Removal of the Commercial Rent Cap after 12 Years: What the Landlord Can Require

A landlord notices that its commercial tenant has been in occupation for fourteen years, with no renewed lease having been formally signed since the outset. The rent, indexed each year to the index, remains well below the values prevailing in the neighbourhood. The question becomes a practical one: can the landlord at last escape the cap and have the rent set at the actual rental value? The answer lies in a specific mechanism of the commercial lease statute, the removal of the cap linked to an effective term of more than twelve years, often reached through tacit extension (tacite prolongation). This analysis sets out the mechanism, how to secure the application and the resulting dispute over rental value.

The principle of the cap and its exception after twelve years

The rent under a renewed commercial lease is subject to a moderation rule. Article L.145-34 of the French Commercial Code lays down the principle of the cap: on renewal, the rent may in principle increase only within the limit of the change in the quarterly reference index, the commercial rents index (ILC) or the tertiary activities rents index (ILAT) depending on the nature of the activity, calculated between the start of the expired lease and the date of its renewal.

Unless there is a significant change in the elements referred to in 1° to 4° of Article L. 145-33, the rate of change of the rent applicable on the date the lease to be renewed takes effect, if its term is not longer than nine years, may not exceed the change... in the quarterly commercial rents index or the quarterly tertiary activities rents index. (Article L.145-34, first paragraph)

This cap protects the tenant against a sharp rent increase on renewal. It is however subject to exceptions, one of which directly concerns the landlord whose tenant has been in place for a long time: removal of the cap on a commercial lease based on duration.

Article L.145-34 indeed specifies that the cap rule applies “if its term is not longer than nine years”. Read together with Article L.145-33, this leads to the following rule: where the effective term of the lease that is ending exceeds twelve years, the cap ceases to apply and the rent under the renewed lease is set at the rental value. Removal of the commercial rent cap after 12 years is thus an autonomous ground for escaping the cap, distinct from a significant change in local commercial factors or in the characteristics of the premises.

This ground is of major interest to the landlord: it is objective. Unlike removal of the cap for a significant change, which requires showing a significant development in one of the criteria of rental value, removal by reason of duration follows from the mere passage of time. The duration must still be correctly calculated.

How the effective term of more than twelve years is calculated

This is the heart of the issue for the landlord: a term of more than twelve years rarely results from an initial lease concluded for that length. It is most often reached through the tacit extension of a nine-year lease that was neither renewed nor terminated at its expiry.

The mechanism of tacit extension

The so-called “3-6-9” commercial lease is concluded for a minimum term of nine years. When the term arrives, if neither notice nor a request for renewal is given, the lease does not come to an end: it continues by tacit extension beyond its contractual term, pursuant to Article L.145-9 of the French Commercial Code. The lease then continues on the same terms, for an indefinite period, until one of the parties takes the initiative of ending it or requesting its renewal. The conditions and time limits for renewal at expiry are set out in our guide to the renewal of a commercial lease after 9 years.

This period of tacit extension is added to the initial contractual term. A nine-year lease that is tacitly extended for more than three years therefore reaches an effective term of more than twelve years, which opens the way to removal of the cap.

The date on which the term is assessed

The term is assessed between the date on which the expired lease took effect and the date on which the renewed lease takes effect, and not on the date of the request for renewal or of the notice. This point, consistently upheld by the Cour de cassation, is decisive in practice.

Take the example of a lease that took effect on 1 January 2011. At its contractual expiry, on 31 December 2019, neither party reacts: the lease continues by tacit extension. If the landlord serves a notice with an offer of renewal taking effect on 30 June 2023, the effective term of the expired lease runs from 1 January 2011 to 30 June 2023, that is, more than twelve years. Removal of the cap is established.

Conversely, if the renewal takes effect on 1 January 2023, the effective term is exactly twelve years. The text, however, requires a term “longer” than twelve years. A term of exactly twelve years is not enough: the cap remains applicable. The distinction, apparently technical, separates two radically different regimes for setting the rent.

Calculating the date on which the renewed lease takes effect

To secure its calculation, the landlord must master the date on which the renewed lease takes effect, which depends on the initiative taken:

• where the landlord serves a notice with an offer of renewal (Article L.145-9), the renewed lease takes effect on expiry of the six-month notice period, for the last day of the calendar quarter;
• where the tenant requests renewal (Article L.145-10), the renewed lease takes effect on the first day of the calendar quarter following that request.

This mechanism explains why a landlord seeking removal of the cap must sometimes wait for the effective term to cross the twelve-year threshold before serving notice, rather than acting prematurely and fixing a term of only just twelve years.

Securing the application for removal of the cap

The right to removal of the cap does not dispense with strict formalities. A badly initiated application can deprive the landlord of the benefit of the rental value, even where the twelve-year term has been exceeded.

