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“Two-component” rents: new development in the “Théâtre Saint Georges” case-law

  • France
  • Other

22-02-2017

In two decisions issued on 3rd November 2016 (Cass., 3° civ., No. 15-16.826 and No. 15-16.827), the French Supreme Court recently lessened the “Théâtre Saint-Georges” case-law dated 10th March 1993 (Cass., 3° civ., No. 91-13.418).

 

Based on the contractual freedom of the parties’ principle (article 1134 of the French Civil Code, which has been renumbered as article 1103 of the Civil Code since the French contract law reform), the Cour de Cassation ruled that, in the case of a “two-component” rent, having recourse to the judge dealing with commercial rents-related issues for him to set the rental value of the property is (i) not only valid (subject that such a recourse is provided for in the contract), but also (ii) such recourse results in the application of the rules related to the status of commercial leases, including in particular the rules set out in article L. 145-33 of the French Commercial Code !

For the record, a “two-component” rent is one that comprises a fixed part (i.e. a “minimum guaranteed rent”) increased by a variable part (the “income-related part”, which is calculated on the basis of the turnover achieved). Such type of rent is mainly found in commercial leases relating to shopping centres or to buildings with retail premises.

Since the “Théâtre Saint-Georges” decision, the Cour de Cassation had been considering that, as a matter of principle, the determining of the “two-component” rent in the event of a renewal of a commercial lease was a matter for the parties to agree upon only. So, the rules resulting from the status of commercial leases relating to the fixing of the rental value were excluded. The jurisdiction of the judge dealing with commercial rents-related issues, to settle any disagreement, was also excluded.

In practice, to avoid any deadlock situation, one would insert clauses in the contract so as to provide, for example, that the fixed part of the rent would be set at the rental value (or according to a specific method for determining the rent on the renewal of the lease), a recourse to arbitration or even to the judge, etc.

But even when the parties were providing for a recourse to the judge dealing with rents for him to determine the fixed part of the rent on renewal of the lease, some courts were declining jurisdiction. Also and above all, the courts were not looking into the variable part of the rent, meaning that there was a risk that the “final” rental value (fixed rent plus additional variable rent) was at the end higher than the “real” rental value.

It seems that this analysis is now over, at least when the parties provide in their commercial lease that there shall be a recourse to the judge dealing with commercial rents-related issues.

In the cases at hand, the commercial leases provided that, in the event of renewal of the lease, “the base rent shall be fixed according to the rental value, as determined by Articles 23 to 23-5 of Decree of 30th September 1953 or any other law or regulation that may replace it” and that “failing an agreement, the base rent shall be fixed in court in accordance with the terms provided by applicable laws in this respect”.

The Court of Appeal had accepted the tenants’ argument and disputed the jurisdiction of the judge dealing with commercial rents-related issues.

The French Supreme Court quashed both appeal judgments on the basis of Article 1134 of the Civil Code and Article L. 145-33 of the Commercial Code. The Court ruled that when, as provided for in the lease, the judge dealing with commercial rents-related issued is referred such a request, such judge can indeed reach a decision on determining the rent at the rental value. Also and above all (and this is both judgments’ main contribution), the French Supreme Court decides that “the judge shall then rule in accordance with the criteria set in the aforementioned Article L. 145-33, notably with regard to the tenant’s contractual obligation to pay a variable part on top of the guaranteed minimum rent, by appreciating the reduction resulting therefrom”.

More prosaically, the judge will apply the status of commercial leases as if the rent was a “one-component” rent, and he shall take account of the criteria set out in Article L. 145-33, including the criteria of the “parties’ respective obligations” (including, as a result, the provisions of Article R. 145-8, para. 1), so as to be able to deduct the part of the rent that corresponds to a percentage of the turnover, from the fixed part of the rent and accordingly to determine a “global” rent that corresponds to the rental value of the premises.

Apart from the questions raised by the extent of the reduction on the variable part, and without willing to anticipate too much though, one will recall here that, as things currently stand, the parties can provide for departures from the legal provisions relating to the rents on renewal of the lease. The drafters of commercial leases will accordingly seek to cover the above in having appropriate contractual provisions.

For example, one may see contractual clauses whereby the deduction of the variable part from the fixed part of the rent is not authorised, or even whereby the sum of the variable part and the fixed part of the rent can exceed the rental value of the property.

To be continued…

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