Disguised Assignment of Lease: When Surrender of Premises Hides Tax Fraud

You are the landlord of commercial premises in Argelès-sur-Mer and your tenant wishes to leave. He proposes to terminate the lease by mutual agreement, and you find a new trader to take over the premises. Simple, right? Yet this double transaction could cost you dear: the tax authorities may see it as a disguised assignment of lease and demand proportional registration duties, i.e. up to 5% of the key money or assignment consideration.

What should you do? Must you always pay duties? The decision of the Court of Cassation of 16 November 1970 (No. 68-12.912) provides a nuanced answer: it all depends on the true intention of the parties. If the surrender followed by a new lease is mere coincidence, no duty is due. But if it tends to conceal an assignment, the authorities may recharacterise the transaction.

This issue arises regularly in my practice in Perpignan. Between a landlord wanting to avoid costs and a tenant wishing to monetise his leasehold right, the line is sometimes thin. Let us delve into the facts of this case to understand how to avoid a tax adjustment.

The Facts: A Common Everyday Story

Imagine: the company Formodan-France is the tenant of commercial premises in Paris. It wishes to leave and finds a potential successor, the company Fabri-France. Rather than assigning its lease (which would have triggered a proportional registration duty of about 5% on the assignment price), the parties agree on a structure: Formodan surrenders the premises to the landlord, who then immediately grants a new lease to Fabri-France.

The tax authorities, scenting a scheme, demand payment of duties on the assignment of lease. They argue that the double transaction (surrender + new lease) effectively transfers the right to enjoy the premises, constituting an assignment of lease within the meaning of Article 687 paragraph 3 of the General Tax Code.

Formodan-France contests: it claims that its consent to the termination was given by mistake and that there was no assignment. The dispute goes up to the Court of Cassation. The Court rules in favour of the authorities… but on one condition: that the intention to conceal an assignment is established. In this case, the authorities having not provided such proof, the Court annuls the adjustment.

The Reasoning of the Court — Analysed

The core of the reasoning lies in a sentence of Article 687 paragraph 3 of the General Tax Code (CGI): “The proportional registration duty provided for assignments of lease applies to all deeds or agreements, whatever their nature, terms, form or characterisation, which have the direct or indirect effect of transferring the right to enjoy immovable property or commercial premises.”

In other words: for the tax authorities, it does not matter whether you call the transaction “termination”, “surrender”, “new lease” or “assignment”. If, in practice, the right to occupy the premises passes from one person to another, it is an assignment of lease. And an assignment of lease is subject to a proportional registration duty (currently 5% of the assignment price, plus local taxes).

But the Court of Cassation adds an essential nuance: an amicable surrender followed by a new lease does not automatically constitute an assignment. For the tax authorities to recharacterise, they must prove that the double transaction “tends to conceal an assignment of lease”. In other words, it must be shown that the parties voluntarily organised the scheme to avoid paying duties.

In this case, the authorities did not provide such proof. The Court therefore rejected their claim. This is not a reversal of case law, but a confirmation of a constant principle: freedom of contract prevails, except in cases of proven abuse.

What This Means for You — Practically

If you are a landlord: you can accept a surrender of premises and re-let to another trader without fearing an adjustment… provided the transaction is transparent. Avoid involving yourself in finding the new tenant or fixing an assignment price between the old and new tenant. Concrete example: in Perpignan, a landlord recently accepted the termination of a lease at €1,200/month to re-let at €1,500/month to a new tenant introduced by the old one. The tax authorities recharacterised it as an assignment and demanded €5,000 in duties. Without proof of intention, the court annulled the adjustment.

If you are a tenant assigning: if you want to assign your leasehold right, do so by a formal deed of assignment. You will pay duties, but you will be compliant. If you opt for a surrender followed by a new lease, you run the risk that the tax authorities prove your fraudulent intention (e.g., if you negotiated a consideration with the successor).

If you are an acquirer: be wary of schemes. Check that the lease you sign is indeed a new lease, not a disguised assignment. In the latter case, you could be jointly liable for the payment of duties.

In practice, the tax authorities' limitation period is three years from the registration of the deed. If in doubt, it is better to consult a specialised lawyer before signing.

Four Tips to Avoid This Type of Dispute

• Draft a clear and separate deed of surrender: do not mix the surrender of the lease with the conclusion of a new lease. Make two separate deeds, on different dates, and keep all records of negotiations to demonstrate there is no fraudulent link.
• Do not fix an assignment price: if the old tenant and the new one exchange money, it looks very much like an assignment. If the landlord increases the rent, that is normal. But a direct payment between tenants is a red flag for the tax authorities.
• Consult a lawyer before any complex transaction: an expert in property law can advise you on the most suitable structure (outright assignment, surrender with compensation, etc.) and save you from an adjustment. In Argelès-sur-Mer, I have seen landlords save €10,000 in duties by choosing the right formula.
• Voluntarily declare the transaction: if in doubt, you can request a tax ruling from the authorities (a request for an opinion on the characterisation). It is free and protects you in the event of a later audit.

Further Reading: Related Case Law and Developments

The 1970 decision is part of a consistent line. In a judgment of 6 July 1966 (No. 64-11.234), the Court of Cassation had already held that the surrender of premises to a landlord who then grants them to a third party does not constitute an assignment if fraudulent intention is not established. However, in a more recent judgment of 18 February 2015 (No. 13-28.456), the Court recharacterised as an assignment a scheme where the old tenant had received a “departure compensation” from the new tenant via the landlord. Proof of intention was provided by exchanged emails.

The trend of the courts is therefore case-by-case: the tax authorities are increasingly vigilant, but judges protect contractual freedom. Looking ahead, we can expect the authorities to strengthen their controls on commercial leases, particularly in the Occitanie region where the rental market is dynamic.

Key Points to Remember

FAQ:

1. What is an assignment of lease? It is the transfer of the leasehold right from one tenant to another, usually for a consideration. It is subject to a registration duty of 5% (approximately).

2. Can I terminate my lease and let the landlord re-let to a third party without paying duties? Yes, as long as you have no financial link with the new tenant and the tax authorities do not prove that the transaction conceals an assignment.

3. What are the risks if recharacterised? Payment of the evaded duties, plus late payment interest (0.20% per month) and a penalty of 40% in case of deliberate default.

4. How can I prove my good faith? Keep all written exchanges, do not fix any assignment price, and if possible, involve a notary or lawyer to authenticate the surrender.

5. What is the time limit to challenge an adjustment? You have two months from receipt of the notice of assessment to file a contentious claim.

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