The choice of the triggering act

The landlord has two routes. It may serve a notice with an offer of renewal, stating the proposed rent, in principle set at the rental value, expressly relying on the term of more than twelve years. It may also wait for the tenant to take the initiative of a request for renewal, to which it will respond by refusing the cap. On the other clauses that may be reopened on this occasion, see our article on the new terms to negotiate on renewal of the commercial lease.

Since Law No. 2014-626 of 18 June 2014, known as the Pinel Law, notice may be served either by a bailiff's act (now a commissaire de justice) or by registered letter with acknowledgement of receipt. The tenant's request for renewal follows the same forms. Prudence nevertheless dictates giving preference to a commissaire de justice's act for the notice, which is more reliable as proof of its date and content.

The preliminary statement, a condition of admissibility

In the event of disagreement on the amount of the rent, the matter is for the commercial rent judge (juge des loyers commerciaux), a function exercised by the president of the judicial court (tribunal judiciaire) or his or her delegate. Referral to the judge is subject to specific formalities laid down in Articles R.145-23 et seq. of the French Commercial Code.

The party wishing to refer the matter to the judge must first notify the other of a preliminary statement (mémoire préalable) setting out its claims and grounds. This statement specifies the rent claimed, in this case the rental value, and details the grounds for removal of the cap, here the effective term of more than twelve years. Referral to the judge may take place only after one month has elapsed following this notification. An imprecise statement, which does not clearly set out the basis for removal of the cap, exposes the application to challenge. The drafting of this document and the referral to the judge are discussed separately in our article on the preliminary statement before the commercial rent judge.

The time limits to watch

An action to set the rent of the renewed lease is time-barred after two years. The starting point of this period is in principle the date on which the renewed lease took effect. After that period, the rent of the renewed lease is frozen at the amount of the expired lease, revalued where applicable. A landlord who lets this period run loses the benefit of the removal of the cap that it could have obtained, which makes rigorous monitoring of the procedural calendar indispensable.

Determining the rental value

Once removal of the cap is established, the rent is no longer contained by the index: it is set at the rental value. That value must still be determined. Article L.145-33 of the French Commercial Code sets out the criteria, as elaborated by Articles R.145-3 to R.145-11.

The rental value is determined on the basis of five elements:

• the characteristics of the premises concerned (area, layout, condition, accessibility, outbuildings);
• the intended use of the premises, that is, the activity permitted by the lease;
• the respective obligations of the parties, in particular clauses departing from the statutory allocation of charges and works, which may increase or reduce the value;
• local commercial factors, which reflect the commercial attractiveness of the location (customer flow, commercial environment, transport links);
• the prices commonly charged in the neighbourhood for comparable premises.

The exercise consists of converting these elements into a price per square metre applied to a weighted area. Weighting adjusts gross areas according to their commercial utility: a basement storeroom or an upper floor is not worth the same as a ground-floor area with a shop window. The prices charged in the neighbourhood, gathered in comparables, form the basis of the valuation, adjusted according to the other criteria.

This valuation work is delicate. The rental value adopted by the judge may differ appreciably from that claimed by the landlord as well as from that argued by the tenant. This is precisely why a dispute over rental value calls for expert evidence and a well-supported argument.

The phasing of the increase under the Pinel Law

Removal of the cap does not necessarily result in immediate and full application of the rental value. The Pinel Law introduced a phasing mechanism intended to soften the largest increases. The last paragraph of Article L.145-34 provides that, where an exception is made to the cap rules, the resulting change in rent may not lead to an increase of more than 10% of the rent paid in the preceding year, for any one year.

In practical terms, if the rental value is double the current capped rent, the move to the rental value takes place in successive annual steps of 10%, until the target amount is reached. This phasing protects the tenant from a cash-flow shock, while allowing the landlord ultimately to reach the market rent.

The application of this phasing to removal of the cap based on a term of more than twelve years has given rise to questions, since the wording of the text refers to “a lease of a term longer than nine years”. The trend in case law accepts that the spreading mechanism also applies where removal of the cap results from an effective term of more than twelve years acquired by tacit extension. The landlord must therefore anticipate that the rental value will not necessarily be received in one go, but progressively, except where the gap with the previous rent stays within the limit of 10% a year.

The dispute over rental value

Failing an amicable agreement, the setting of the uncapped rent is decided before the commercial rent judge. This litigation has its own characteristics, which call for careful preparation.

Court-appointed expert evidence

The commercial rent judge frequently orders an expert report, entrusted to a court-listed expert who works in commercial rental valuation. The expert visits the premises, records the characteristics of the premises, analyses the lease clauses relating to charges and works, and gathers comparables from similar premises in the area. The report proposes a reasoned rental value.

