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Rents on the renewal of leases: of certain paradoxical effects of the pinel law…

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In a previous article posted on 21st April 2017 we had written that, notwithstanding various legislative and regulatory measures, which have emerged and which aim is to protect the party who is considered to be the weakest in contractual relationships, practitioners never stop trying to “counterbalance” those protective effects.

We had taken the example of contractual provisions specifying the surface area of the relevant premises, but with the following provision written next to it “share of common areas included”, and we had summarised the (negative) consequences thereof on tenants.

But other contractual provisions are along the same lines and may usefully be stressed here. They notably include the contractual provisions about the rent on the renewal of a lease, and more precisely those about a guaranteed minimum rent in commercial leases.

What landlords want here is to depart from the provisions of article L. 145-33 and article L. 145-34 of the French Commercial Code, which provide that the rent of the renewed lease shall be calculated on the basis of the variation in the Insee index over the relevant period, except if there is a reason for uncapping the increase of the rent (the duration of the lease to be renewed is longer than nine years; there has been a notable change in the elements mentioned in para. 1° to 4° of article L. 145-33, etc.).

Precisely, the landlords’ willingness to depart from the above legal provisions can be explained by their willingness to free themselves from the rules applicable to the calculation of the rental value. One will recall here that those rules are not mandatory, whereas the rules applicable to the revision of the rent are.

It has now become common for institutional landlords to provide in their commercial leases that, unless the parties agree otherwise, the rent of the renewed lease shall be set at the higher of:

  • the amount of the latest rent due on the lease renewal date; or
  • the market rental value in force on the lease renewal date.

Similarly, in order to determine the “rental value”, it has been common to provide in the lease agreement that the comparison rent will only be the “rents that have been discussed between a landlord and its tenant in the nine months preceding the end of the lease, in respect of premises that are free from any occupancy, excluding any idea of renewal, and in no event rents that are set in court”, in respect of “buildings that are comparable to the Leased Premises, that is to say buildings that are of the same nature, prestige, quality standard, construction (…), are located in the same property complex or in the same district (…)”. In short, one is thus creating a specific rental value for the relevant building.

This “derogatory” process first spread in relation to shopping centres. This phenomenon could be explained, as it is conceivable that a “specific” market may exist for this type of assets, and that this “specific” market would, to a certain extent however, be disconnected from the “global” market.

But what is new is to now find this type of contractual provisions in an increasing number of leases relating to buildings with a shop on the ground floor that are located in a city centre, as well as of leases relating to office buildings located in a city centre.

What is even newer is that negotiating this type of clause has now become extremely difficult, in relation to buildings with a shop on the ground floor and even in relation to office buildings.

Yet, some time ago, when one marked the clauses about the contractual calculation of the rent on renewal of the lease as deleted text in a draft lease relating to this type of building (and in particular in a draft lease relating to office premises), this deletion would raise no specific comment from either the landlord or his advisor, and would not give rise to further discussions either.

Clearly, this is no longer the case. The discussions aiming at deleting this type of clause from leases (or at least at relaxing this type of clauses), including in relation to office premises, now give rise to numerous exchanges between the parties. Sometimes, such exchanges even lead to deadlock situations.

Listening to landlords, the recent changes in applicable laws (and notably the so-called “Pinel” law dated 18th June 2014) would have reduced the landlords’ prerogatives and the profitability of their assets, thus justifying their willingness that leases contain as much “firm” provisions as possible.

And indeed, the taking effect of the Pinel law led landlords to seize every opportunity to strengthen their position, by departing almost systematically from all of the non-mandatory provisions of the Commercial Code and the Civil Code. It seems to us that never commercial leases contained so many phrases “by exception to the provisions of article…” than in the last few years.

So, the taking effect of the Pinel law led to a paradoxical situation, in that it led institutional landlords to try and set aside all of the non-mandatory legal provisions, which they would consider not to serve their interests, (…) to the detriment of tenants, who were nevertheless precisely the parties that the law was seeking to protect.