On 3 November 2016, the French Court of Cassation handed down two decisions which break with the established case law on the determination of a ‘loyer binaire’ (hereinafter ‘binary rent’ composed in the current situation of a fixed minimum portion or ‘base rent’ and a ‘variable rent’ based on the lessee’s turn-over) in case of renewal. With these decisions, the Court of Cassation marks a departure from past case law. It assigns jurisdiction to the rents tribunal to determine the renewed base rent of the binary rent to the rental value specified by the statutory commercial leases provisions if and when the parties have explicitly submitted any dispute to the competence of the rents tribunal for its review (Cass. Civ. 3rd n° 15-16.826 and 15-16.827).
The concept of binary rent was introduced in France with the arrival of shopping centers in the 60s. Nevertheless, it did not fall within the scope of the statutory commercial leases provisions and, therefore, were challenged in courts. The courts, however, confirmed that lease agreements with binary rents were valid in France under the concept of contractual freedom.
In practice, some lease agreements stipulated that only the base rent should be renewed applying the statutory provisions, namely the ‘rental value’. However, this idea was rejected on the basis that the sole reference to the ‘rental value’ was insufficient to ensure the rents tribunal’s jurisdiction.
Hence, the legal doctrine discussed the following two solutions to this delimma:
- Conventionally defining the renewal process of the binary rent, which was in practice by far the most wide spread solution after the Théâtre Saint-Georges jurisprudence (Cass. Civ. 3rd, March, 10th 1993, n° 91-13.418) ;
- Assigning jurisdiction to rents tribunal to determine the rental value of the renewed base rent in accordance with statutory provisions of the commercial leases (the Court of Cassation had to decide on the basis of this practical solution).
The laws of the contracting parties
In the cited Court decisions, the rent was made up of (i) a base rent, determined contractually in the lease with an index clause (or not), and (ii) a variable rent, sets as a function of the lessee’s turnover. In the most common form, the variable rent only applies if it exceeds the base rent and therefore englobes it; otherwise, the base rent constitutes the sole rent paid by the lessee.
Until recently, the rents tribunal that it cannot determine a base rent while it is not competent to review the variable rent.
The question is very relevant in shopping centers where the contracting parties and generally lessors (investors standard leases) determine the rental value of the renewed base rent by referring for instance to an amicable expert mutually agreed upon by the contracting parties for this purpose. For the determination of the rental value, the said expert may be deemed to use as comparable only such rents which are paid in shopping centers and shops of the same kind.
Nevertheless, the dilemma persisted in particular if the lease did not define the procedure for the determination of the rental value and/or if the contracting parties did not find an agreement on the said rental value.
The contractual provision assigning jurisdiction to rents tribunal failing prior agreement between the parties
The Court of Cassation has, with its two decisions, set out the conditions under which the parties are entitled to require the involvement of the rents court: the contractual parties may explicitly state in the commercial lease that failing amicable agreement, they assign jurisdiction to the rents tribunal in order to determine the renewed base rate to the rental value specified by the statutory commercial leases provisions.
In the cases at hand, the contractual clause read as follows: “By express agreement between the parties as an essential and determining convention of the lease it is established that in case of renewal (…) the base rent will be determined in accordance with the rental value specified by article 23 to 23-5 of the Decree dated 30 September 1953 or by any other provision for which it was substituted. Failing amicable agreement the base rent will be determined by a rents tribunal in accordance with the procedures laid down for that purpose set forth in existing legislation. Hence, it left no ambiguity over the interpretation of the parties' intention.
This is how the French Court of Cassation set aside the two decisions handed down by the Court of appeal of Aixen-Provence dated 19 February 2015 considering that « the contractual provision according to which a commercial lease rent is made up of a minimum guaranteed rent and a rent sets as a function of the lessee’s turnover is not prohibited when the contract provides to assign jurisdiction to rents tribunal in order to determine the renewed base rent to the rental value ; the judge therefore decides upon according to the procedure set forth in article L. 145-33, especially in view of the contractual obligation incumbent upon the lessee to pay aside from the minimum guaranteed rent, a variable rent, while appreciating the deduction arising from it”.
It goes without saying that the two decisions should normally benefit lessors, except in the (unfortunate) case that the initial minimum rent (at its indexed value, if any) is lower than the market rent nine (or usually more) years later.
The fate of the laws fo the contracting parties in the light of the French Contract Law Reform
These decisions mark a turning point with regard to the determination of renewed base rent to rental value. Nevertheless, the wording of the provision assigning jurisdiction to rents tribunal in the absence of prior amicable agreement must be unambiguous. In this context, we would like to mention the entry into force of the French Contract Law Reform dated 10 February 2016 (the ‘Reform’) and its impact on leases concluded (or renewed) and executed after1 October 2016 (please see in this respect our TW newsletter dated March 2017).
The variable rents are mainly used in shopping centers or in the hospitality sector (hotels) in which the owners of the properties (landlords) are institutional investors who frequently use lease agreements composed of general conditions and particular conditions (individually negotiated lease conditions).
Since the Reform, we recommend landlords to review their lease documentation whether it could qualify as a ‘standard form contract’ which would give tenants some options to challenge its provisions. In the affirmative, provisions creating a “significant (economic) imbalance” between the parties could be deemed unenforceable pursuant to article 1171 of the Civil Code.
In the same way, lessors should undoubtedly bear in mind the legal obligation to negotiate, draft and execute in ‘good faith’ the lease agreement – the application of the concept of good faith has been declared part of the French ‘ordre public’. The Court of Cassation specifically referred in the two decisions to the (former) article 1134 of the French Civil Code to justify its decisions.
Practitioners anticipated the two decisions and we expect that future lease agreements will contain lease renewal provisions along the lines of such on which the Court of Cassation decided (see above). Moreover, the practice must adapt to the new requirements of the French Contract Law Reform.