanism of lease specialization allows the lessee the right to change the intended use of the leased premises, as provided in the contract, by altering their original purpose or adding a related or complementary activity (Article L. 145-47 et seq. Commercial Code). Furthermore, the parties have the freedom to set the rent, include an escalator clause, which allows it to be revised (Article L. 145-39 Commercial Code), and thus deviate from the provisions of Article L. 145-38 of the Commercial Code, applicable to rent revisions. While the status prohibits total or partial subletting, it does allow the parties to agree otherwise by mutual consent (Article L. 145-31 Commercial Code). Conversely, it permits the lessee to assign their lease rights to a third party and deems unenforceable any clauses aiming to prohibit them from assigning their lease to the purchaser of their business assets (Article L. 145-16 Commercial Code). The flexibility of the commercial lease regime also lies in the parties' ability to terminate the contractual relationship at the contractual term or, prematurely, at the end of each three-year period.

Protective status for merchants

In comparison with the law of other European countries, which allows a wide scope for contractual freedom, French commercial lease law is much more protective. The development of European trade, which has led economic actors to establish themselves in various Member States of the European Union, as well as the growing influence of European law on different national legislations, raises the question of the compatibility of the commercial lease status with EU law.

The issue of “commercial property” does not fall within the scope of European law. According to Article 345 TFEU, “the Treaties shall in no way prejudice the rules in Member States governing the system of property ownership.” Thus, the rules relating to property fall under the sole jurisdiction of national legislation. In this case, “commercial property,” through the benefit of the right to lease renewal or, failing that, the payment of eviction compensation, indirectly affects real estate ownership and consequently escapes European law.

The principle of freedom of establishment set out in Article 49 TFEU  implies equal treatment among nationals of Member States, prohibiting any discrimination based on nationality. In French law, Article L. 145-13 of the Commercial Code, now repealed by Law No 2014-626 of 18 June 2014 , prohibited foreign nationals who were merchants, industrialists, or persons registered in the trade directory from invoking the provisions related to the status of commercial leases. However, the same text specified that this prohibition was not “applicable to nationals of a Member State of the European Community or a State party to the Agreement on the European Economic Area.” From this perspective, and despite the repeal of that text, the principle of equality among nationals of Member States was already effective. Thus, the argument that the French status of commercial leases is not compatible with European law and would restrict competition between French and foreign merchants is unfounded, as some countries, like Germany, do not benefit from any protective regime for tenants, unlike France. Indeed, any national of the European Union and, since the repeal of Article L. 145-13, any non-EU national benefits from the French status and its advantages, such as the right to lease renewal and eviction compensation, under the same conditions as a French merchant.

A ministerial response dated 9 May 1988 concluded the compatibility of the status of commercial leases with European law by stating that “no current or future provision at the Community level challenges French legislation relating to commercial property and business assets” .

Art. 49, para. 2, TFEU: “Freedom of establishment shall include the right to take up and pursue  activities as self-employed persons and to set up and manage  undertakings, in particular companies or firms within the meaning of the  second paragraph of Article 54, under the conditions laid down for its own nationals by the law of the country where such establishment is effected, subject to the provisions of the Chapter relating to capital”

Law No 2014-626 of 18 June 2014 on crafts, trade, and very small enterprises, JORF 0140 of 19 June 2014, Art. 5.

Written Question Reply No 35134, JO, Debates of the National Assembly, 9 May 1988, 1982.

Compatibility with European Union law

For several years, it has been common for the provisions of the European Convention on Human Rights and Fundamental Freedoms to be invoked before national courts. Litigation concerning commercial leases is no exception and has significantly contributed to its implementation through  the Court of Cassation's review of its conformity with the Convention.

The question thus arose regarding the potential infringement by the commercial lease regime on the property rights of landlords. Indeed, some of them have invoked the incompatibility of the status with Article 1 of the first additional protocol of the European Convention on Human Rights and Fundamental Freedoms, according to which, on the one hand, if “every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his property except in the public interest and subject to the conditions provided for by law and by the general principles of international law” (para. 1), and on the other hand, these provisions “shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties” (para. 2). Lessors argued that the provisions relating to the status of commercial leases did not serve the general interest, as intended by the text, but only the interest of the tenant. The Court of Cassation rejected this argument. It considered, on the contrary, that the provisions relating to the status of commercial leases, which achieve a fair balance between the requirements of the general interest and the imperatives of safeguarding the fundamental rights of the individual, are not contrary to the provisions of Article 1 of the first additional protocol of the European Convention on Human Rights and Fundamental Freedoms .

