Assigning the right to a commercial lease: procedure, price and tax

The assignment of the right to the lease ("droit au bail") is often confused with the sale of the business ("fonds de commerce"), although these two transactions follow neither the same rules nor the same tax treatment. A shopkeeper who ceases trading but wants to realise the value of the location, or a restaurateur who wishes to transfer only the lease to a successor from another sector, has every interest in understanding this difference before signing. This guide distinguishes precisely between the assignment of the right to the lease alone and the sale of a business, sets out the role of the approval clause and of the assignor's joint and several guarantee, and then covers the tax aspects, from registration duties to taxation of the capital gain.

Assigning the right to the lease alone or selling the business: two transactions not to be confused

The first decision that shapes the transaction concerns the very subject of the sale. A right to the lease may be assigned on its own, or assigned as a component of a business. The legal and tax consequences differ sharply.

What the right to the lease covers

The right to the lease is the right of the commercial tenant to occupy the premises on the terms of the commercial lease governed by Articles L. 145-1 et seq. of the French Commercial Code. Its value essentially lies in the gap between the rent actually paid, often below the market price, and the real rental value of the location, as well as in the right to renewal and the commercial property rights attached to it. In a busy street where rents have risen sharply since the lease was signed, this right may represent a substantial sum on its own.

Assigning the right to the lease alone means transferring this right of occupation, without transferring the customer base, the sign, the trade name, the equipment or the contracts. The assignee takes the premises on the terms of the existing lease, but carries on its own business. This is the typical pattern of a location being taken over by a trader from another sector.

The sale of a business includes the right to the lease

Conversely, the sale of a business transfers a set of elements: the customer base, which is its core, but also the sign, the trade name, the right to the lease, the equipment, the stock and sometimes certain contracts. The right to the lease is here only one element among others. A baker who sells his business transfers his customer base, his bakehouse, his brand and his lease to another baker, who carries on the same activity.

This sale is subject to a heavier protective regime, built around Articles L. 141-1 et seq. of the French Commercial Code. It requires publicity formalities, notice to the seller's creditors, who may lodge an objection, and the price being held in escrow for several months. None of this applies to the assignment of the right to the lease alone. The prior information of employees, another formality attached to certain sales of businesses, is dealt with separately in our article on the obligation to inform employees under the Hamon Law.

Why the choice changes everything

The tipping point is the customer base. If the customer base is transferred, the tax authorities and the courts readily requalify the transaction as a sale of a business, with the corresponding formalities and tax treatment. Otherwise, it remains a pure assignment of the right to a commercial lease. The distinction is therefore not merely a choice of label: it determines the formalities, the protection of the landlord and above all the taxation. Seeking to disguise a sale of a business as an assignment of the right to the lease in order to reduce registration duties exposes the parties to a tax reassessment.

The approval clause and restrictions on assignment

The commercial lease almost always contains clauses that regulate the ability to assign. Their scope depends, again, on the type of assignment contemplated.

Freedom to assign with the business

Article L. 145-16 of the French Commercial Code protects the assignment of the right to the lease where it accompanies the sale of the business or of the undertaking.

Any agreements [...] intended to prevent the tenant from assigning its lease, or the rights it holds under this chapter, to the purchaser of its business or undertaking are void, whatever their form.

In other words, the landlord cannot prevent the tenant from assigning its lease to the purchaser of its business. This rule is a matter of public policy. A trader who sells his business may therefore transfer the lease despite a prohibition clause, which is deemed unwritten.

A word of caution, however: this protection does not remove every requirement. The lease may validly provide for procedures, such as the obligation to inform the landlord, to call upon it to take part in the deed, or to respect a right of pre-emption, provided that these clauses do not make the assignment impossible or excessively difficult. On approval, participation in the deed and the joint and several guarantee stipulated for the landlord's benefit, see our analysis of the landlord's means of control over the sale of the business.

