French hotel, tourist residence and apart-hotel leases are evolving
By Christopher Boinet, Lawyer at the Paris Bar and Partner at In Extenso Avocats and Anne Epinat, Partner In Extenso Avocats
French commercial leases and contract law governing hotels, hotel residences, tourist residences and restaurants constitute essential legal and economic stakes. In this sense, the 2014 Pinel Law represents a major legislative change for landlords and tenants.
Over the last three years, major reforms have taken place that change the status of commercial leases and contract law, untouched for decades. Lawmakers took inspiration from residential lease interactions, seeking to frame and rebalance the relationship between commercial landlords and tenants
The Pinel Law n° 2014-626 dated 18 June 2014 and its decree of application dated 3 November 2014 revolutionised the commercial lease relationship in favour of the tenant. This constituted the most important legislative change in the commercial lease field in over 60 years – since the 30 September 1953 decree which laid down the applicable regulations in the area.
Further, the Macron Law (n° 2015-990 dated 6 August 2015) notably relaxed the formalities for giving notice. In addition, Decree n° 15-282 dated 11 March 2015 requires seeking an amicable settlement before taking judicial action, and has a specific application for commercial leases and consequently for hotel leases.
Lastly, Ordinance n° 2016-131 dated 10 February 2016 has, since the 1 October 2016, modified contract law and obligations, with consequences for commercial and hotel leases.
A number of lessons can be drawn from the consideration of commercial leases concluded in the context of hotels, apart-hotels, tourist residences and restaurants.
Highlight 1: Different lease rules for each type of property
The three different lodging types are not, in fact, necessarily subject to the same lease regulations.
Commercial leases: reinforced obligations in contract conclusion and execution
The 10 February 2016 Ordinance (applicable from 1 October 2016) introduced in the French Civil Code the obligation to negotiate in good faith (new article 1104 of the French Civil Code) compensation for the breakdown in discussions and the protection of confidential information exchanged during negotiations. Much more, the Ordinance introduced a general right to information (new article 1112-1 of the French Civil Code).
This is a sensitive point when delivering premises to the tenant of an establishment such as a hotel, a tourist residence, an apart-hotel or a restaurant. These amendments, which are public policy (i.e. they cannot be waived), reinforce the practice already established by case law.
The major reform is now related to the admission of 'unpredictability', allowing judges to amend a contract in the event of a change in circumstances – unforeseeable at the time the agreement was concluded, and which render its execution excessively onerous for one party. In general, the Court of Appeal considers that it is not the 'unexpected' that must be taken into account, but the 'unpredictable', i.e. 'that which could not be reasonably foreseen by the obligor when contracting an agreement.'
Here, cases spring to mind where rent may be overvalued at the beginning of the lease agreement and where the economic balance of the contract is thus rendered fragile. Rent levels may become excessive due to economic or technical circumstances beyond the control of the tenant.
Lesson n° 1
The revision of a commercial lease by judges for reasons of unpredictability must take into account the rental value of the premises. Public policy, rental value is the key reference for commercial leases where it is difficult to determine the rent.
Unpredictability, which supposedly enables judges to re-establish an economic balance in the parties' relationship, will come up against a rental value condition. This may remain excessive when compared to the 'unforeseeable' economic constraints encountered by the tenant who can no longer cover their costs.
The new legal innovation of unpredictability – a veritable revolution compared to the applicable regulations thus far – here runs into a first hurdle for commercial leases (relating to hotels, apart-hotels, tourist residences and restaurants).
The three-year termination option offered to the tenant
Prior to the 2014 Pinel Law, it was possible to provide for a fixed-term rental period (e.g. nine years) in the lease, during which the tenant may not leave the premises.
The Pinel Law, article L 145-4 of the French Commercial Code, amended, imposes a three-year termination option to be offered to the tenant, except in four cases, including:
- leases with an initial term exceeding nine years, leases for premises exclusively for office use and storage;
- leases for premises built for a single specific use.
Consequently, nothing has changed for hotel leases relating to premises considered 'single use'.
Neither has the Pinel Law amended the framework for tourist residences, which occupy a special place since the lease term is subject to specific provisions (article L.145-7-1 of the French Commercial Code and article L.321-1 of the French Tourism Code) that provide for a fixed-term lease of at least nine years.
Lesson n° 2
Tourist residence leases are always fixed-term leases (nine years).
