Subtenant under a commercial lease (Art. L. 145-32): the right to renewal it can assert against the landlord

An audit of leases across a portfolio of offices or shops regularly turns up the same anomaly: the actual occupier of the premises is not the tenant named in the lease. A retailer trades from part of the ground floor, a subsidiary occupies two floors, a service provider has set up in a storeroom. In most cases, the landlord knows of the situation, has let it develop, and has never formalised its agreement. This tolerance is not neutral: it can turn an occupier with no contractual link to the owner into the holder of a right to renewal directly enforceable against the owner, together with, in the event of refusal, an eviction indemnity (indemnité d'éviction). This guide deals with subletting from the angle of the risk borne by the institutional landlord: the exact conditions of Article L. 145-32 of the French Commercial Code, the mechanism of tacit approval (agrément), the chronology of the acts that crystallise the subtenant's right, and the resulting financial exposure.

What Article L. 145-32 places on the owner

The central text runs to three sentences, the scope of which is systematically underestimated by asset managers.

"The subtenant may request renewal of its lease from the main tenant to the extent of the rights that the latter itself holds from the owner. The main tenant must, where appropriate, bring its owner into the proceedings. When the main lease comes to an end, the owner is bound to renew only if it has, expressly or tacitly, authorised or approved the sublease and if, in the case of a partial sublease, the premises that are the subject of the main lease do not form an indivisible whole." (Article L. 145-32 of the French Commercial Code)

Two distinct mechanisms coexist in this provision, and confusing them leads to a misjudgement of the exposure.

The first is horizontal: the subtenant under a commercial lease requests renewal of its sublease from its own counterparty, the main tenant. The right is here capped by the right of the main tenant itself. If the main lease is for nine years and expires in two years, the sublease cannot be renewed beyond that. The adage that no one can transfer more rights than they have finds direct application here.

The second is vertical, and it is the one that creates the risk: when the main lease comes to an end, the subtenant may take action against the owner itself to obtain a direct lease. This right is not automatic. It is subject to two cumulative conditions, authorisation or approval of the sublease, and the absence of indivisibility of the premises in the case of a partial sublease. But when they are met, the owner finds itself bound to a tenant it did not choose, over a surface area it may have intended for restructuring, and at a rent that is not necessarily the one it received from the subtenant through its tenant.

Regular, irregular and tolerated subletting: the dividing line

The default prohibition under Article L. 145-31

Article L. 145-31 of the French Commercial Code lays down a rule of relative prohibition: "Unless the lease provides otherwise or the landlord agrees, any total or partial subletting is prohibited." Subletting under a commercial lease is therefore, by default, a breach of contract by the tenant, which can be sanctioned by the termination clause (clause résolutoire), by judicial termination or by refusal of renewal for a serious and legitimate reason within the meaning of Article L. 145-17 I 1°.

The same text organises the procedure for involving the owner. Where the sublease is authorised by the lease or accepted, the tenant must notify the landlord of its intention to sublet by extrajudicial act or by registered letter with acknowledgment of receipt. The landlord then has fifteen days from receipt to state whether it intends to take part in the deed. If it refuses or remains silent, it is passed over: the sublease goes ahead without it, but it is no less regular provided that the principle was admitted.

This fifteen-day period is a classic trap for property departments. Silence is not opposition. It cures nothing and does not prevent the sublease from taking effect; it only deprives the landlord of control over the terms of the deed, in particular the amount of the sub-rent, the use of the sublet premises and the duration granted. The formalities of authorisation and participation in the deed are dealt with separately in our article on the landlord's control of subletting.

Tacit approval: the blind spot of property management

The most dangerous point of Article L. 145-32 is the word "tacitly". The direct right to renewal does not require written authorisation. Approval is enough, and that approval may result from the owner's conduct.

The courts in principle require the approval to be certain and unequivocal. Mere knowledge of the sublease, even of long standing, does not in itself amount to approval. But the line is quickly crossed once the landlord behaves as if it had accepted the situation. The elements usually taken into account as a body of evidence are the following:

• collecting rent revised by reference to the sublease, or exercising the right to an increase provided for in Article L. 145-31 where the sub-rent exceeds the main rent;
• issuing a works authorisation, a signage authorisation or an agreement to a change of use (déspécialisation) directly to the subtenant;
• invoicing charges, taxes or energy recharges addressed to the subtenant;
• the landlord's involvement in contractual exchanges with the subtenant on the operation of the premises, access, security or handover;
• mention of the occupation, without reservation, in a rent roll annexed to a sale deed or in a refinancing data room.

