Commercial Lease: The Base Rent for the Three-Yearly Review is Fixed Even Without Works

Imagine: you are the owner of commercial premises in Moissac. You sign a lease with a trader for 9 years. The “listed” rent is 36,000 francs per year, but you agree to a reduction to 24,000 francs during the early years because the tenant is to redo the roof at his own expense. Three years later, you want to revise the rent. On what basis? 36,000 or 24,000? And if the tenant never did the works, can he still benefit from the reduction?

This is precisely the question put to the Court of Cassation in its judgment of 18 May 1978 (No. 77-10.316). The answer is clear: the base rent for the three-yearly review is the one agreed between the parties as a reference, regardless of the initial reduction and whether or not the tenant has carried out the works.

In other words, if the lease provides that the review is calculated on 36,000 francs, it is that amount that counts, even if the rent actually paid is lower. And if the tenant has not carried out the promised works, that does not affect the calculation of the review. A decision with significant practical consequences for commercial leases, which we will analyse.

The facts: a story that happens every day

Mr Devaux, an owner in Moissac, grants a commercial lease of premises to Mr X for his business. The lease is signed in 1970. The rent stipulated in the deed is 36,000 francs per year (the base rent). But the parties agree on an initial reduction: for the first few years, the tenant will pay only 24,000 francs per year, the difference of 12,000 francs representing the consideration for the works that the tenant undertakes to carry out (roof renovation, for example).

The lease also includes a standard three-yearly review clause: "the rent will be revised every three years according to the variation in the construction cost index, based on the initial rent of 36,000 francs." So far, everything seems clear.

But then: the tenant never carries out the works. Three years after signing, the owner requests the rent review. He argues that since the works were not done, the base rent for the review should no longer be 36,000 francs, but the rent actually paid (24,000 francs). The tenant, on the other hand, contends that the review should be based on 36,000 francs, as provided in the contract.

The first instance court rules in favour of the owner: it holds that the tenant's failure to perform the works must be taken into account in fixing the revised rent. But the tenant appeals. The Montauban Court of Appeal (the territorial jurisdiction of the decision) reverses the judgment and holds that the review must be calculated on the basis of 36,000 francs, without regard to the works not carried out. The owner appeals to the Court of Cassation.

The case thus comes before the Court of Cassation, which will finally settle this dispute.

The reasoning of the court — analysed

The Court of Cassation dismisses the owner's appeal and confirms the Court of Appeal's judgment. Its reasoning is based on the interpretation of the parties' intention as expressed in the lease.

The judges note that the contract clearly stipulates that "the three-yearly review will be calculated based on an initial rent of 36,000 francs per year." The initial reduction (from 36,000 to 24,000 francs) is a temporary payment arrangement linked to the tenant's obligation to carry out works. But this reduction does not affect the basis for calculating the review, which remains the agreed base rent: 36,000 francs.

In short, the Court distinguishes two concepts: the base rent (the reference for the review) and the actual rent (the rent actually paid each month). The base rent is a fixed figure, independent of subsequent circumstances such as whether or not the works are carried out.

The owner argued that since the tenant had not done the works, he was not entitled to the reduction, and therefore the review basis should be the rent actually paid (24,000 francs). But the Court replies that the failure to carry out the works has no impact on the fixation of the revised rent, because the parties freely chose the base rent in the contract. If the owner considered that the absence of works should alter the basis, he should have expressly provided for it in the lease.

However, note: the decision does not say that the owner cannot claim anything for the works not carried out. He can still claim damages from the tenant for breach of contract (on the basis of Article 1240 of the Civil Code, which requires compensation for damage caused by fault). But that does not affect the three-yearly review calculation.

What few people know is that this solution is consistent in case law: the Court of Cassation has always protected the binding force of agreements (Article 1103 of the Civil Code). Once the parties have fixed a base rent, it applies for reviews, unless there is a contrary clause.

What this changes for you — practically

This decision has very practical implications for all players in commercial property.