Apart-hotel and restaurant leases can never be fixed-term leases and must give the tenant the option to terminate the lease agreement every three years.
Hotel leases – for premises generally considered as 'single use' – can be fixed-term or not, depending on the agreement of parties.
One could, however, question the 'single use' nature of certain hotels that are governed by co-ownership regulations and that offer studios which could be converted into an apart-hotel or a residential apartment block, thereby subjecting them to common law.
For these three types of lodging, three regimes for the duration of commercial leases thus exist.
In theory, commercial rents under common law are capped when the lease is revised or renewed. In the event of a rent review, and pursuant to article L.145-38 of the French Commercial Code (triennial review) and article L.145-39 (the increase in rent exceeds 25%, compared to the initial rent), resulting changes in rent can lead to steep rises for the tenant and an application of the entire increase from the first year onwards.
The Pinel Law stipulates that the variation in the rent resulting from the exclusion of rent capping (nothing is specified when rents are revised downwards) cannot lead to an increase in the rent, for a year, of more than 10% of the rent paid during the previous year. With regard to lease renewal, this levelling also applies to leases entered into for a term of over nine years.
This mechanism means that the rent resulting from the exclusion of rent caps is not actually limited, but is 'spread over' the first years of the renewed lease by limiting any increase in rent to 10% per year (compared to the last rent paid) until the fixed rent is reached.
Lesson n° 3
This flagship measure of the Pinel Law does not apply to 'single use' premises. In principal, hotels are considered 'single use'.
With regard to the renewal or revision of leases, rent levels are uncapped. The resulting change in rent can sometimes lead to a steep increase in rent for the tenant and a full application of such from the first year onwards, as before.
The terms and conditions relating to increases resulting from the exclusion of rent caps are consequently different for apart-hotels, tourist residences and restaurants, on the one hand (spread in increments of 10%) and hotels, on the other (immediate application of the new rent). Again, the question surrounding the single use nature of hotels that are subject to co-ownership rules arises.
In all cases, it is recommended that the lease rental value be thoroughly evaluated before any negotiations are undertaken.
The Pinel Law and commercial leases: relaxation of the formalities for giving notice
Prior to the Pinel reform, termination notice had to be given by writ. Lawmakers have since relaxed the formalities for giving notice. Consequently, pursuant to article L.145-9 of the French Commercial Code, termination notice can now be given by registered letter with acknowledgement of receipt, or by writ. The date of the termination is the date of the first presentation of the registered letter (article R.145-1 of the French Commercial Code).
However, nothing has changed for a tenant who intends requesting a lease renewal. Only the writ remains valid.
Lesson n° 4
Regardless of the type of operation (hotel, apart-hotel, tourist residence or restaurant), the continued use of writs is recommended, both for giving notice and for renewal requests, so as to avoid any unnecessary risk of litigation associated with the legal notices referred to in article L.145-9 of the French Commercial Code, and in particular dates of receipt of the registered letter.
Highlight 2: The 2014 Pinel Law introduces new distributions of charges
The Pinel Law and the suppression of any reference to the construction cost index published by INSEE (ICC) in the provisions relating to rent renewals
The commercial rent index (ILC, including shopping centres) and the index of tertiary activities (ILAT, the benchmark for tertiary, business and logistics activities) have become the legal reference for framing commercial lease rent evolutions.
Lesson n° 5
The ILC index was already widely used in commercial leases; consequently no real change has taken place. However, the cost of construction index (ICC) can still be used in sliding scale clauses.
This may, however, pose a number of difficulties for reconciling calculation methods in the case of triennial rent reviews, requested in addition to annual indexation.
Prior to the Pinel reform, no legal provision on the distribution of charges between the landlord and tenant existed, and parties were free to split charges. Failing that, parties could refer to the French Civil Code regulations, which could prove to be a source of litigation.
The decree dated 3 November 2014 changed the existing regulations by imposing a precise and limiting list of charges, taxes and fees to be annexed to the lease agreement. The landlord must provide the tenant with a summary of these expenses on an annual basis.
Henceforth, article L.145-40-2 of the French Commercial Code stipulates that on conclusion of the lease agreement and every three years thereafter, the landlord must provide a provisional statement of repairs planned over the next three years, as well as a forecast budget and a summary of repairs carried out over the past three years, together with their cost.