The assignment of the right to the lease alone may be strictly restricted

The situation is radically different where the tenant assigns the right to the lease alone, without its business. The protection of Article L. 145-16 does not apply. The landlord may then validly:

• prohibit outright the separate assignment of the right to the lease
• make it subject to its prior approval
• require its participation in the deed of assignment
• impose a right of pre-emption in its favour

A tenant who is considering assigning only its right to the lease must therefore begin by reading its contract carefully. An approval clause or a clause prohibiting separate assignment is perfectly lawful and will obstruct the transaction if it is not complied with. Disregarding it exposes the tenant to termination of the lease and to damages.

Landlord's approval and participation in practice

Where the lease requires the landlord's approval, the assignor must introduce the prospective assignee and seek its written agreement. The landlord cannot refuse abusively where the clause provides for a reasoned refusal, but it has a real margin of discretion, in particular as to the assignee's solvency and the nature of its business. Where the lease requires the landlord to take part in the deed, the landlord signs the assignment, which has the advantage of making it enforceable against the landlord without any further formality.

The assignor's joint and several guarantee

Assigning does not always mean being fully released. Many leases stipulate a joint and several guarantee clause, under which the assignor remains guarantor of the payment of the rent due by the assignee.

The mechanism and what is at stake

This clause makes the assignor a sort of surety for the successor. If the assignee stops paying rent, the landlord may turn to the former tenant, even though he left the premises long ago. For a trader who thought he had turned the page, the financial risk is real: he may be asked to pay several months of unpaid rent by a defaulting successor.

The safeguards of the Pinel Law

Law No. 2014-626 of 18 June 2014, known as the Pinel Law, regulated these clauses in order to protect the assignor. Two rules should be known.

First, Article L. 145-16-2 of the French Commercial Code caps the duration of the joint and several guarantee at three years from the assignment of the lease. Beyond that, the assignor can no longer be called upon, even if the lease provided for a longer guarantee.

Second, Article L. 145-16-1 of the same code requires a landlord who intends to call on this guarantee to inform the assignor of any payment default by the assignee within one month of the date on which the sum should have been paid. Failing notice within this period, the landlord loses the benefit of the guarantee for the instalment concerned. An assignor who receives such a warning therefore has an interest in reacting quickly, because it means that his financial liability may be engaged.

In practice, every assignor should negotiate the removal or limitation of this clause in the deed, or failing that obtain a counter-guarantee from the assignee.

The assignment procedure step by step

A secure assignment of the right to a commercial lease follows a logical sequence, the order of which matters.

Step 1: audit the lease and the occupation

Before any negotiation, the content of the lease must be checked: assignment, approval and joint and several guarantee clauses, permitted use of the premises, state of rent and service charges, expiry date and right to renewal. The permitted use is a sensitive point: if the assignee wishes to carry on a business different from the one authorised by the lease, it will have to obtain a change of use ("déspécialisation"), which requires a specific procedure and the landlord's agreement or being informed.

Step 2: set the price

The price for the assignment of the right to the lease is freely negotiated between assignor and assignee. It reflects the value of the location and the economic advantage of the lease, a subject developed below.

Step 3: draft the deed of assignment

The deed, whether private or notarial, states the exact subject of the assignment (the right to the lease alone, excluding any element of a business), the price, the conditions precedent, in particular obtaining the landlord's approval, and the fate of the joint and several guarantee clause. The drafting must remove any ambiguity as to the absence of a transfer of the customer base, on pain of requalification as a sale of a business. The choice between a unilateral promise and a bilateral preliminary agreement ("compromis"), and the clauses specific to the preliminary contract, are detailed in our article on the sale of a right to the lease by preliminary agreement or promise.