Before their repeal by Law No 2014-626 of 18 June 2014 , the provisions of Article L. 145-13 of the Commercial Code, which deprived certain foreigners of the benefit of the status of commercial leases , were also subject to a review of convention compliance. Seized of this issue, the Court of Cassation held that Article L. 145-13, insofar as it subordinated, without justification of a general interest reason, the right to renewal of the commercial lease, protected by Article 1 of the first additional protocol to the Convention for the Protection of Human Rights and Fundamental Freedoms, to a nationality condition, constituted discrimination prohibited by Article 14 of the same convention and declared it non-compliant .

Addressing the issue of legislative interference in judicial proceedings related to rent revision, the Plenary Assembly of the Court of Cassation accurately applied the solution established by the European Court of Human Rights in the case of Zielinski and Others v. France, 28 October 1999 . It considered that while the legislature may adopt retroactive provisions in civil matters, the principle of the rule of law and the notion of a fair trial enshrined in Article 6 of the ECHR oppose, except for compelling reasons of general interest, legislative interference in the administration of justice to influence the judicial outcome of disputes. This general rule applies regardless of the formal designation given to the law, even when the State is not a party to the proceedings. It concluded that neither the terms of Law No 2001-1168 of 11 December 2001, known as the MURCEF Law, nor the parliamentary debates indicate that the legislature intended to address a compelling reason of general interest to correct the judicial interpretation of Article L. 145-38 of the Commercial Code and give this new law retroactive effect to influence the outcome of ongoing disputes .

Finally, pursuant to Article 11 of the ECHR, the Court of Cassation considered that a clause in a commercial lease, which obligates the lessee to join a merchants' association and maintain membership for the duration of the lease, is null and void , thus applying the case law of the European Court of Human Rights, which has established the right not to join an association or to withdraw from it .

Cass. 3e civ., 27 February 1991, LawLex202300014891JBJ. Also see Cass. 3e civ., 12 June 1996, LawLex202300014892JBJ.

Law No 2014-626 of 18 June 2014 on Crafts, Commerce, and Very Small Enterprises, JORF 0140 of 19 June 2014, Art. 5.

Only nationals of a Member State of the European Union or a State party to the Agreement on the European Economic Area, foreigners who are nationals of a State granting legislative reciprocity to French nationals, or those benefiting from a bilateral establishment agreement were exempt from these provisions.

Cass. 3e civ., 9 November 2011, LawLex202100003170JBJ.

ECHR, 28 October 1999, No 24846/94; 34165/96; 34173/96, Zielinski and Pradal and Gonzalez and others v. France, ECHR Reports 1999, VII; D. 2000.

Ass. Plén., 23 January 2004, LawLex202300014893JBJ.

Cass. 3e civ., 12 June 2003, LawLex202200011410JBJ.

ECHR, 30 June 1993, No 16130/90, Sigurjonsson v. Iceland, ECHR Reports, Series A-264.

Even though legal commentators regularly examine the impact of European law on national rental laws and question the potential unity of commercial lease law within the Union, the regime of commercial leases still escapes any European or international harmonization in this area.

On the economic front, the need for harmonization or unification of rental legislations among Member States remains relevant. Indeed, according to some economists, the overly broad scope of the commercial lease status, as well as the excessive limitation of owner's rights, constitute a hindrance to development and economic expansion. Protecting existing market players by increasing the cost for new entrants is a serious factor of inefficiency in the French economy. In this regard, it had been particularly recommended to restrict the scope of the status, to limit the right to renewal over time, and to prohibit the practice known as “pas-de-porte.” (key money). The French legislator did not yield to these recommendations and, on the contrary, further extended the scope of the commercial lease regime, notably by adopting Law No 2008-776 of 4 August 2008  which allowed the status to apply to leases for exclusively professional use.

Trade is now primarily European, while leasing regimes are national, and this opposition is likely to create a distortion. Thus, the strictness of the French commercial lease status may deter major economic operators, whether large retail chains or real estate companies, from investing in France, preferring instead to establish themselves in other Member States where the leasing regime is oriented towards contractual freedom. Therefore, the question arises whether it would be desirable, if not to create a unique European commercial lease status, at least to incorporate more flexibility into the French commercial leasing regime to make it more competitive within the European Union.

Law No 2008-776 of 4 August 2008 on the Modernization of the Economy, OJ of 5 August 2008.

Commercial Leases/Business Goodwill

4. Compliance of the status with the provisions of the ECHR

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4. Compliance of the status with the provisions of the ECHR

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