Furthermore, 'triple net' leases have come to an end (lease agreements net of all charges for the landlord, whatever these charges may be). Landlords are now prohibited from passing on to tenants the cost of heavy work required by article 606 of the French Civil Code, as well as any fees related to carrying out works 'intended to rectify obsolescence or bring into compliance', when such constitute major works relating to the structure of the building (article R.145-35 of the French Commercial Code). This is particularly the case for the installation of lifts or the widening of doors as part of compliance with the new accessibility standards for disabled persons.
The landlord can allow the tenant to bear any charges relating to improvements, when the expense exceeds the cost of identically replacing these assets. The thorny topic of improvements (in hotels, apart-hotels, tourist residences or restaurants) and ensuing financial issues can result in a court battle and the intervention of experts to debate:
- the type and nature of the works in question, which is decisive in determining the party responsible;
- the cost of the works, which should be systematically assessed in order to obtain a comparison with the cost of the identical replacement of the assets in question.
The burden of tax expenses and fees borne by the landlord can only be transferred to the tenant if they are directly or indirectly linked to the use of the premises, or to a service that benefits the tenant. In practice, this means that landlords are facing an increase in all types of costs and taxes for which they are responsible, as well as additional building management fees and annual administrative and accounting expenses.
The regulations governing the distribution of charges covered by the new article L.145-40-2 of the French Commercial Code have become law.
Parties cannot, therefore, derogate from the rules on the distribution of charges and taxes. Any clause contrary to these provisions would be deemed unwritten, in accordance with article L.145 – 15 of the French Commercial Code. Parties are recommended to remain vigilant when negotiating and drafting future leases and renewed leases to which the amendments will apply.
Lesson n° 6
These new provisions are of paramount importance for hotel, apart-hotel, tourist residence and restaurant leases.
Previously, the majority of leases traditionally transferred to the tenant the significant financial burden of renovation and compliance works. A priori, it is therefore the tenant who likely takes the initiative to amend the agreement in this respect when renewing a lease (see the following text, 'Hotel leases and works favourable to the tenant').
Henceforth, the law requires a contradictory inventory of fixtures when:
- the tenant takes possession of the premises as the lease agreement is concluded;
- the leasehold rights are assigned;
- the leasehold rights are assigned;
in the frame of the transfer of business " cession de fonds de commerce";
- the premises are handed back.
The inventory of fixtures must thus be annexed in the lease agreement, or failing that, kept by each of the parties. In the event of disagreement, a court bailiff may intervene and draw up an inventory should this be requested by the most diligent party. Costs are then shared equally between the landlord and the tenant (article L.145-40-1 of the French Commercial Code).
Lesson n° 7
The inventory of fixtures (when properly done) is a key element for a lodging establishment open to the public. It makes it possible to verify that the landlord has correctly fulfilled the stricter obligation to deliver rented premises that conform to their intended use and that are properly maintained, in accordance with applicable case law (CA Rouen 17 mats 2016 – RG : 15/01605). This obligation is particularly important in the case of off-plan (BEFA) hotel, apart-hotel, tourist residence or restaurant leases at the time of delivery. Non-compliance regularly leads to litigation between landlords and tenants.
The formalism of the inventory of fixtures is particularly important for each party. Indeed, it is recommended going even further and conducting a full technical audit of the premises.
The Pinel Law and the pre-emption right in the event of a sale of the leased premises
Under the Pinel Law, the tenant henceforth enjoys the benefit of a pre-emption right in the event of the sale of the premises in which their business operates (article L.145-46-1 of the French Commercial Code).
Lesson n° 8
Since these provisions are not public policy, they can be circumvented in a lease clause. Nevertheless, and in addition to being legitimate, they could prove useful for tenants and would avoid certain issues of negotiation and tension.
Extension of short-term leases
The Pinel Law (article L.145-5 of the French Commercial Code) extended the period of derogating from the commercial lease status to a maximum of three years, compared to 24 months previously.
Lesson n° 9
This contribution is mentioned just for the record, since short-term leases are rarely, if ever, used for hotels, tourist residences and apart-hotels, all of which necessitate significant investment. They are also the exception in the restaurant world, since restaurant operators seek a stable location for their business in order to build customer loyalty.
Highlight 3: Cases can be brought more easily before the Departmental Conciliation Commission
In the event of a company merger or a partial transfer of assets, the lease is transferred, notwithstanding any provision to the contrary, to the newly amalgamated company or to the company benefiting from the transfer. This legal vehicle for transferring leases or businesses is relatively simple to put in place, and in this respect, the law has adopted the position of case law.
