Draft bill on the simplification of the economic life: the main measures regarding commercial leases

On June 17^th, the French National Assembly completed its examination of the draft bill on the simplification of the economic life’s amendments. From here, the draft still needs to be examined – likely at the beginning of the next parliamentary session – by a joint parliamentary committee. Here are the main measures to note in the current state of the draft. Once the bill is fully adopted by the French Parliament, these provisions will require to be more thoroughly analyzed in order to assess their extent and impact.

1. Property tax borne by the lessor

The draft bill plans to complete Article L. 145-40-2 of the French Commercial Code by a paragraph written as follows: “the property tax referred to in article 1380 of the French General Tax Code is borne by the lessor and automatically paid by the latter” (Article 8 ter) as a way of prohibiting the tenant from the chargeback of this tax under a commercial lease.

This new paragraph should figure – as does the rest of the article that it would complete – within the list of public policy provisions, which falls under the principle stating that: “shall be deemed unwritten, regardless of their form, any clauses, stipulations, and arrangements that have the effect of defeating [it]“. In other words, no derogation from this interdiction would be possible within the contract.

Let us recall that the recharging of property tax by the lessor to the lessee (tenant) currently falls within the scope of contractual freedom and is expressly permitted by Article R145-35 of the French Commercial Code, which notably provides that “property tax and all its additional taxes can be attributed to the tenant […] “.

The amendment behind this new measure implies that it was suggested by the Union of Independents and Small Businesses, and that its aim is notably to “reduce the financial burden on our small businesses and also to combat the decline of city centers by supporting craftsmen and tradesmen“. However, the drafting planned by the bill aims all commercial leases, without making a distinction between the different categories of tenants, nor the nature of the premises rented. It remains to determine whether this reform shall apply to ongoing leases.

2. Monthly rent payments

The draft bill foresees that the “the monthly payment of rent shall be mandatory when the tenant of premises intended for the conduct of retail or wholesale commercial activity, or for the provision of commercial or craft services, makes such a request“. This measure would therefore apply to ongoing leases, regardless of the terms stated in the contract.

The demand for monthly rent payments would take effect with no condition “as from the next rent payment due date provided for in the lease“. The provision that conditioned the tenant’s right to benefit from this measure in the absence of outstanding payments was deleted by the deputies “to make the installment of monthly commercial rent payments wholly effective […] “.

3. Validity of “tunnel” indexation clauses

The draft bill plans to authorize “by derogation from Article L.112-1 of the French Monetary and Financial Code, in leases for premises used for commercial purposes, any clause whose object or effect is to regulate — in equal proportions, both upward and downward — the annual variation of the commercial rent index taken into account for rent revision pursuant to Articles L. 145-38 and L. 145-39 of this Code“.

It would mean for the legislator to authorize rent indexation clauses solely based on the commercial rent index (French “ILC”), which equivalates to a “tunnel“, on the condition, however, that the admitted variation  remains the same, both upward and downward.

The validity of these indexation’s clauses – which may be deemed unwritten under current case law, insofar as they exclude any reciprocity of variation and result in a distortion prohibited by Article L.112-1 of the French Monetary and Financial Code — would thus be expressly enshrined in law.

4. Limitation of rental guarantees

According to the draft bill, “amounts paid as a security deposit by the tenant of a premise [intended for retail or wholesale trade or for commercial or craft services], whether paid directly or provided by third parties, may not exceed the amount of rent owed for one quarter. These amounts do not accrue interest for the benefit of the tenant”.

This measure would be applicable to the same types of premises eligible for the option of monthly rent payments presented above. Meaning that it would apply to ongoing leases, regardless of the terms of the contract.

Thus, the landlord of an ongoing lease relating to such premises, who holds guarantees of any kind “whose total amount exceeds the rent owed for one quarter”,  would benefit from a six-month period, as from the date the law is enacted, “to return the excess amounts to the tenant or to waive the guarantees covering the excess amount“.

5. Fate of the security deposit

The draft bill also plans to supervise/organize the fate of any security deposit paid by the tenant under a commercial lease in the following circumstances:

• In the event of a transfer of the leased premises during the term of the lease: the obligation to refund the sums paid as a security deposit to the tenant shall be transferred to the new landlord. As is already common practice, the purchaser shall reimburse the seller for the amount of the security deposit held by the latter.
• At the end of the commercial lease: any security deposit paid by the tenant must be returned by the lessor or their agent “within a reasonable period not exceeding three months, from the date the keys are handed over […], subject to deduction, where applicable, of any amounts still owed to the landlord, and of any amounts for which the landlord may be liable in lieu of the tenant, provided such amounts are duly substantiated“.

6. Absence of amendments to the provisions concerning  the “Pinel” pre-emption right

The “Pinel” pre-emption right provided for under Article L. 145‑46‑1 of the French Commercial Code applies to the sale of premises “for commercial or craft use” rented under a commercial lease. The draft bill initially proposed to clarify the definitions of “premises for commercial use”, and “premises for artisanal use”, with the aim of reducing precautionary notifications for certain categories of premises and limiting the number of disputes over the nullity of sales resulting therefrom.

However, this measure was ultimately rejected by French deputies in the latest version of the bill, on the grounds that it would narrow the scope of the tenant’s pre-emption right in the context of the sale of commercial or artisanal premises. As a result, the wording of Article L. 145‑46‑1 of the French Commercial Code is not expected to be amended by this legislation. This raises the question of whether, under these circumstances, the concept of “premises for commercial or artisanal use” should align with the definition applicable to the option of monthly rent payments referred to above.