Commercial Lease and Transfer of Ownership: A Game-Changing Decision for Landlords

Imagine: you own a plot of land in Mougins, on which you have built an industrial building that you let under a commercial lease. A finance lease allows you to acquire the land, and you wish to sell the whole while benefiting from a deferral of tax on the capital gain. But the tax authority objects that the commercial lease has already transferred ownership, making the deferral impossible. This is exactly the situation experienced by the X family, which led to a landmark judgment of the Court of Cassation on 9 January 2019.

This decision answers a crucial question: can a commercial lease be considered as a deed evidencing the transfer of ownership of a property? The answer is no, and this has significant consequences on notaries' liability and landlords' tax strategies.

But what exactly changes? How should you react if you are in a similar situation? In this article, I break down this case law for you, with concrete examples in Mougins and Mandelieu.

The Facts: An Everyday Story

Mr X, a property owner in Mougins, had set up a SCI (Société Civile Immobilière) with other partners. This SCI had acquired a plot of land via a finance lease, then built an industrial building, let under a commercial lease to a company. When the partners exercised the option to purchase the land (a notarised deed executed by a notary), they wished to benefit from a deferral of tax on the capital gain realised on the transfer of their shares. But the tax authority refused, considering that the commercial lease had already effected a transfer of ownership, thus excluding the deferral.

The X family then sued the notary for liability, arguing that he had been negligent in failing to inform them of this difficulty and in not enabling them to request the deferral in the notarised deed. The Court of Appeal dismissed their claim, holding that there was no causal link between the notary's fault and the loss, because even if the notary had informed his clients, the tax authority would have refused the deferral in any event.

But the Court of Cassation quashed this judgment: it ruled that a commercial lease does not constitute a deed transferring ownership within the meaning of Article 93 quater IV of the General Tax Code (CGI). In other words, the lease did not transfer ownership, so the deferral was potentially applicable. The Court of Appeal should have considered whether, if properly informed, the authority would have granted the deferral. In failing to do so, it violated the law.

The Court's Reasoning — Analysed

The Court of Cassation relied on two fundamental texts. First, Article 93 quater IV of the CGI, which allows a deferral of tax on capital gains in the event of a transfer of shares, provided that this transfer is evidenced by a notarised deed. Second, Article 1240 of the Civil Code (formerly 1382), which requires any person to compensate for damage caused by his or her fault.

The reasoning is simple in appearance: a commercial lease has no effect of transferring ownership (it does not transfer ownership of the property, only the right to enjoy it). Consequently, it cannot be considered as 'the deed which evidences the transfer of ownership' within the meaning of the CGI. The Court of Appeal was therefore wrong to presume that the tax authority would have refused the deferral even if the notary had acted correctly.

In clear terms, the High Court reminds us that the causal link between the notary's fault (failing to inform his clients) and the loss (immediate taxation of the capital gain) must be examined concretely. It cannot be dismissed by assuming that the authority would have refused anyway. In other words, the notary may be held liable if he did not put his clients in a position to request the deferral.

However, note: this decision does not say that the deferral would have been granted, only that the commercial lease is not an obstacle. What few people know is that this case is also a reminder of the notary's duty to advise, which requires anticipating all tax consequences of the deeds he executes.

What This Changes for You — Practically

For landlord owners: if you hold a property let under a commercial lease and you plan to transfer your shares or the property, you may potentially benefit from a deferral of tax on the capital gain, even if the lease was signed before the transfer. Have a professional verify that the notarised deed does evidence the transfer of ownership (e.g., the exercise of an option under a finance lease).

For buyers: if you buy a leased property, ensure the notary informs you of the tax consequences. For example, in Mandelieu, a buyer who purchased a commercial premises with an existing lease could, before this decision, have been refused a deferral. Now, the case law clarifies that the lease is not a transfer.

For tenants: this concerns you less directly, but know that your lease does not vest ownership in you. You remain a mere occupier.

If you are in this situation, you should: 1) check the dates of the lease and the transfer deed, 2) consult a tax lawyer or notary, 3) in the event of a dispute, do not hesitate to pursue the notary's liability if you have suffered a loss. The limitation periods are 5 years from the discovery of the damage.

undefined, I have come across cases where SCI partners had to pay immediate tax of several tens of thousands of euros because the notary had not provided for the deferral request. This decision opens a pathway for recourse.

Four Tips to Avoid This Type of Dispute

• Insist on a tax review before any transfer: ask your notary or accountant for a simulation of the capital gains tax, including the deferral option. Do not sign without understanding the consequences.
• Have the notarised deed carefully drafted: the deed must expressly mention the request for deferral if you are entitled to it. Check that the transfer of ownership is evidenced by this deed, and not by a prior lease.
• Keep all documents: retain copies of the lease, the finance lease deed, the transfer deed and correspondence with the notary. In the event of a dispute, these pieces of evidence are essential.
• Consult a lawyer specialising in property law: before signing, a lawyer can alert you to tax risks and professional liability. In Mougins or Mandelieu, I regularly see property owners for this type of advice.

Besoin d'un conseil personnalisé ? Contactez Maître Zakine — première consultation 30 min à 45€.

Further Reading: Related Case Law and Developments

This decision is part of a line of Court of Cassation judgments protecting taxpayers against notaries' errors. For example, in a judgment of 28 March 2018 (No. 16-28.443), the Court had already held that the notary must inform his client of the tax consequences of a deed, failing which his liability may be engaged. Here, it goes further by specifying what constitutes a 'deed transferring ownership'.

On the other hand, a decision of the Conseil d'État (10 July 2019, No. 418648) adopted a more restrictive position on the deferral for transfers of SCI shares. There is therefore a tension between the two orders of jurisdiction. But for commercial leases, the position of the Court of Cassation is clear: the lease is not a transfer.

In the future, we can expect notaries to be more vigilant in their duty to advise, and that litigation will multiply if taxpayers have been wronged. This case law is therefore a weapon for property owners.

Frequently Asked Questions

Can a commercial lease be reclassified as a sale by the tax authority? No, not in principle. The lease only confers a personal right of enjoyment. But beware of abusive clauses (very long-term lease, disguised option to purchase).

Can I request a deferral after signing the deed? No, the deferral must be requested in the transfer deed. If you have already signed, it is too late, unless you pursue the notary's liability.

What are the time limits for suing the notary? The limitation period is 5 years from the day you became aware of the loss. In practice, as soon as the authority refuses, consult a lawyer.

Does this decision apply to residential leases? No, it specifically concerns commercial leases and the tax regime for business capital gains.

What should I do if the tax authority demands payment of tax? Contest the decision by sending a formal objection within the time limits (2 months after the notice of assessment). Mention this Court of Cassation judgment.

Are you in a similar situation? An initial 30-minute consultation with Maître Zakine (45€) could save you months of proceedings — and often much more. Book an appointment →