Lesson n° 10
Along with its favourable tax regime and its simplicity, this should encourage even more restructuring in the hotel industry (article L.145-16, al. 2 of the French Commercial Code).
Lease assignment and vendor's guarantee limited to three years
Where a guarantee clause exists in connection with the lease assignment, the landlord must inform the assignor of any payment default within one month.
Since the introduction of the Pinel Law, the duration of the assignor's guarantee to the assignee is set at three years after the lease is sold, which is very protective for all tenants.
Lesson n° 11
This measure makes it possible to limit the joint liability of the assignor (article L.145-16, al.1 and article L.145-16, al.2 of the French Commercial Code). The law does not provide for penalties for failure to provide information within the prescribed period.
Wider recourse to the Departmental Conciliation Commission
Prior to the introduction of the Pinel Law, the Departmental Conciliation Commission could only deal with disputes relating to the exclusion of rent capping in renewed leases. The law now has now extended the competence of the Commission to disputes relating to (French Commercial Code – article L.145-35):
- triennial rent reviews;
- charges and works.
Reminder: The Departmental Conciliation Commission is one step prior to going before the courts in the location of the leased premises, if no amical agreement can be reached. Referral of a dossier to the Commission is voluntary.
Lesson n° 12
This reform is a more general part of the development of ADR (Alternative Dispute Resolution) that aims to bring to the fore the amicable rapprochement of parties through mediation, conciliation and collaborative law… without recourse to litigation.
Such methods are also intended as a means for parties to maintain communication, enabling them to reach agreement. These dispute resolution mechanisms undoubtedly constitute a 'plus' for the optimal operation of a lodging establishment (hotel, apart-hotel or tourist residence), where it is crucial that the operator maintain a lasting and constructive relationship with the landlord.
Hotel leases and works favourable to tenants
In the case of common law leases (apart-hotels and tourist residences), the tenant cannot undertake any works that alter the layout of the premises without first obtaining the express permission of the landlord.
Hotel leases fall under a specific regime as they relate to establishments open to the public (ERP). The owner of a property in which a hotel operates cannot – notwithstanding any provision to the contrary – object to any works or improvements that the tenant – the owner of the business – undertakes at their own expense and under their own responsibility, when such works concern the eight cases listed in article L.311-1 of the French Tourism Code, even if such works entail changing the layout of the premises.
A further particularity exists with regard to existing hotel safety regulations. Article R.123-3 of the French Building and Housing Code stipulates that 'builders, owners and operators of establishments open to the public are required both at the time of construction and during the building's operation to respect the preventative and security measures necessary to ensuring the safety of persons; these measures are determined in accordance with the nature of the operation, the size of the premises, the manner in which the building has been constructed, the authorised capacity and the ability of persons admitted to escape in case of a fire.'
Joint and several responsibility
Constructors, owners and operators of buildings open to the public (ERP) are thus jointly and severally responsible for fire safety, which has far-reaching general and civil consequences for all involved.
Lastly, within the context of a hotel lease, particularly with regard to emergencies or safety procedures, the hotel operator may do (almost) anything. When there is a particular urgency for works to be carried out, the two conditions of the landlord's formal notice and/ or judicial authorisation are abolished (judgment C. Cass 23 May 2013). An example would be the case of a hotel threatened with closure because the landlord – responsible for works ordered by the Security Commission – has not undertaken such works in the time allowed, under the terms of the lease. The tenant may immediately carry out these works without informing the landlord and without losing the right to reimbursement for the said works.
Christopher has extensive knowledge of corporate finance, commercial and real estate transactions, the hotel business, construction law and litigation-related matters. He has wide-reaching experience in managing and structuring investment operations, acquisitions and assignments of resorts (business and premises), financing operations, joint ventures, management and franchising contracts, business organization, audits and dispute resolution.More from Christopher Boinet
Anne advises clients on all corporate-related matters such as setting up companies, shareholders’ meetings, acquisitions and commercial lease negotiations, particularly in the insurance and hotel industry sectors. With regard to litigation, Anne is involved in commercial lease issues, as well as distribution, competition, property management and hotel industry and construction issues, in front of civil, commercial, criminal and labor courts as arbitration courts.More from Anne Epinat