A law enacted on 20 June 2014 (known as the Pinel Law) is set to have a significant impact on the provisions applicable to commercial leases in France including those affecting logistics facilities. The main aim of the Pinel Law is to secure the position of small business operators, focusing mainly on those in the retail and crafts sectors.
Despite strong lobbying from investors, numerous provisions of the Pinel Law remain tenant-oriented and will probably tip the balance of lease negotiations in favour of the tenant’s interests. This may well have negative implications for all commercial real estate investments in France.
Restrictions on terms of leases
Investors are usually keen to secure their cash flow by ensuring firm commitments from tenants as to the term of the lease. This is now being challenged by a provision of the Pinel Law which imposes restrictions on leases for terms of six or nine years. However, investors have been successful in their attempt to have leases of warehouse and office premises taken out of the scope of this provision.
Restrictions on rent reviews on renewal of the lease
Rules governing the assessment of rent on renewal of the lease have been slightly modified by the Pinel Law. The French Commercial Code already provides for a mechanism whereby the rent in a renewed lease is capped by reference to variations in the applicable index. The rent will be uncapped and assessed at the current rental value of the premises only in the following cases:
- 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;
- where the leased premises are designed for a specific use; or
- where the lease is granted for office use only.
Under the new provisions of the Pinel Law, the uncapped rent of a renewed lease may not be subject to an annual increase of more than 10 per cent of the rent paid in the previous year. Thus any fixed increases in rent where rent is uncapped will be spread over time with a 10 per cent cap each year.
It should be noted that this provision is not applicable to leases which are not covered by provisions on rent capping generally, such as leases granted for premises that are designed for a specific use or leases with a term of longer than 12 years, which could relate to logistics facilities.
Given the continuing uncertainty as to whether or not warehouse premises are deemed to be constructed for a single use (and would therefore fall within the scope of the provisions which would prevent an uncapped rent being applied), it is recommended that investors follow the current market practice of agreeing on renewal that the rent should be uncapped and that a contractual mode of calculation of the rental value of the lease should apply.
Allocation of service charges
Investors are particularly opposed to the new provisions of the Pinel Law concerning the allocation of service charges since it puts an end to triple net, investor-type leases (known as “FRI” leases in the UK).
Indeed, the Pinel Law provides that landlords must detail every single service charge, tax and/or fee and indicate whether the cost of each of these items is to be borne by the landlord or the tenant.
In addition to this inventory, the landlord must also provide the tenant with a detailed statement of annual charges and the budget for, and list of works carried out, for the previous three years as well as those to be carried out within the next three years. Matters to be detailed include the following:
- charges for services: structural works, compliance works, wear and tear, etc;
- taxes: land tax, office tax, etc;
- fees: asset/property management fees, co-ownership fees, common equipment use fees, etc
Where a service charge is not included in the inventory, it is very likely that it will not be rechargeable to tenants and that it will instead fall to be borne by the landlord rather than the tenant.
Finally, an implementation order is set to be enacted in the very near future which will list specific charges, taxes and fees that will not be rechargeable to tenants, thus putting an end to classic triple net leases.
Property managers should expect their clients to be in touch with requests for a clear and exhaustive list of the various service charges, taxes and fees that may until now have been deemed to be included in general, catch-all provisions.
Prolonged and heated debates on the ability of investors to opt out of these provisions and reallocate the financial burden of such taxes and charges in accordance with the parties’ initial contractual agreement, are anticipated. In addition, significant rent increases in future leases may be expected, reflecting the burden of taxes and charges to be paid by the tenant.