Sliding-scale clause deemed unwritten in a commercial lease: challenging indexation

A tenant who challenges the validity of its indexation clause several years after the lease was signed is not engaging in a theoretical debate: it claims repayment of the sums paid under past indexations and freezes the rent at its initial level. For a landlord, a property company (foncière) or an investor, the stakes quickly run into tens of thousands of euros per asset, and they multiply across a portfolio where the same clause has been reproduced in dozens of leases. The sanction under French law, the clause being deemed unwritten (réputé non écrit), has a formidable feature: the action is subject to no limitation period. This article examines, from the landlord's point of view, the grounds on which a sliding-scale clause (clause d'échelle mobile) may be void, the precise regime of the sanction, the extent of the repayments at risk and the means of securing the drafting for the future.

The legal framework of indexation in commercial leases

The sliding-scale clause, or indexation clause, allows the rent to vary automatically according to the movement of an index, without waiting for the statutory three-yearly review provided for by Article L. 145-38 of the French Commercial Code. It is the landlords' standard contractual tool for preserving the real value of the rent throughout the term of the lease, generally nine years. The timetable, formalities and mechanics of that statutory review are detailed in our guide to the three-yearly review of commercial rent.

Its validity is governed by two sources. First, the French Monetary and Financial Code sets the general principle of the lawfulness of indexation clauses. Article L. 112-1 prohibits indexation based on the general price level or on the minimum wage (SMIC). Article L. 112-2 requires that the index used be directly related to the purpose of the contract or to the activity of one of the parties. Second, the commercial lease statute governs the relationship between contractual indexation and statutory review, notably in Article L. 145-39 of the French Commercial Code, which opens a review where the operation of the sliding-scale clause has caused the rent to vary by more than a quarter compared with the price previously fixed.

Since Law No. 2014-626 of 18 June 2014, known as the Pinel Law, the indices admitted for the review of commercial leases are the commercial rent index (ILC) and the tertiary activities rent index (ILAT), the construction cost index (ICC) having been removed from the scope of statutory review. The drafting of a commercial lease sliding-scale clause must therefore comply simultaneously with these two bodies of rules, failing which the clause is neutralised. On the choice between the ICC, ILC and ILAT depending on the lease concerned, see our analysis of the construction cost index in commercial leases.

Grounds of nullity: when the indexation clause is deemed unwritten

The case law of the Third Civil Chamber of the Cour de cassation has progressively identified several defects that bring down an indexation clause. For the tenant, these grounds are so many bases for challenge and, for the landlord, so many points of vulnerability to be audited.

The distortion between the period of variation of the index and the revision interval

This is the ground most frequently invoked. An indexation clause deemed unwritten is most often so because it creates a distortion between the period of variation of the index and the time elapsing between two successive indexations.

The mechanism is best understood through an example. A clause provides for annual indexation, but fixes as its starting point a fixed base index, that of the quarter in which the lease was signed, while comparing each year the index for the same quarter. As long as the clause operates at regular one-year intervals by comparing two indices one year apart, there is no distortion. By contrast, where the drafting results in comparing a variation of the index over a period different from the interval between two revisions, for example a variation calculated over fifteen months for an annual revision, the Cour de cassation considers that the clause distorts the sliding-scale mechanism and deems it unwritten.

The sensitive point is the first indexation. Many leases provide for a first indexation on a date which does not coincide exactly with the anniversary of the initial reference index, creating a first period of variation that is longer or shorter than the following ones. This single offset first deadline is enough to establish the distortion.

The one-way indexation clause

A second ground concerns clauses which exclude any downward variation of the rent. Some leases stipulate that the rent may only increase, indexation operating only where the index rises, or that the revised rent may never be lower than the initial rent.

The Cour de cassation holds that a clause which excludes reciprocity of variation, by blocking the operation of the index downwards, distorts the normal functioning of the sliding scale and is deemed unwritten. The reasoning is mechanical: a sliding scale by nature implies variation in both directions. Neutralising a decrease denatures the clause. This ground took on particular sharpness during periods when indices fell, when tenants were able to challenge clauses that had until then been painless.

A prohibited reference index or one unrelated to the purpose of the contract

A third ground relates to the choice of index. Indexation based on an index prohibited by Article L. 112-1 of the French Monetary and Financial Code, such as the general price level, is void. Likewise, an index with no direct relationship to the purpose of the lease or to the activity of the parties, within the meaning of Article L. 112-2, is liable to be struck down. Disputes on this basis remain rarer for recent leases using the ILC or the ILAT, but they still concern older leases indexed on indices that have become inadequate.