Step 4: make the assignment enforceable against the landlord

An assignment that has not been served is not enforceable against the landlord, who could refuse to recognise the new tenant. Two routes exist. If the lease requires the landlord to take part in the deed, the landlord signs the deed and the assignment is enforceable against it from the outset. Otherwise, service must be effected by act of a commissaire de justice (bailiff), on the basis of Article 1690 of the French Civil Code, or the landlord's acceptance must be obtained in a notarial deed. This formality conditions the security of the whole transaction.

Step 5: complete the tax formalities

The deed must be registered with the tax office, in principle within one month of its signature, an operation that triggers payment of registration duties. This is the bridge between the procedure and the tax treatment.

The price for the assignment of the right to the lease

The price is one of the most discussed points, because it rests on economic parameters and not on an accounting value.

How the value is determined

The value of the right to the lease rests mainly on the differential between the contractual rent and the market rental value: the lower the rent paid compared with the prices prevailing in the area, the more the right to the lease is worth. The location, the remaining term, the strength of the right to renewal, the floor area and the flexibility of the permitted use also come into account. On a prime city-centre location, a tenant paying a long-standing rent far below the market can realise a high value for its right to the lease, because the assignee will benefit from this gap over the long term.

Not to be confused with the key money

The right to the lease assigned by the outgoing tenant must not be confused with key money ("pas-de-porte", or entry fee), a sum paid to the landlord when a new lease is entered into. Key money is a matter between the landlord and the incoming tenant, whereas the price of the right to the lease is paid to the previous tenant. The two follow distinct logics and distinct regimes.

The tax treatment of the assignment of the right to the lease

The tax aspect operates on two levels: registration duties, borne by the purchaser, and taxation of the capital gain, borne by the assignor. The tax treatment of the assignment of the right to a commercial lease is close to that of the business, which explains part of the tax authorities' vigilance.

Registration duties

Under Article 725 of the French General Tax Code (CGI), assignments of the right to a lease are subject to registration duties according to the progressive scale applicable to sales of businesses provided for in Article 719 of the CGI. This scale applies by bands to the price, or to the market value if it is higher:

• no duty up to €23,000
• 3% for the portion between €23,000 and €200,000
• 5% for the portion above €200,000

These duties are in principle payable by the purchaser and paid on registration of the deed. This point is central to the tax treatment of an assignment of the right to a lease: it is the assignee who bears this charge, which is added to the price paid to the assignor and must be included in its financing plan.

This regime also explains the tax authorities' scrutiny of undervalued transactions. If the declared price is lower than the real value of the right to the lease, the tax authorities may start a reassessment procedure and claim additional duties, together with interest and penalties.

The capital gain made by the assignor

On the seller's side, the assignment most often generates a professional capital gain, since the right to the lease forms part of the assets of the assignor's business. The regime depends on the assignor's status.

For a business subject to income tax (sole trader, partnership), the capital gain is in principle classified as long-term where the right to the lease has been held for at least two years. The long-term capital gain is then taxed at the flat rate of 12.8%, to which social contributions of 17.2% are added, giving an overall taxation of 30%. The short-term portion, corresponding in particular to depreciation, is subject to the progressive income tax scale.

For a company subject to corporation tax, the capital gain is included in taxable profit and taxed at the corporation tax rate.

Several exemption schemes may reduce or even eliminate this taxation. Article 151 septies of the CGI exempts the capital gains of small businesses subject to conditions as to turnover and a period of activity of at least five years. Article 238 quindecies of the CGI provides for an exemption depending on the value of the assets sold, total below a threshold and reducing above it. Article 151 septies A of the CGI covers the operator's retirement. These regimes are subject to strict conditions that must be checked case by case before signing.

The tax treatment of the assignment of the right to a commercial lease therefore calls for forward planning: an assignor who neglects the question of the capital gain may see its net gain sharply reduced, whereas a transaction correctly timed may benefit from an exemption.

The question of VAT

The assignment of the right to the lease alone, which concerns an intangible right, is in principle not subject to VAT, but to the registration duties described above. The position may be more nuanced where the transaction forms part of a wider whole or depending on the status of the parties. This point deserves a prior check, because an error of analysis on liability to VAT changes the final cost for the purchaser.