An institutional landlord mechanically multiplies these acts, because the day-to-day management of a building runs through the real occupier. This is why the risk of tacit approval is structurally higher with a professional owner than with an individual landlord.

The clock effect of the two-year limitation period

Article L. 145-60 of the French Commercial Code subjects actions brought under the commercial lease statute to a two-year limitation period. An irregular sublease that is known and uncontested for more than two years puts the landlord in a weakened position: its action based on the breach becomes open to argument, and prolonged inaction feeds the case for tacit approval. Time works against the owner, and tolerance turns into a right.

For a fund acquiring an asset, the consequence is direct: the tacit approval given by the seller is enforceable against the buyer, which takes over the lease as it stands. The discount negotiated on a partially sublet building does not always offset what is really being acquired, namely a latent liability for renewal and eviction.

The conditions of the right to renewal enforceable against the landlord

First condition: an authorised or approved sublease

This is the pivotal condition. If the sublease is irregular and was never approved, the subtenant is, as regards the owner, an occupier without right or title once the main lease has ended. It has no enforceable right to renewal and may be evicted, subject to the use of an appropriate procedure.

Two levels must be distinguished. Authorisation relates to the principle of subletting, and may appear in the lease itself. Approval relates to the sublease actually concluded, that is, to the identity of the subtenant, the surface area and the use. A clause authorising subletting solely to companies in the tenant's group does not amount to approval of a sublease granted to an outside third party. Conversely, a general authorisation clause, drafted without reservation, is enough to open the direct right to renewal without any further act by the landlord being necessary.

Second condition: absence of indivisibility in the case of a partial sublease

Where the sublease covers only part of the premises, the owner is bound to renew only if the premises that are the subject of the main lease do not form an indivisible whole. Indivisibility is assessed in concrete terms: physical layout, independence of access, existence of shared facilities, and the possibility of operating the sublet part separately without compromising operation of the rest.

A lease clause stating that the premises form an indivisible whole is useful, but it is not self-sufficient: it is an element of assessment that the judge weighs against the physical and functional reality of the whole. An office floor with independent access from the landing, a separate meter and its own sanitary facilities will hardly be characterised as indivisible from the rest of the building, whatever the wording of the lease. Conversely, a basement storeroom served only through the main premises has no operational autonomy.

This is a drafting point to be dealt with upstream, when the main lease is concluded or renewed: the description of the premises, the mention of the accesses and the way charges are divided build, or destroy, the case for indivisibility that will be relied on ten years later.

Third condition: the subtenant must itself meet the conditions of the statute

The subtenant's right to renewal exists only if it is itself within the scope of the statute. It must operate a business or craft business in the sublet premises, be registered in the commercial and companies register or the trades register for the establishment concerned, and have its own clientele attached to those premises. A subtenant that carries on only an incidental activity there, that receives no customers there or that has not registered the establishment is outside the statute, and its eviction gives rise to no indemnity.

This filter is the landlord's first line of defence. Before negotiating a regularisation, the Kbis extract of the sublet establishment, the reality of the operation and the independence of the clientele must be checked.

Fourth limit: the extent of the main tenant's rights

In the horizontal relationship, the subtenant can claim only what the main tenant holds. If the main lease is terminated for breach by the tenant, the sublease disappears with it. If the main lease is a short-term derogation lease within the meaning of Article L. 145-5, the sublease cannot confer statutory rights. If the main tenant has itself lost its right to renewal, through failure to register or as a result of a notice to terminate not contested within the time limits, the subtenant bears that extinction. The conditions of this regime and its conversion into the statute are set out in our article on the short-term derogation lease.

The mechanism of Article L. 145-32 is therefore not a general way around the main lease. It is a direct right whose birth is conditional on the end of the main lease, and whose substance is limited by the landlord's conduct towards the sublease.

Procedural chronology: the acts that crystallise the risk

Managing the subletting risk is above all a question of timing. Several sequences overlap and follow one another.

Notice to terminate served on the main tenant must be given at least six months in advance for the last day of a calendar quarter, in accordance with Article L. 145-9. It is for the main tenant to pass that notice on to its subtenant; failing that, it incurs liability towards the subtenant, but this default does not protect the owner, who will remain exposed to the direct action if the conditions of Article L. 145-32 are met.

The main tenant's request for renewal, governed by Articles L. 145-10 et seq., gives the landlord three months in which to state its refusal. After that period, it is deemed to have accepted the principle of renewal. Where a sublease exists, this silence also amounts to consolidation of the existing occupation.