Throughout the expert's operations, the parties are free to submit their own material: area surveys, comparable leases, analysis of commercial factors. A landlord who prepares a file of solid comparables in advance carries more weight in the valuation than one who merely challenges the report once it has been filed.

The recurring points of friction

Disputes over rental value generally crystallise around a few technical questions. The weighting of areas is often debated, each party seeking to enhance or reduce the value of certain zones. The obligations arising from the lease are another area of debate: a clause placing on the tenant works normally due from the landlord may justify a discount on the rental value, while the reverse increases it. Finally, the relevance of the comparables, and their real similarity to the premises in question, accounts for a significant part of the discussions.

The judge is never bound by the expert's report: the judge has sovereign discretion to assess the rental value in light of all the material submitted. This freedom of assessment reinforces the value of a complete legal and technical argument, rather than a mere challenge on figures.

The effect of the judgment

The rent set by the judge applies retroactively to the date on which the renewed lease took effect. This retroactivity may generate a significant rent arrears payment in the landlord's favour, covering the whole period elapsed since the renewal, subject to the possible application of annual phasing. The tenant must therefore factor in, from the outset of the dispute, the financial risk of a confirmed removal of the cap, and the landlord must take care to preserve its claim for the arrears by bringing an action within the limitation period.

Conclusion

Removal of the cap on the basis of an effective term of more than twelve years is one of the few objective levers available to a landlord to bring an old commercial rent back to the rental value. Its strength lies in its automatic character: once the effective term, often reached by tacit extension, strictly crosses the twelve-year threshold on the date the renewed lease takes effect, the cap falls away. Its fragility lies in the calendar and the formalities: a notice served too early fixes a twelve-year term that is insufficient, a poorly reasoned preliminary statement weakens the application, and a neglected limitation period destroys the claim for rent arrears.

The position is clear: this removal of the cap is won upstream, by a precise calculation of the dates and by a rental value file built even before the act is served, not in the improvisation of a dispute that is merely endured. Before serving a notice or responding to a request for renewal, have counsel verify the exact date on which the renewed lease takes effect and the effective term elapsed: it is this verification, and not the tenant's apparent length of occupation alone, that determines the success of the application for removal of the cap.

Frequently asked questions

Is a commercial lease of more than 12 years automatically uncapped?

Removal of the cap is not automatic in the sense that it would apply without any step being taken. The ground for removal of the cap, an effective term of more than twelve years, objectively results from the passage of time under Article L.145-34 of the French Commercial Code. The landlord must, however, rely on that term in its notice or in response to the request for renewal and then, in the event of disagreement, refer the matter to the commercial rent judge within two years. Without any initiative on its part, the rent remains at the previous amount.

How is the 12-year term calculated in the case of tacit extension?

The term is assessed between the date the expired lease took effect and the date the renewed lease takes effect, the period of tacit extension being added to the initial contractual term. A nine-year lease tacitly extended for more than three years thus exceeds twelve years. The text requires a term strictly longer than twelve years: a term of only just twelve years leaves the cap in place.

Does removal of the cap allow the rental value to be applied immediately?

Not necessarily. Since the Pinel Law of 18 June 2014, Article L.145-34 provides for phasing: the rent increase may not exceed 10% of the previous year's rent for any given year. Where the rental value is much higher than the current rent, the move takes place in successive annual steps. The trend in case law accepts this phasing also for removal of the cap based on duration.

What is the difference between removal of the cap by duration and removal of the cap for a significant change?

Removal of the cap by duration follows from the mere passage of more than twelve years and requires no particular proof. Removal of the cap for a significant change, provided for in Article L.145-33, requires showing a significant development in one of the criteria of rental value, for example local commercial factors. The former is therefore easier to establish, which explains why it is preferred when the duration allows.

What is the time limit for bringing an action to set the uncapped rent?

An action to set the rent of the renewed lease is time-barred after two years, running in principle from the date on which the renewed lease took effect. After that period, the rent is frozen at the previous amount as revalued, and the benefit of the removal of the cap is lost. Rigorous monitoring of the calendar, including notification of the preliminary statement and compliance with the one-month period before referral to the judge, is indispensable.

Who sets the rental value in the event of disagreement?

The matter is for the commercial rent judge, a function exercised by the president of the judicial court or his or her delegate, seised after notification of a preliminary statement pursuant to Articles R.145-23 et seq. of the French Commercial Code. The judge frequently orders an expert report, but has sovereign discretion to assess the rental value in light of all the criteria of Article L.145-33 and the material submitted by the parties.

Can the tenant challenge removal of the cap after 12 years?

The tenant cannot challenge the principle of removal of the cap if the effective term of more than twelve years is established on the date the renewed lease takes effect. Its dispute then shifts to the rental value itself: it contests the weighting of areas, the relevance of the comparables or the effect of the obligations placed on it by the lease. It may also rely on phasing to spread the increase over time.