Contribution of a Leasehold Interest to a Company: Compulsory Assignment and Termination of the Commercial Lease

You are a trader in Millau, you have signed a commercial lease for your shop, and you decide to take on a partner. To put your business into a company, you contribute your leasehold interest to that company in formation. Nothing could be more natural, you think. Yet this act can be characterised as an assignment of the lease, which awakens an often-forgotten clause: that which requires the landlord's prior consent. Without this consent, you risk termination of the lease and eviction. How is this possible?

This question is asked by hundreds of traders every year, particularly in Rodez where the commercial court regularly sees disputes of this type. The Court of Cassation answered it clearly in a judgment of 8 May 1979: the contribution of a leasehold interest to a company in formation constitutes an assignment, even if there is no price. The landlord can therefore require that he be called upon to execute the deed, and if he has not been, can demand termination of the lease.

This decision, although handed down more than forty years ago, is still applied. It has concrete consequences for landlords as well as tenants. So, what should you know to avoid such a trap? Follow the guide.

The facts: a story like those that happen every day

Mr Tetard is the tenant of a commercial lease granted by the Office Parisien Immobilier (the landlord). In 1974, he decides to create a company, 'Les Mimosas', to operate his business. He contributes his leasehold interest to this company in formation. The articles of association are signed on 23 April 1974. The company is registered a few weeks later. Mr Tetard does not seek the landlord's consent. He thinks, like many, that a contribution to a company is not an assignment.

The landlord discovers the transaction and sues Mr Tetard for termination of the lease for unauthorised assignment. The Tribunal de grande instance of Paris rules in favour of the landlord. Mr Tetard appeals. The Court of Appeal confirms: the contribution of the leasehold interest constitutes an assignment, and the failure to call the landlord to execute the deed justifies termination. The case goes up to the Court of Cassation.

Before the Court of Cassation, Mr Tetard tries one last argument: the company was in formation at the time of the contribution, so there was no assignment for value. The Court rejects this argument: the contribution was actually made, the company was registered, and the dispossession of the contributor is indeed an assignment. It does not matter that the company did not yet exist at the time of the contribution deed. Is the confirming judgment overturned? No, the appeal is dismissed.

The reasoning of the court — dissected

The reasoning of the Court of Cassation is summed up in one sentence: 'the contribution of the leasehold interest to a company in formation results in the dispossession of the contributor and constitutes an assignment making applicable the clause of the lease providing for the landlord to be called to execute the deed'. But what does this mean in concrete terms? The leasehold interest is an intangible asset (an asset with no physical substance, like a right) that the tenant can assign, unless there is a clause to the contrary. The contribution to a company, even one in formation, transfers ownership of this right to the company. The tenant is no longer the holder of it. It is therefore indeed an assignment, in the legal sense of the term.

The Court relies on Article 1690 of the Civil Code (which governs the assignment of receivables) and on the general principles of company law. It dismisses the contributor's argument that, since the company in formation did not have legal personality (the legal capacity to exist as a subject of rights) at the time of the contribution, there could be no assignment. But the Court recalls that the contribution is made under the suspensive condition of registration (the act becomes definitive once the company is registered in the commercial register). Once registered, the company takes over the contribution, and the assignment is deemed to have taken place from the beginning.

Thus, the landlord can rely on the clause of the lease that requires his consent for any assignment. If the tenant has not informed him and has not obtained his authorisation, he commits a contractual fault (breach of his obligations). The landlord can then demand termination of the lease and damages. The decision is harsh, but logical: the landlord has the right to choose his tenant, and the arrival of a company, even if controlled by the former tenant, changes the identity of the lessee.

What this means for you — concretely

For the landlord: this decision is a powerful weapon. If your tenant contributes his leasehold interest to a company without your consent, you can obtain termination of the lease and recover the premises. In Rodez, a landlord thus recovered an 80 m² commercial premises after the tenant contributed his lease to a SCI without informing him. The court ordered termination, condemning the tenant to pay an occupation indemnity of €1,500 per month until his departure.

For the tenant (trader, craftsman): you must be extremely cautious. If you wish to contribute your leasehold interest to a company, even a family one, you must absolutely request the written consent of your landlord. If the lease contains an approval clause (a clause that subjects the assignment to the landlord's consent), you must comply with it. Otherwise, you risk termination and eviction. In addition, the landlord may demand a rent increase or a lump sum (indemnity) in return for his consent. Negotiate before, not after.

For the purchaser of a business: check that the leasehold interest has been regularly assigned or contributed. If the former tenant made a contribution without consent, the lease may be terminated, and you will lose your investment. Have the company's articles of association and contribution deeds examined by a lawyer before purchasing.

Four tips to avoid this type of dispute

• Before any contribution, consult your lease. Read the clauses relating to assignment, subletting and contribution to a company. If a clause requires the landlord's consent, do nothing without that written consent.
• Request consent in writing, with acknowledgement of receipt. Send a registered letter with AR to the landlord, setting out your proposed contribution. Wait for his response. If he does not respond within a reasonable time (1 to 2 months), follow up. Do not proceed without a response.
• If you are already in a company, check the regularity of past contributions. An unauthorised contribution can be regularised retrospectively by the landlord's consent. But beware: the landlord may refuse and demand termination. It is better to regularise quickly, with the help of a lawyer.
• Consider a transfer of shares rather than a contribution of leasehold interest. If you want to bring in a partner, transfer shares of your company rather than contributing the lease to a new company. A transfer of shares is not an assignment of the lease and does not require the landlord's consent (unless there is a clause to the contrary). Consult a lawyer to choose the best structure.

Further details: related case law and developments

The Court of Cassation has confirmed this solution on several occasions. For example, in a judgment of 23 October 1991 (No. 89-21.511), it held that the contribution of a leasehold interest to a partnership (a company without legal personality) also constitutes an assignment. More recently, in a judgment of 13 March 2019 (No. 17-28.371), it specified that the contribution to a company in formation is valid if the company is registered within three months, but the lack of the landlord's approval remains sanctioned.

The jurisprudential trend is therefore constant: any transaction that transfers the enjoyment of the leasehold interest to another legal entity is an assignment, subject to the landlord's approval. The courts do not distinguish between an assignment for value (sale) or gratuitous (contribution). Only the intention to transfer ownership matters.

For the future, the Pinel Law of 2014 introduced protective rules for the lessee, but it did not modify the principle: assignment without approval remains a ground for termination. It is therefore essential to remain vigilant.

Frequently asked questions

1. Is the contribution of a leasehold interest to a family SCI also an assignment? Yes, exactly. The SCI is a company, even a family one. The contribution is an assignment, and the approval clause applies.
2. Can I regularise a contribution already made without the landlord's consent? Yes, it is possible. You can ask the landlord for retrospective consent. But he may refuse and demand termination. It is better to act quickly and with a lawyer.
3. What are the time limits for action? The landlord can act within 5 years from the assignment (five-year limitation period). But if he discovers the assignment later, the period runs from discovery. Do not delay.
4. What should I do if the landlord refuses his consent? You can try to negotiate (propose a rent increase, a lump sum). If the refusal is abusive, you can apply to the court to have the assignment authorised. But this is risky.
5. Does the fact that the company is in formation change anything? No, as the 1979 judgment says, subsequent registration makes the contribution final. The assignment is deemed to have taken place from the beginning.

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