The request for renewal made by the subtenant must be addressed to the main tenant, which must bring the owner into the proceedings. In practice, the owner often discovers the existence of the subtenant at the stage of the summons, when the time useful for contesting the regularity of the sublease has already been used up by the two-year limitation period of Article L. 145-60.

Finally, relying on the serious and legitimate reason presupposes a prior formal notice to put an end to the breach, Article L. 145-17 I 1° requiring that the breach has continued or been repeated more than one month after that formal notice. A landlord considering refusing renewal without indemnity on account of an irregular sublease must therefore have completed this step, by an act that is precise in its terms and in its description of the breach.

The financial exposure: sub-rent, renewal rent and eviction indemnity

The right to increase the main rent

Article L. 145-31 provides that where the rent under the sublease is higher than the price of the main lease, the owner has the right to demand a corresponding increase in the rent under the main lease, the amount being fixed by the judge failing agreement. This lever is real but it presupposes a practical condition: knowing the sub-rent. A landlord that did not take part in the deed, that never required communication of the sublease contract and that did not stipulate a periodic reporting obligation does not have the information. The margin captured by the main tenant, sometimes considerable on Paris assets with old leases, then escapes the owner for a long time.

The rent under the lease granted to the subtenant

Where the subtenant obtains a direct lease when the main lease ends, the question of price becomes central. A landlord that hoped to take back the asset in order to re-let it at market rental value is faced with a contractual continuity whose economic logic largely escapes it. Depending on the characterisation adopted, renewal of a pre-existing letting relationship or new lease, the rules for fixing the rent differ, and the gap between the capped rent resulting from the main lease and the current rental value is the main financial stake in the litigation.

This is also where the argument on removal of the rent cap (déplafonnement) is played out. The existence of an authorised sublease, the change in the actual use of the sublet premises and the modification of the parties' respective obligations within the meaning of Article R. 145-8 of the French Commercial Code, like the characteristics of the premises within the meaning of Article R. 145-3, are the usual grounds for a request to fix the rent at rental value. These arguments succeed only if the landlord has documented over time the state of the premises, the actual use and the authorisations issued. An incomplete management file in practice rules out any demonstration of a notable change.

The eviction indemnity due to the subtenant

The maximum risk is that of a refusal of renewal against a subtenant that meets the conditions of Article L. 145-32. The owner must then compensate it on the basis of Article L. 145-14, the indemnity being equal to the loss caused by the failure to renew and including in particular the market value of the business, removal and re-installation costs, and the transfer fees and duties payable for a business of the same value. On the methods for valuing this indemnity, see our analysis of the calculation of the eviction indemnity and its scales.

This exposure is cumulative, where applicable, with the indemnity due to the main tenant in respect of the part of the premises it operates itself. By contrast, a main tenant that has ceased all operation in the sublet premises cannot in principle claim the benefit of the statute for that part, since it does not operate a business there. A landlord faced with a total and approved sublease is in the least favourable configuration: a main tenant reduced to the role of financial intermediary, and a subtenant holding a direct right together with an eviction indemnity calculated on the value of a business it has developed in the building.

For an investor acquiring an asset with a view to a major restructuring, energy-efficiency upgrading or a change of use, this indemnity is not a marginal risk: it determines the very feasibility of the transaction and must appear in the business plan on the same footing as capex.

Dealing with the risk: audit, drafting, remediation

The lease audit as a precondition to any transaction

Before an acquisition, a refinancing or a restructuring, the review of the leases must include a specific part dedicated to detecting third-party occupation. The points to check are the following:

• the identity of the actual occupier of each unit, compared with the tenant named in the lease, by cross-checking signage, letter boxes, nameplates, insurance policies and Kbis extracts for the establishment;
• the exact wording of the subletting clause in the main lease, distinguishing absolute prohibition, intra-group authorisation and general authorisation;
• the existence of a deed of approval, a three-party amendment or correspondence amounting to approval;
• any trace, in the management history, of acts by the landlord addressed directly to the subtenant;
• the date on which the landlord became aware of the occupation, in light of the two-year limitation period;
• the physical configuration of the sublet premises, in light of the indivisibility condition.

Drafting the main lease

On the landlord's side, three stipulations significantly reduce the exposure. A clause prohibiting subletting, with exceptions exhaustively listed and subject to the landlord's prior written approval of the identity of the subtenant. A continuing information obligation, requiring communication of the sublease contract and its amendments, together with an annual declaration of the sub-rent received, a practical condition for exercising the right to an increase under Article L. 145-31. A description of the premises and accesses built to support the indivisibility of the let premises as a whole, supplemented by an express clause to that effect.

Remediation options for an existing situation

Where the sublease is already in place, three routes are open to the owner, to be weighed according to the strategy for holding the asset.