Other neutralising stipulations

Other ancillary clauses may be targeted: those establishing a guaranteed floor which deprives the index of any effect, or those combining several correctives resulting in practice in an increase disconnected from the actual movement of the index. The analysis is concrete: the judge examines whether the stipulation denatures the indexation mechanism.

The regime of the sanction: deemed unwritten and imprescriptibility

The characterisation adopted is not ordinary nullity but the clause being deemed unwritten. Article L. 145-15 of the French Commercial Code deems unwritten clauses which defeat certain provisions of the statute. This characterisation has major procedural consequences for the landlord.

No limitation period for the action

The distinction between nullity and a clause deemed unwritten is decisive. An action for nullity is, in principle, time-barred after five years. By contrast, the Cour de cassation holds that the action seeking a declaration that a clause is deemed unwritten is subject to no limitation period. In other words, a tenant may raise the defect in its indexation clause at any time, including at the end of the lease or on renewal, without the passage of time since signature being held against it.

This imprescriptibility is the blind spot of many portfolios. A lease concluded eight years ago, whose clause reproduces a defective model, remains exposed. The landlord cannot rely on any consolidation through the passage of time.

Severability: the whole clause or an isolated stipulation

A central question governs the extent of the sanction: does the clause being deemed unwritten affect the indexation clause as a whole, or only the stipulation that creates the defect?

The case law has moved towards an approach based on severability. Where the defective stipulation can be isolated without depriving the clause of its substance, only that stipulation is deemed unwritten, the indexation mechanism subsisting for the rest. Thus, in the case of a one-way clause, the Court tends to neutralise only the stipulation excluding a decrease, while maintaining reciprocal indexation. Conversely, where the defect affects the heart of the mechanism, for example a distortion inherent in the method of calculation itself, the entire indexation clause falls, and the rent remains frozen at its initial contractual amount until a possible statutory review.

This nuance governs the defence strategy. The landlord has every interest in arguing severability in order to preserve the very principle of indexation, while the tenant will seek to show that the defect contaminates the whole clause.

The financial effects: repayment of rent unduly received

The challenge is not limited to depriving the landlord of future indexations. It gives the tenant an action for repayment of sums already paid under indexations applied on the basis of the neutralised clause.

The mechanism of recovery of undue payment

Once the clause is deemed unwritten, the increases received on its basis lack a cause. The tenant may claim their repayment on the basis of recovery of undue payment (répétition de l'indu), governed by Articles 1302 et seq. of the French Civil Code. In practical terms, the landlord must repay the difference between the rent actually collected and the rent that would have been due without the defective indexation.

The five-year limitation period for repayments

Here an essential correction operates in favour of the landlord. While the action to have the clause declared unwritten is not subject to limitation, the action for repayment of overpayments is time-barred after five years. The tenant can therefore recover only the indexations unduly received during the five years preceding its claim.

This separation of regimes is crucial when quantifying the risk. On a long lease with a clause defective from the outset, the landlord's exposure does not cover the entire history, but the last five financial years. The calculation requires reconstructing, year by year, the theoretical non-indexed rent and comparing it with the rent demands actually sent to the tenant.

A numerical illustration of the reasoning

Take commercial premises whose initial rent was raised, through the operation of an indexation clause later held to be defective, to a significantly higher amount. If the defect affects the mechanism as a whole and the clause falls entirely, the tenant obtains repayment of the cumulative difference over five years, then pays for the future the rent frozen at its original amount, until a statutory review, based on Article L. 145-38 or L. 145-39, possibly corrects the situation. The effect is twofold: an immediate loss of cash and a lasting block on the rental value.

The landlord's litigation and defensive strategy

Faced with a challenge to the indexation of a commercial rent, the landlord has several lines of defence, provided it anticipates.

The first step is to recharacterise the alleged defect. Not all distortions are equal: the landlord must show that the clause operates at regular intervals and that the period of variation of the index coincides with the interval between two revisions. A rigorous reading of the contractual mechanics often makes it possible to rule out a distortion wrongly alleged by the tenant.

The second line is severability, already mentioned. Arguing for the maintenance of the clause stripped only of its defective stipulation preserves the essential: the ability to index for the future.

The third line concerns quantification. The landlord must systematically raise the five-year limitation period against any repayment claim relating to an earlier period, and challenge the tenant's method of calculation, in particular where it ignores downward movements of the index which would have reduced the difference.

