Covid-19 consequences on commercial leases terminations under French Law

The Covid-19 pandemic, which led the French government to close all “non-essential” businesses for several months, had a major impact on commercial leases.

Administrative closures of so called “non-essential” shops have taken place during the three national lockdowns that France has experienced so far[1].

The definition of “essential shops” evolved throughout the months and included more businesses each time. For instance, bookshops weren’t considered as essential during the first two lockdowns but were allowed to remain open during lockdown number three.

On May 19^th, many restrictions will be lifted in France which will allow numerous shops and venues to reopen: bars and restaurants’ sidewalk sitting areas at half-capacity, museums, theaters, and many “non-essential shops”. Being closed to the public since October 30^th, these businesses’ commercial activities have been dramatically reduced.

This long closure raises the question of what should happen to the rent payments for the periods of administrative shutdowns of the premises.

General principals of commercial leases terminations at the lessor’s initiative

According to commercial law article L145-4, a commercial lease is in principle signed for a duration of 9 years and must be carried out to the end of the contract duration.

The lessee who wishes to terminate a commercial lease in advance can do so at each three-year contract term, without a motive, complying to a six months’ notice.

The lessor is entitled to the same right, but he however is required to motivate his will to terminate the commercial lease.

Any notice given to the lessee by the lessor must be motivated, on pain of nullity, under article L145-4 of the Commercial Code.

He must notify the lessee his intent to terminate the lease with 6 months’ notice by addressing a registered letter with acknowledgment of receipt or through the action of a court bailiff.

Articles L145-6 and L145-7 of the Commercial Code state that the lessor who wishes to terminate a commercial lease must:

• Either provide an equivalent replacement premise;
• Or pay the lessee eviction compensation costs in order to compensate for the damageable consequences of the temporary privation of the premise, taking into account, if necessary, the temporary installation carried out at the expense of the Lessor and the reimbursement of its normal moving and relocation expenses.

The lessee is also entitled to this eviction compensation in case of refusal by the lessor to renew the lease, solicited by the lessee.

General principals of commercial leases terminations as a consequence of breach of contract by the lessee that justify a judicial request

For the lessor, an alternative to terminate in advance a commercial lease is to revoke the contract based on the lessee’s breaches of his contractual obligations.

The commercial lease concluded between the two companies requires the lessee to pay rent to the lessor on a regular basis.

To that effect, commercial leases include a termination clause which provides that, a month after an order to pay the due rent and additional costs has been issued to the lessee, mentioning the lessor’s intent to use this termination clause, the lessor is entitled to terminate the lease.

The current public health crisis has nevertheless been considered by some courts as a serious motive for default.

French Government’s protective measures in favor of lessees temporarily modify the commercial leases termination legal base

Since the beginning of this crisis, the French government’s public policies intend to guarantee lessees certain protections, such as the possibility for lessees to delay or to stagger rent payments on several months.

More specifically, order n°2020-316 of March 25^th, 2020 implemented a principle according to which no coercive measure will be taken in the case of a default in the payment of commercial leases rents due between March 12^th and September 10^th, 2020.

What it actually means is that the lessee was allowed during this time frame to suspend rent payments without enduring any late payment penalty.

Nonetheless, this law does not question the requirement of payment of the rents, which still stand.  

A judgment on the substance from July 10^th, 2020 has been issued on this matter and stated that as far as article 4 of the order prohibited coercive enforcement measures, rents for the time frame at stake remained to be paid by the lessee and could be lawfully demanded by the lessor. (TJ Paris, RGn°20/04516)

Subsequent decisions have taken the same position.

Thereafter, during the second lockdown, article 14 of the legislation n°2020-1379 from November 14^th, 2020 implemented a new protection mechanism to businesses by allowing them to fully delay or stagger the payment of bills or rents affiliated with commercial leases shutdowns because of the public health state of emergency, and this, retroactively to October 17^th, 2020.

These measures are applicable until the expiration of a two months’ period starting when the business of the affected company ceases to be impacted by the administrative closure.

Justifications for non-payment used by the lessees: force majeure, loss of the goods, exception of non-performance and unforeseen circumstances

In order to oppose the termination by court order of the commercial lease by the lessor for default, lessees have made use of legal mechanisms deriving for general contract law.

Certain lessees called on the force majeure to contest the payment of the due rents.

Force majeure is characterized by “the occurrence of an event exogenous to the debtor, unpredictable and compelling, of such a kind that it makes impossible the obligation’s execution”. (CA Paris, 7 mai 2021, n°20/11923).

Several courts have nonetheless decided that the implementation of a solidarity fund and the possibility to delay or stagger rent payments by Parliament constituted an obstacle to the compelling dimension of the force majeure. (T.com, Lyon 11 nov. 2020, n°2020J00420 ; CA Riom, 2 mars 2021, n°20/01418).

The Paris Court of Appeal concluded in a decision delivered on May 7^th, 2021 that the “obligation to pay any amount of money is always subject to execution, if necessary under duress, on the debtor’s estate. It is, in nature, not impossible: it is only more difficult or expensive”. (CA Paris, 7 mai 2021, n°20/11923).

Debtors also used article 1722 of the Civil Code, related to the loss of the goods, in order to justify the default of payment of the due rents.

This article provides that “if, during the lease duration, the rented premise is fully destroyed by fortuitous occurrence, the lease is rightfully terminated; if it is only partially destroyed, the lessee can, according to the circumstances, require either a diminution of the renting price, or the termination of the lease. In both cases, no compensation is due”.

This argument has been considered by some urgent application judges as constituent, a the very least, of a serious contestation, being a sufficient justification to refer to a decision on substance.

Lessees have also called on the exception of non-performance to justify the default.

It has been decided by urgent application judges that the exception of non-performance could constitute a serious contestation, and yet recent decisions state that the lessee can under no circumstance oppose to the lessor a breach of his obligation of delivery, insofar as the impossibility of exploitation, if it is proved, is not imputable to him.

Unforeseen circumstances, which represents “a change of circumstances that could not have been predicted at the time of the contract formation” that “makes the execution excessively expensive for one party who didn’t consent to carry this risk” as stated in article 1195 of the Civil Code, is another motive that has been raised by lessees before jurisdictions. It gives right to renegotiation of the terms of the contract. If it were to fail, the lease could be terminated.

As of today, the only judge who has been asked to elaborate on substance, to our knowledge, has rejected this motive, by strictly assessing the “execution excessively expensive” and considering that rent did not increase because of the pandemic.

Taking into account the different court decisions issued by French jurisdictions so far, negotiation is the most sensible solution on the basis of contractual good faith, to attempt to settle out of court the fate of the rents for the closure period.

On that matter, several court orders, based on articles 1103 and 1104 of the Civil Code, used the formula saying that “parties are obliged, in case of exceptional circumstances, to verify whether these circumstances do not make necessary an adaptation of the execution modalities of their respective obligations.” (CA Riom, 2 mars 2021, n°20/01418 ; TJ Paris, 21 janv. 2021, n°20/55750 ; T.com. Nancy, 16 déc. 2020, n°2020008085TJ Paris, 26 oct. 2020, n°20/55901).

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In a nutshell, these general contract law mechanisms are hardly applicable in this global health crisis context because of the protective governmental measures in favor of lessees.

The French State did allow for a rent payment suspension but in no case does it constitute an abolition of the payment obligation.

The lessor can thus rightfully terminate the commercial lease for default of payment of the due rents during the exceptional times related to the Covid-19 pandemic, during which the French government enforced business activity restrictions and showed great flexibility to the lessees.

For more information, contact ODEON’s team.