Challenge requires prompt action, by formal notice to put an end to the irregular occupation, followed by enforcement of the termination clause or an action for termination, taking account of the one-month period in Article L. 145-17 I 1° and of the two-year limitation period. Any reluctance to act feeds the case for tacit approval.

Negotiated regularisation consists in turning an endured situation into a controlled one: a three-party amendment, express approval accompanied by reservations on duration and use, revision of the main rent to capture the sub-rent differential, and a clear stipulation on what becomes of the occupation when the main lease expires.

Economic neutralisation, finally, aims to build the risk into the price: a provision for eviction indemnity, a specific liability warranty in the sale deed, or an adjustment to the valuation of the asset on a deferred-vacancy scenario.

Conclusion: tolerance is a decision, not an absence of decision

From the point of view of the institutional landlord, subletting is not a secondary matter of property management. It is a mechanism by which a third party gradually acquires rights, which feeds on the owner's silence and which the two-year limitation period locks in after two years. The dividing line rests on a single point: has the landlord, by an act or by conduct, approved the occupation. Everything else, indivisibility, registration of the subtenant, the amount of the renewal rent, is then argued, but on ground already largely determined by the quality of the management file.

The position to adopt is therefore as follows: treat each third-party occupation as a dated and documented asset management decision, and not as a commercial tolerance. In concrete terms, before any acquisition or refinancing, have a map made of the actual occupiers unit by unit, checked against the subletting clauses and the history of management correspondence; and for the situations identified, decide within two years between challenge and contractual regularisation. Beyond that, the choice no longer belongs to the owner.

Frequently asked questions

Can a subtenant obtain a lease directly from the owner without the owner's agreement? No, not in the absence of authorisation or approval. Article L. 145-32 of the French Commercial Code makes the owner's obligation to renew conditional on its having, expressly or tacitly, authorised or approved the sublease. Without approval, the subtenant becomes an occupier without right or title when the main lease ends. The point of vigilance is the tacit nature of approval: management acts addressed directly to the subtenant may be enough to establish it.

Does the landlord's silence for fifteen days after notification of the intention to sublet amount to refusal? No. Article L. 145-31 provides that the tenant notifies its intention to sublet by extrajudicial act or registered letter with acknowledgment of receipt, and that the landlord has fifteen days to state whether it intends to take part in the deed. If it refuses or does not reply, it is passed over. Silence therefore does not stand in the way of the sublease where the principle is admitted by the lease; it only deprives the landlord of control over the terms of the deed.

Is a clause stating that the premises form an indivisible whole enough to rule out the subtenant's right to renewal? It contributes to that end without guaranteeing it. Article L. 145-32 rules out the obligation to renew where, in the case of a partial sublease, the premises that are the subject of the main lease form an indivisible whole. Indivisibility is assessed in concrete terms, having regard to the physical layout, the independence of the accesses and the possibility of separate operation. A clause contradicted by the physical reality of the premises will not be decisive.

Can the landlord recover the margin made by the main tenant on the sublease? Yes, within the limit provided for in Article L. 145-31: where the sublease rent exceeds the price of the main lease, the owner may demand a corresponding increase in the rent under the main lease, fixed by the judge failing agreement. The amount of the sub-rent must still be known, which presupposes having taken part in the deed or having stipulated a contractual obligation to provide it. The action remains subject to the two-year limitation period of Article L. 145-60.

Does an irregular sublease make it possible to refuse renewal without an eviction indemnity? It may constitute a serious and legitimate reason within the meaning of Article L. 145-17 I 1° of the French Commercial Code, which permits refusal of renewal without indemnity. Relying on it presupposes a prior formal notice to put an end to the breach and its persistence more than one month afterwards. A landlord that has let the sublease develop for several years risks having its inaction analysed as tacit approval, which neutralises this argument.

What becomes of the sublease if the main lease is terminated for breach by the tenant? It disappears with it. The subtenant holds its rights only to the extent of those of the main tenant, in the very terms of Article L. 145-32. Termination of the main lease extinguishes the subtenant's title to occupy, and it can then assert no right to renewal against the owner, subject to cases where direct approval by the landlord has created an independent contractual relationship.

Is a buyer of a building bound by a sublease tolerated by the seller? Yes. The buyer takes over the commercial lease as it stands, with the consequences of the approval, even tacit, given by its predecessor. Late discovery of an approved sublease does not allow it to go back on the situation. Hence the need, at the due diligence stage, to audit the actual occupations unit by unit and the history of management correspondence, and then to deal with the risk by a price adjustment, a provision or a specific warranty.