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French contract law reform: Eight major impacts on real estate law
- United Kingdom
- Real estate
- Real estate sector
The French contract law reform results from an order No. 2016-131 of 10th February 2016, which was published in the Journal Officiel on 11th February 2016. The reform took effect on 1st October 2016. It applies to any agreements and contracts entered into after such date. However, certain aspects of the reform, i.e. the so-called “actions interrogatoires”, shall apply to current contracts.
Even if the order contains few provisions, which deal specifically with real estate law, most of its measures are likely to impact real estate law in practice.
Given the extent of the reform, and without willing to list all of its impacts exhaustively, we would like to focus notably on the following impacts, which we have chosen arbitrarily:
1. Good faith in commercial leases and in the sale of real estate assets
The article 1112 of the French Civil Code provides that if the initiative, conduct and termination of pre-contractual negotiations are free, said initiative, conduct and termination have to take place in good faith.
This obligation to negotiate in good faith imposes a duty to inform on the parties, and particularly on the seller/promisor and on the landlord. Under this duty to inform, the party, who is aware of information which significance is determining in the other party’s consent, has to inform such other party of such information if said other party was legitimately unaware of such information or legitimately relies on the contracting party (article 1112-1 of the Civil Code). This duty to inform is a ‘public policy’ obligation (d’ordre public).
In the event of litigation, the assessment of the legitimate nature of the contracting party’s unawareness will necessarily be left at the court’s discretion. Similarly, the idea of reliance on the contracting party may give rise to questions, as it introduces a subjective criterion which essentially varies according to the personality of the contracting party.
In practice, the terms, which are traditionally found in promises to sell and in notarised deeds of sale, and which deal with issues such as the studying of documentation by the purchaser and its counsels, the answers given by the seller to any questions raised by the purchaser and its counsels, the informed analysis carried out by the purchaser, etc., obviously might spread, not only in the sale of real estate assets but also in civil and commercial leases.
2. Withdrawal of a unilateral promise
The article 1124 of the Civil Code also establishes the ineffectiveness of the promisor’s withdrawal of a unilateral promise. The withdrawal of the promise during the period of time, during which the beneficiary may exercise the option, won’t prevent the formation of the promised contract.
A contract entered into in breach of the unilateral promise shall be null and void, but only in the event the third party knew of the existence of the promise.
However, it shall remain possible for the promisor, who wants to retain the possibility to withdraw the promise before the beneficiary exercises the option, to include an express term to that effect in the promise.
One will also note here that the article 1124 of the Civil Code is not only applicable to unilateral promises to sell. Such article 1124 shall also be applicable to unilateral promises to enter into a lease agreement.
3. Frustration and shopping centres
The new Civil Code now includes the doctrine of frustration (théorie de l’imprévision), being a doctrine that French courts have long been rejecting i.e. since the judgment in re. “Canal de Craponne”. The article 1195 provides that “where a change in circumstances, which was not foreseeable at the time the contract was entered into, makes the performance of the contract excessively expensive for a party, who had not accepted to assume the risk thereof, such party may apply to the contracting party for re-negotiating the contract. […]”.
Frustration shall, under certain circumstances, make it possible for the debtor of an obligation that is “excessively expensive”, to raise the non-foreseeability of a risk occurring after the formation of the contract to try and re-negotiate the contract. In the event the other party refuses the renegotiation or the renegotiations fail, the aforesaid debtor may ask the court to adapt the contract or terminate it.
One may wonder whether it would be possible to rely on such legal provisions in, notably, commercial leases or franchise agreements in the shopping centres where the level of business would decrease noticeably.
One may distinguish according to the nature of the agreement, i.e. franchise or lease. However, in relation to leases, and subject to any contractual provisions to the contrary, one may wonder about the “passive” or “wait-and-see” behaviour of a landlord with regard to the development and attractiveness of the shopping centre.
The new legal provisions about the doctrine of frustration will obviously not be limited to commercial leases only. It may very well be that frustration applies in other sectors, such as the sale of real estate assets.
4. The non-retroactivity of conditions precedent
Here, the article 1304-6 of the French Civil Code established a practice that practitioners have been following for a long term. Most of the time, practitioners would be taking the precaution of providing that the conditions precedent contained in promises would not be retroactive. The reasons for taking such precaution were notably tax reasons (in promises to sell).
The parties may however provide that the condition precedent shall take retroactive effect on the day of the contract. This possibility is provided in the aforementioned article 1304-6.
5. Standard-form contracts and commercial leases
The situations in which the execution of a commercial lease was not preceded with negotiations are rare. But it often happens that a commercial lease includes general terms, which are not negotiated and are generally not negotiable, and which would seem to turn the commercial lease into some sort of standard-form contracts (contrat d’adhésion). This is often the case with the commercial leases, which are offered by investors, especially in shopping centres. Now, the new article 1171 of the Civil Code provides that “in a standard-form contract, any clause which creates a significant imbalance between the rights and obligations of the parties to the contract shall be deemed not to be written.”
