Commercial Lease Renewal: The New Terms to Negotiate

A commercial lease reaches its expiry date after nine years. The landlord sends an offer of renewal at a markedly higher rent, citing the development of the neighbourhood. The shopkeeper, for his part, believed that his rent could only increase within the limit of an index. This situation is one of the most frequent in commercial lease litigation, and one of the most poorly understood. The renewal of a commercial lease is governed by a protective principle, the rent cap (plafonnement), but this principle has exceptions that allow the landlord to claim the actual rental value of the premises. This guide explains when the cap can be lifted (déplafonnement), what the landlord can legitimately impose on renewal, and what the tenant remains entitled to refuse or renegotiate.

Renewal of the commercial lease: a right governed by the statute

The commercial lease falls under the commercial lease statute, codified in Articles L.145-1 et seq. of the French Commercial Code. This statute gives the tenant what is known as commercial property rights (propriété commerciale), that is, a right to renewal of its lease on expiry of the contractual term, generally nine years.

In practical terms, two routes are possible on expiry. Either the landlord serves a notice to quit with an offer of renewal (Article L.145-9 of the French Commercial Code), or the tenant takes the initiative by sending a request for renewal (Article L.145-10). In both cases, the central question becomes the rent under the renewed lease.

The principle laid down by the statute is that of stability. The rent under the renewed lease does not freely correspond to the market price: it is in principle capped. This means that any increase is limited by the change in a quarterly index published by INSEE (the French national statistics institute). This mechanism protects the shopkeeper against sudden increases that would threaten the survival of its business.

How the cap works

Article L.145-34 of the French Commercial Code sets the rule: the variation in the renewed rent may not exceed the variation in the quarterly reference index since the initial rent was set. Two indices are used today:

• the commercial rent index (ILC), applicable to commercial and craft activities
• the tertiary activities rent index (ILAT), applicable in particular to offices and professional activities

The construction cost index (ICC), historically dominant, was set aside for rent review and renewal by the Pinel Act of 18 June 2014 (Act No. 2014-626 on crafts, commerce and very small businesses), in favour of the ILC and the ILAT, considered more representative of the economic reality of businesses. The other changes made by that Act to the commercial lease statute are presented in our article on the Pinel Act and the commercial lease.

As long as the rent remains capped, the calculation is mechanical: the rate of variation of the index between the original reference quarter and that of the renewal is applied to the current rent. The landlord cannot, in principle, claim more, even if the premises are objectively worth much more on the market.

Cases in which the rent cap is lifted

Lifting the cap is the breach in this protective mechanism. Where it applies, the rent is no longer calculated by reference to the index but set at the actual rental value of the premises, as defined by Article L.145-33 of the French Commercial Code. This rental value may be much higher than the capped rent, especially for locations whose appeal has grown over the years.

Understanding the cases in which the cap is lifted is therefore the central issue in any renegotiation of a lease. They are exhaustively defined by statute and case law, and it is for the landlord to prove them.

A notable change in the factors determining rental value

This is the most frequent and most debated ground for lifting the cap. Article L.145-34, by reference to Article L.145-33, allows the cap to be lifted where, during the expired lease, notable changes have occurred in one of the elements that make up the rental value. These elements are specified in Articles R.145-3 to R.145-8 of the French Commercial Code:

• the characteristics of the premises (Article R.145-3), for example an extension of the area used or substantial improvement works
• the use of the premises (Article R.145-4), where the tenant has obtained an extension of or a change in activity
• the respective obligations of the parties (Article R.145-5), in particular a transfer of charges or works from the landlord to the tenant, or the reverse
• local commercial factors (Article R.145-6), which reflect the commercial appeal of the location

Disputes most often centre on local commercial factors. The case law requires a change that is both notable and favourable to the business carried on. The arrival of a new public transport line nearby, the pedestrianisation of a shopping street, or the opening of a major anchor store that draws a new clientele may constitute such a change. Conversely, a general development of the town, without demonstrated impact on the commercial appeal of the precise location, is not enough.

Take the example of a shopkeeper established for nine years in a street that was previously secondary, which has since become a major pedestrian thoroughfare after the opening of a metro station fifty metres away and the arrival of national chains. The landlord will probably be able to demonstrate a notable change in local commercial factors and claim that the cap should be lifted. The landlord will still have to prove that this development actually benefits the tenant's business.

An expired lease lasting more than nine years

The second case in which the cap is lifted concerns duration. Where the actual duration of the lease has exceeded twelve years, the cap is disapplied by operation of law (Article L.145-34, paragraph 1). This situation arises where the lease has continued by tacit extension beyond its contractual term of nine years, without either party serving notice to quit or a request for renewal.

A tenant who allows its lease to be tacitly extended beyond twelve years therefore runs the risk of losing the benefit of the cap at renewal. This is a point too often overlooked: inertia can be costly for the shopkeeper. The calculation of this actual duration and how to deal with the landlord's request are set out in our article on lifting the commercial rent cap after twelve years.

Likewise, a lease concluded for a contractual term of more than nine years is outside the cap at renewal, the law considering that the parties accepted in advance a long commitment justifying an adjustment to rental value.