For the landlord owner: if you sign a lease with a high base rent and a temporary reduction in consideration for works, you must be aware that the review will be based on the base rent, even if the works are not carried out. undefined, I have come across cases where owners in Castelsarrasin lost thousands of euros because they had not included a clause linking the performance of works to the review basis. Do not make the same mistake: if you want the review basis to be the actual rent, say so in the lease. Example: base rent €36,000, actual rent €24,000. After 3 years, if the index has increased by 10%, the review on €36,000 gives €39,600, whereas on €24,000 it would give €26,400. That is a difference of €13,200 per year!

For the commercial tenant: this decision protects you. If you have negotiated a rent reduction in exchange for works, you have an interest in the review being calculated on the base rent (usually higher) if indices rise. But be careful: if you do not carry out the works, the owner can sue you for damages. You cannot combine the rent reduction and the absence of works without consequence.

For the purchaser of a commercial lease: before taking over a lease, check the review clause and the base rent. A high base rent may seem disadvantageous, but if the actual rent is lower, the review may be higher. Do your calculations.

For the co-owner of commercial premises: if the co-ownership is the lessor, ensure that the lease clearly defines the base rent and the review terms. Ambiguity can be costly for all co-owners.

In summary, the key is the drafting of the lease. If you are in this situation, you must read the review clause carefully and, if necessary, have it amended by a lawyer lawyer.

Four tips to avoid this type of dispute

• Draft the review clause clearly: expressly state the amount of the base rent used to calculate the three-yearly review. Do not simply refer to the "current" or "effective" rent. Mention a specific figure.
• Link the performance of works to the review basis if you wish: if you want the review to be based on the actual rent if works are not carried out, add a clause such as: "If the tenant fails to carry out the works within the prescribed period, the base rent for the review shall be the rent actually paid, and not the initially provided rent."
• Provide for a contractual penalty for non-performance of works: instead of relying on a subsequent action for damages, insert a penalty clause requiring the tenant to pay a fixed sum if the works are not done. This deters and simplifies recourse.
• Have the lease reviewed by a lawyer before signing: a property law professional can identify ambiguities and dangerous clauses. undefined, I have seen leases signed without advice that led to long and costly proceedings. Better to invest €500 in a consultation than €10,000 in a lawsuit.

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Further analysis: related case law and developments

The 1978 solution has been confirmed several times. For example, in a judgment of 12 December 2012 (No. 11-24.982), the Court of Cassation held that the review clause must be interpreted literally: if it refers to a determined base rent, that amount applies, even if the actual rent has been amended by a rider. The courts' tendency is therefore strict adherence to the letter of the contract, in accordance with the principle of the binding force of agreements.

However, if the review clause is ambiguous, the judges may resort to interpretation. For example, if the lease mentions "the rent in force at the time of the review," then the actual rent will be used. But as soon as the parties have designated a specific figure, it is conclusive.

For the future, case law should not evolve in the opposite direction, as it is consistent with the general law of contracts. However, the Pinel Law of 2014 introduced caps for commercial rents in certain tight areas, which may limit the impact of review clauses. It is therefore necessary to combine the jurisprudential rule with the applicable statutory provisions.

Checklist before acting

FAQ: Frequently Asked Questions

1. Can I revise the rent on a different basis if the tenant has not done the works? No, unless the lease expressly provides so. The 1978 decision is clear: the agreed base rent applies, regardless of the performance of works.
2. What should I do if I am an owner and the tenant has not done the works? You can take legal action for damages, but that will not affect the three-yearly review. Consider including a penalty clause in the lease.
3. Can the base rent be changed after the lease is signed? Yes, by a rider signed by both parties. But be careful: if you change the base rent, it will affect future reviews. Do so with caution.
4. What is the time limit to challenge a miscalculated review? The limitation period is 5 years from the date the revised rent became due. If in doubt, consult a lawyer promptly.
5. Does this decision apply to residential leases? No, it specifically concerns commercial leases governed by the status of commercial leases (Decree of 30 September 1953). Residential leases have their own rules.

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