Finally, in renewal situations, the landlord may integrate the neutralisation of the clause into the negotiation of a new rent, curing the defect through a compliant indexation clause in the renewed lease. The terms liable to be renegotiated on that occasion, including the rent and its cap, are dealt with separately in our article on the renewal of the commercial lease.

Securing the drafting of the clause for the future

Prevention remains the best investment for a property company or an investor. Litigation always costs more than drafting that is locked down from the outset.

Several principles apply. The period of variation of the index must correspond exactly to the interval between two indexations: for an annual indexation, two indices twelve months apart are compared, with no exception for the first deadline. Any fixed base index which, combined with periodic revision, would create a mechanical distortion must be ruled out. The clause must provide for reciprocal variation, upwards and downwards, with no guaranteed floor neutralising the index. The index used must be the ILC or the ILAT depending on the nature of the activity, consistent with the purpose of the lease.

It is also prudent to insert an express severability clause, stipulating that the possible neutralisation of part of the indexation clause does not call into question the principle of indexation or the remaining stipulations. This precaution does not bind the judge absolutely, but it supports the argument in favour of a partial deeming as unwritten.

For a portfolio, a systematic review of existing indexation clauses is necessary. The aim is to identify exposed leases, to measure the risk of repayment over five years and to use renewal windows to substitute a compliant clause. This exercise is as much a matter of asset audit as of legal audit.

Conclusion

Challenging a sliding-scale clause is not a niche dispute: it is a structural risk for any holder of commercial assets, aggravated by the imprescriptibility of the action to have a clause deemed unwritten. The informed landlord does not suffer this risk, it manages it. The separation between the imprescriptibility of the action for neutralisation and the five-year limitation period for repayments caps the financial exposure, and the severability of the sanction offers a real lever for preserving the very principle of indexation.

The real line of defence, however, lies upstream, in the drafter's pen. A clause whose period of variation coincides with the revision interval, which allows variation in both directions and which relies on an index compliant with the French Monetary and Financial Code, does not expose itself to challenge. Before any management act or acquisition, have all your indexation clauses audited by counsel: each defective lease identified in time is a repayment avoided and a rental value secured.

Frequently asked questions

Does an indexation clause deemed unwritten make the whole lease void? No. A clause being deemed unwritten affects only the clause, or even only the defective stipulation where severability is accepted. The lease subsists in all its other provisions. Depending on the case, the indexation disappears entirely and the rent is frozen at its initial amount, or only the defective part is neutralised and the indexation mechanism continues to take effect for the rest.

What is the time limit for challenging the indexation of a commercial rent? The action seeking a declaration that a sliding-scale clause is deemed unwritten is subject to no limitation period: the tenant may bring it at any time during the lease. By contrast, the action for repayment of rent unduly received is time-barred after five years, so that repayment can cover only the indexations applied during the last five years.

What is a distortion between the period of variation of the index and the revision interval? It is the main ground for neutralisation. A distortion exists where the period over which the index varies does not correspond to the period separating two indexations. For an annual indexation, two indices exactly twelve months apart must be compared. An offset, often introduced from the first deadline or through the use of a fixed base index, is enough to cause the clause to be deemed unwritten.

Is a clause providing that the rent may only increase valid? No. A one-way indexation clause, which excludes downward variation of the rent, distorts the functioning of the sliding scale and is deemed unwritten. A sliding scale by nature implies reciprocity of variation. The case law tends to neutralise only the stipulation excluding a decrease, maintaining reciprocal indexation for the future.

Must the landlord repay all indexations received since the lease was signed? No. Repayment is limited to the sums unduly received during the five years preceding the claim, by application of the five-year limitation period for recovery of undue payment. The calculation consists in reconstructing the theoretical rent without the defective indexation and comparing it with the rent actually collected over that period.

Which indices can be used to index a commercial lease since the Pinel Law? Since the law of 18 June 2014, the review of commercial leases relies on the commercial rent index (ILC) for commercial and craft activities, and on the tertiary activities rent index (ILAT) for tertiary activities. The construction cost index (ICC) has been removed from the scope of review. The index used must remain directly related to the purpose of the lease within the meaning of Article L. 112-2 of the French Monetary and Financial Code.

How can the drafting of a sliding-scale clause be secured to avoid challenge? The clause must make the period of variation of the index coincide with the interval between two indexations, including for the first deadline, provide for reciprocal variation upwards and downwards, exclude any guaranteed floor and use a compliant index, the ILC or the ILAT. The addition of an express severability clause strengthens the landlord's position in the event of a partial challenge.