Single-purpose premises and special categories

Certain premises are structurally outside the cap by reason of their nature. For single-purpose premises (locaux monovalents), that is, those built for a single use (a hotel, a cinema, a clinic), the rent is set according to the customs of the profession under Article R.145-10 of the French Commercial Code, without a cap.

The same applies, under Article R.145-11, to land and, subject to conditions, to premises used exclusively as offices. For the latter, the renewal rent is determined by reference to the prices charged for equivalent premises, which brings them closer to the logic of rental value.

What the landlord can impose on renewal

The landlord has real levers, but they are limited. Its room for manoeuvre depends closely on whether or not a case for lifting the cap is made out.

Where a ground for lifting the cap is established, the landlord may claim a rent set at the actual rental value. That is its right, provided that it bears the burden of proof. It will have to support its claim with concrete evidence: references to rents of comparable premises in the neighbourhood (Article R.145-7), demonstration of the notable change relied on, and a reasoned valuation of the rental value.

Where the cap is not lifted, the landlord may apply the capped increase resulting from the change in the index. This increase is automatic and is not negotiable in principle, only as to its calculation (choice of the applicable index, reference quarters used).

The landlord may also impose, in the renewed lease, clauses in line with the market, subject to the public policy provisions of the statute. It cannot, however, unilaterally change the use of the premises or remove the tenant's right to renewal.

Finally, the landlord retains the option of refusing renewal. But this refusal has a cost: in principle it triggers payment of eviction compensation (indemnité d'éviction) (Article L.145-14 of the French Commercial Code), intended to compensate the loss suffered by the shopkeeper deprived of its business. This compensation corresponds in particular to the value of the business (fonds de commerce) from which the tenant is evicted. Refusal of renewal is therefore a credible lever only where the landlord is prepared to bear the price, or where it can rely on a serious and legitimate ground exempting it from any compensation.

What the tenant can refuse or renegotiate

Faced with a request to lift the cap, the tenant is not without resources. The statute offers it several lines of defence, some of which are particularly effective.

Challenging whether the cap can actually be lifted

The first defence is to challenge whether the conditions for lifting the cap are met. Since the burden of proof lies on the landlord, the tenant can require precise demonstration of the notable change relied on. A vague development of the neighbourhood, not quantified and not linked to the activity carried on, is not enough to justify lifting the cap. The tenant has every interest in documenting, for its part, the absence of any favourable change, or even a deterioration in commercial appeal (departure of neighbouring stores, prolonged roadworks that hindered access, a fall in footfall).

Disputing the rental value used

Even where the cap is lifted, the amount of the rent remains open to challenge. Rental value is not a single, indisputable figure: it results from an assessment of the five elements in Article L.145-33 and lends itself to adversarial expert evidence. The tenant may put forward its own references to comparable rents, rely on the charges and works it bears, or on the particular constraints attached to the premises (operating constraints, easements, condition of the building). It is not unusual for the rental value finally adopted by the commercial rent judge (juge des loyers commerciaux) to be significantly lower than that claimed by the landlord.

Relying on the phasing of the increase

The most powerful lever available to the tenant is the phasing mechanism introduced by the Pinel Act. Article L.145-34, paragraph 3, of the French Commercial Code provides that where lifting the cap leads to an increase in rent, that increase is spread over time: it may not exceed, for any one year, 10% of the rent paid in the previous year.

Where there is a notable change in the elements referred to in 1° to 4° of Article L. 145-33 or where an exception is made to the rules on the cap, the resulting variation in rent may not lead to increases of more than 10% of the rent paid in the previous year, for any one year.

This mechanism radically changes the economic equation of lifting the cap. A landlord who obtains an uncapped rent that is theoretically doubled will not receive it immediately: the increase will be spread over several years, at an annual limit of 10%. For the shopkeeper, this phasing absorbs the shock and protects its cash flow. It is a public policy provision that the landlord cannot defeat by a clause in the lease.

It should be noted, however, that this phasing does not apply to leases with a term of more than nine years, nor, according to the case law, to certain particular situations. Care is therefore still needed as to the exact scope of the mechanism.

Negotiating the other terms of the lease

Renewal is not only about rent. It is the time to audit and renegotiate all the clauses, which many tenants forget. Several items deserve particular attention.

The allocation of charges, taxes and works has been regulated since the Pinel Act. Articles L.145-40-1 and L.145-40-2 of the French Commercial Code require the landlord to provide a precise inventory of the categories of charges and their allocation, and prohibit passing certain expenses on to the tenant, in particular major repairs falling under Article 606 of the French Civil Code (main walls, vaults, rebuilding of retaining walls and roofs). A clause that would transfer such works to the tenant has no effect. Renewal is an opportunity to clear the lease of clauses that have become unlawful.

The inventory of fixtures (état des lieux), now compulsory on entry and exit (Article L.145-40-1), must be drawn up or updated. Its absence may be turned against the party that would have had an interest in producing it.

The term of the renewed lease, the indexation clause, the use of the premises and any non-competition clauses are all points open to discussion, provided that the public policy rules of the statute are respected.