A definition of the standard-form contract can be found in the second paragraph of article 1110 of the Civil Code. It is a contract, which “…general terms are excluded from the negotiations, and are determined by one of the parties in advance”.
In practice, a good many lease agreements in shopping centres (but also lease agreements for other premises) contain (i) either general terms and special terms, or (ii) general terms, special terms, and a “schedule” (or “specific terms”), which contains departures from a limited number of the issues that are dealt with in the general terms...
Would the fact of departing slightly from the general terms make it possible to avoid the “non-written” nature of the unfair terms contained in standard-form contracts? And by the way, are these contracts really standard-form contracts?
There is much to be written and said about this issue. In our opinion, such departure should not make it possible to avoid the “non-written” nature of such unfair terms, unless contractual precautions are taken – and there is no doubt that law practitioners will imagine such precautions.
In any event, the article 1190 of the Civil Code reiterates that in the contracts negotiated by the parties and in standard-form contracts, a lease agreement shall be interpreted in the tenant’s favour (“When in doubt, a contract negotiated by the parties will be interpreted to the detriment of the creditor and in favour of the debtor, and a standard-form contract will be interpreted to the detriment of the party who offered the contract”).
6. Essential obligations and commercial leases
In line with the above, one will stress that the article 1170 of the Civil Code provides that “any clause, which deprives the debtor’s essential obligation of its substance, shall be deemed not to be written”.
One will necessarily refer here to the essential obligations, which are incumbent on landlords. Said obligations, which are defined in article 1719 of the Civil Code, mainly include the obligations to deliver, guarantee the peaceful enjoyment (jouissance paisible) of, and maintain the premises.
Those new legal provisions should incite landlords to be particularly careful when drafting their lease agreements.
Please note that the “non-written” nature of such clause is not limited to leases only. According to us, it should notably apply to contract for the sale of real estate assets as well.
7. Actions interrogatoires and index-linking clauses in leases
Even though the aforementioned order took effect on 1st October 2016 and is applicable to those agreements, which were entered into from 1st October 2016 onwards, a limited number of the provisions of such order apply to current contracts.
What we are talking about here are the so-called “actions interrogatoires”, which were created by the order. One of said actions is the one that relates to the nullity of a contract (article 1183 of the Civil Code). Provided the cause for the nullity of a contract has ended, it shall now be possible to clear the possibility of an action for “nullity” by asking the party, who may otherwise avail himself of the nullity, in writing, to either confirm the contract or take legal action for nullity of the contract. The party would be given six months from the application, to either confirm the contract or take legal action for nullity. The right to take legal action shall lapse on the expiry of such six-month time.
One of the practical applications of this new mechanism would be where there are uncertainties in the relationships between landlord and tenant, in order to remove uncertainties about index-linking clauses, in view of a recent case-law (CCass, 3e civile, 14th January 2016) about these clauses, which, notwithstanding the provisions of the Pinel law dealing with commercial leases, strangely talked about both the “nullity” and the “non-written nature of the [index-linking] clause”.
Assuming this significant pitfall is sorted out, the other question would be to know whether prevention is better than cure, as the use of the mechanism would have drawn the tenant’s attention to the doubts the landlord has.
8. Rescission clauses in commercial leases
Finally, we will mention here the first paragraph of article 1225 of the Civil Code, which provides: “the rescission clause shall specify those commitments, which non-performance shall result in the termination of the contract.”
In relation to leases, the article 1728 of the Civil Code provides that the two main obligations, which are incumbent on the tenant, are the obligation to use the thing in a reasonable manner and the obligation to pay the price of the lease on the agreed terms.
So, given the article 1225, it should be possible to punish a breach of those two obligations if said obligations are “specified” in the clause. However, one may wonder what happens with all the other commitments, which are not specifically “specified” (e.g. payment of service charges, clauses relating to the carrying out of works, prohibition to sub-let the premises, etc.), as it seems that a clause that would refer to “any” breach is condemned by law.
As things currently stand, prudence would recommend including a (precise) list of those commitments, to which the rescission clause would apply, even if such list might be quite long. By the way, one may wonder whether courts would have the power to interpret the seriousness of the breaches.
Once again, the issues we have stressed above are by no means limitative, and there were chosen totally arbitrarily. The purpose of the order, i.e. contract law, and the richness of the order necessarily affect all areas of the law, including real estate law. Despite its specificities, real estate law indeed remains based on general contract law.
Nevertheless, on many issues, and as is more and more frequently the case, it shall now be up to French courts to clearly define the shape of the new provisions of the Civil Code.
In other words, the story has not ended - it has just begun.
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