This brief report provides a summary of the most important amendments of the legal provisions applicable to commercial leases, introduced in Luxembourg through the law dated 17 January 17, 2018 on commercial lease and amending certain provisions of the Civil Code (the “Law”).
Reform of the commercial lease legal provisions
After more than two years, the bill of law n°6864, filed by the Ministry of Economy on 3 September 2015, has finally been adopted, further to the vote of the law on 17 January 17, 2018.
The main amendments brought by this reform, reinforce to some extent the protection of tenants, although not all amendments foreseen by the initial text of the bill of law have been ultimately adopted.
Definition and duration
The Law now defines a commercial lease as any lease of a building for use of commercial, industrial or craft activities. However, the provisions relating to commercial leases, introduced by the Law, will not be applicable to leases of a duration of one year or less and commercial leases may be concluded for a limited or unlimited period. The emergence of pop-up stores, discussed during parliamentary sessions, would therefore not be negatively impacted.
Ban on certain practices
The practice of paying an entry fee (“pas de porte”) is clearly covered by new legal provisions and will be forbidden. The new Law declares that any additional payment on top of the rent paid to the landlord or to a third party intermediary as null and void. Likewise, it prohibits a landlord from imposing on a tenant a specific third-party intermediary for the assignment or sub-letting of the lease. This ban obviously does not concern commissions paid to real estate agents for transactions.
However, the provisions which provided tenants with the ability to require the reimbursement of any amounts paid in breach of this rule, for an unlimited period, have been discarded.
Rent guarantees will be limited to an amount equivalent to a maximum of six months’ rent. The landlord may also be obliged to accept the rental guarantee in the form of an insurance policy or other type of guarantee (such as a parent guarantee for example), as long as it covers an amount equivalent to six months’ rent.
Assignment - subletting: avoid speculation
The new legal provisions specifically seek to avoid speculation on subleases. In the case of subletting, the sublease contract must be notified to the lessor and the new Law indicates that the rents paid by the subtenant to the lessee cannot be higher than those paid by the lessee to the lessor, except if the latter has made specific investments in the activity of the sub-tenant.
Termination and eviction
In the event of termination of the lease as well as a tacit renewal for an indefinite period (regardless of the cause of termination), the Law now provides for a notice period of not less than six months. In the event of the death of the lessee of a commercial, industrial or farm property, the lease is maintained, provided that a family member continues to use the property.
However, the commercial suspension arrangement is largely modified. The opportunity to obtain two grace periods of up to six months is replaced by one grace period of up to nine months, with no possibility of extension. The grace period is subject to cumulative conditions – namely that all rents and advances on due expenses must be paid on the day the submission of the application, and the grace period is granted only for the purpose of allowing the applicant to find new premises in order to continue its activity and meet its obligations arising from contracts of employment with employees. The judicial decision will not be subject to opposition or appeal.
Renewal of the contract and eviction indemnity
The renewal right is reinforced as the lease contract cannot prohibit the tenant (or even the sub-tenant if subleasing is not prohibited by the lease contract) to request the renewal of his contract. This renewal right is also reinforced by the fact that the landlord cannot refuse it for a period of nine years of occupation of the rented premises, unless an eviction indemnity is paid, which may be paid by a third party. Although the duration of the protection period has been reduced and its starting point modified, the obligation to pay an eviction indemnity protects the tenant's situation.
The contracts may include a clause to determine the amount of the eviction indemnity but in the absence of such a clause, the parties may go before the court to determine the amount of indemnity on the basis of the market value of the business for the concerned activity.
Pre-emptive right in favor of the lessee
Following the French model (Pinel law of 2014), the Law introduces a pre-emptive right in favor of the long-term lessee, whose has held a lease for at least 18 years, except if the leased premises are subject to a sale by auction or transferred to a lessor's family member (parent or up to a third-degree relative) or subject to free assignment.
The impact of this right of pre-emption will be limited in practice as it can be exercised only if the lessee has rented the entire building or if the rented premises are placed under the regime of co-ownership. In addition, if the rented premises have been sold to a third party purchaser despite the pre-emptive right, the injured tenant can only claim damages of up to one year’s rent from the seller.
Law enforcement over time
The Law shall be applicable to contracts in progress from the date of its entry into force, with the exception of the prohibition of payment of entry fee (if the entry into force for the lessee is fixed before the entry into force of the Law). The provision stating that the rent of sublease must not exceed the rent paid by the lessee will come into effect only 12 months after the entry into force of the Law. Transitional provisions are also provided for the grace period.
The Law provides strong, but not absolute protection, of tenants operating businesses, while having some moralistic aims. The tenant must pay market rent, but no entry fee to the landlord, and provide a rent guarantee of up to 6 months without possibility for the landlord to apply for a first demand bank guarantee. However, it is forbidden for the tenant to get richer at the expense of a sub-tenant (the trade is not speculation). For the landlord, the grace periods are narrower and clearer, and he will be obliged to pay a reasonable eviction indemnity of up to one year’s rent if he wants his tenant to leave quickly.