The procedure: controlling the timetable and the remedies

The negotiation of renewal takes place within a rigorous procedural framework, compliance with which determines the validity of each party's position.

Where the landlord serves a notice to quit with an offer of renewal, or where the tenant makes a request for renewal, a period opens for the rent to be set. In the event of disagreement, the party acting first may refer the matter to the departmental conciliation commission for commercial leases, a step that is often useful before any litigation. Failing agreement, the dispute falls to the commercial rent judge, a specialist judge of the judicial court (tribunal judiciaire), who rules on the basis of a compulsory preliminary statement exchanged between the parties. How the statement is built and how the proceedings run are covered in our article on the judicial determination of rental value on renewal.

The tenant also has a valuable safeguard: the right of option and, on the landlord's side, the right of withdrawal (droit de repentir) provided for in Article L.145-57 of the French Commercial Code. The latter allows a landlord who had refused renewal to go back on that decision and ultimately grant it, subject to time limits, in particular to avoid paying eviction compensation. These mechanisms create windows for negotiation that an informed adviser knows how to use.

Prudence dictates never letting time limits slip. A tenant who fails to respond to a notice to quit, or who allows its lease to be tacitly extended beyond twelve years, considerably weakens its position when it comes to discussing the rent.

Conclusion: anticipating renewal rather than enduring it

Renewal of a commercial lease is not a mere formality of continuation. It is a legal balance of power whose outcome depends on one main factor: whether or not a case for lifting the cap is made out. The cap remains the rule, and lifting it the exception, and it is for the landlord to establish the conditions. A tenant who knows these rules does not have to put up with an increase presented as inevitable.

The position taken in this guide is clear: in the great majority of renewals, the tenant's room for negotiation is wider than it believes. Between challenging whether the cap can actually be lifted, discussing the rental value, the public policy phasing at 10% a year and renegotiating unlawful charges and works, there are many levers. They still have to be used at the right time, within a strict procedural timetable.

The concrete recommendation: as soon as you receive a notice to quit, or as the nine-year expiry approaches, have your lease and the development of your location analysed by an adviser, before any written reply. A position stated too early, or out of time, can jeopardise months of negotiation. Anticipation, here, is worth far more than reaction.

Frequently asked questions

When can the rent under a commercial lease be uncapped on renewal?

The rent can be uncapped in several cases provided for by the French Commercial Code: where a notable change in the elements of rental value has occurred during the expired lease (characteristics of the premises, use, obligations of the parties, local commercial factors, Articles L.145-33 and R.145-3 to R.145-8), where the actual duration of the lease has exceeded twelve years, where the lease had a contractual term of more than nine years, or for single-purpose premises and certain offices. It is for the landlord to prove that one of these conditions is met.

Does lifting the cap lead to an immediate rent increase?

No, subject to exceptions. Since the Pinel Act of 18 June 2014, Article L.145-34, paragraph 3, of the French Commercial Code provides for phasing: the increase resulting from lifting the cap may not exceed 10% of the previous year's rent for any one year. The increase is therefore spread over time, which protects the shopkeeper's cash flow. This phasing does not, however, apply to leases with a term of more than nine years.

What does a tenant risk by letting its lease be tacitly extended?

The main risk is loss of the cap. Where the actual duration of the lease exceeds twelve years as a result of tacit extension, the renewal rent may be set at the actual rental value without a cap, under Article L.145-34 of the French Commercial Code. A tenant who remains passive beyond twelve years may thus face a substantial increase. It is prudent to keep track of the nine-year expiry and to take the initiative of a request for renewal.

Can the landlord simply refuse to renew the lease?

Yes, but this refusal has a cost. Under Article L.145-14 of the French Commercial Code, refusal of renewal in principle gives rise to a right to eviction compensation intended to make good the tenant's loss, including in particular the value of the business (fonds de commerce). The landlord can avoid it only if it relies on a serious and legitimate ground or on one of the cases provided for by law. Refusal is therefore conceivable only if the landlord accepts bearing the price.

How is rental value calculated where the cap is lifted?

Rental value is determined from the five elements in Article L.145-33 of the French Commercial Code: the characteristics of the premises, the use of the premises, the respective obligations of the parties, local commercial factors and the prices commonly charged in the neighbourhood. It is assessed on an adversarial basis and may be debated through expert evidence. The tenant may put forward its own references to comparable rents and rely on the charges and constraints it bears.

Does renewal of the lease allow charges and works to be renegotiated?

Yes, and it is a point often overlooked. Since the Pinel Act, Articles L.145-40-1 and L.145-40-2 of the French Commercial Code require a precise inventory of charges and prohibit passing on to the tenant the major repairs under Article 606 of the French Civil Code. Renewal is the time to check the validity of the clauses of the lease and to remove those that have become unlawful. Drawing up an up-to-date inventory of fixtures is also compulsory.

Who decides in the event of disagreement on the renewal rent?

In the event of disagreement, the parties may first refer the matter to the departmental conciliation commission for commercial leases, an amicable step that is often useful. Failing agreement, the dispute falls to the commercial rent judge of the judicial court, who rules after a compulsory exchange of statements. This judge has sole power to assess whether the conditions for lifting the cap are met and the amount of the rental value.