Conclusion

The assignment of the right to a commercial lease is not a simple lighter variant of the sale of a business: it is a legally autonomous transaction, more flexible as to form but often more constrained as to substance by the clauses of the lease. Where an assignment with the business benefits from the protection of Article L. 145-16 of the French Commercial Code, the assignment of the right to the lease alone remains at the mercy of a perfectly lawful approval or prohibition clause. The joint and several guarantee, now capped at three years by the Pinel Law, also prolongs the assignor's exposure well after departure. On the tax side, finally, the alignment of registration duties with the scale for businesses and the regime for professional capital gains make it necessary to anticipate the real cost of the transaction for each party.

The position is clear: the security of an assignment is determined before signing, in the audit of the lease and the tax calibration, not afterwards. Before any commitment, have your lease analysed clause by clause and the tax treatment of the transaction simulated, for the assignor as for the assignee, so that no surprise arises at the time of registration or of a default by the assignee.

Frequently asked questions

What is the difference between an assignment of the right to the lease and a sale of a business?

The sale of a business transfers a set of elements, mainly the customer base, but also the sign, the equipment and the right to the lease, whereas the assignment of the right to the lease transfers only the right to occupy the premises, without customer base or elements of a business. The decisive criterion is the transfer of the customer base: if there is one, the transaction is in principle a sale of a business. This classification governs the applicable formalities and the tax treatment, hence the importance of drafting the deed without ambiguity.

Can the landlord prohibit the assignment of the right to the lease?

It depends on the context. Under Article L. 145-16 of the French Commercial Code, it cannot prohibit the assignment of the lease to the purchaser of the business, any clause to that effect being void. On the other hand, it may validly prohibit, or make subject to approval, the assignment of the right to the lease alone made without the business. The clauses of the lease must therefore always be checked before starting negotiations.

For how long does the assignor remain bound by the joint and several guarantee?

Since the Pinel Law of 18 June 2014, Article L. 145-16-2 of the French Commercial Code limits the assignor's joint and several guarantee to three years from the assignment of the lease. In addition, Article L. 145-16-1 requires the landlord to inform the assignor of any payment default by the assignee within one month of the unpaid instalment falling due, failing which it loses the benefit of the guarantee for that instalment. The assignor may also negotiate the removal of this clause in the deed.

Who pays the registration duties on an assignment of the right to a lease?

Registration duties are in principle borne by the purchaser and paid on registration of the deed. Under Articles 725 and 719 of the CGI, the progressive scale is 0% up to €23,000, 3% from €23,000 to €200,000 and 5% above. The assignee must therefore include this cost, which is added to the price paid to the assignor.

How is the assignor's capital gain taxed?

As the right to the lease is among the professional assets, its assignment falls under the regime of professional capital gains. For a business subject to income tax, the long-term capital gain, after two years of ownership, is taxed at 12.8% plus 17.2% of social contributions, that is 30%. Exemptions exist, in particular under Articles 151 septies, 238 quindecies and 151 septies A of the CGI, subject to strict conditions to be checked before signing.

How is the price of a right to the lease set?

The price is freely negotiated and mainly reflects the gap between the rent paid and the market rental value, as well as the quality of the location, the remaining term and the strength of the right to renewal. A rent far below the market on a good location greatly increases the value of the right to the lease. An undervaluation in the deed, however, exposes the parties to a reassessment by the tax authorities.

Must an assignment of the right to a lease be served on the landlord?

Yes, unless the landlord takes part directly in the deed. Failing the landlord's participation, the assignment must be made enforceable against it by service by a commissaire de justice (bailiff) on the basis of Article 1690 of the French Civil Code, or by acceptance in a notarial deed. Without this formality, the assignment is not enforceable against the landlord, which weakens the whole transaction.