Assignment of lease without business assets: watch out for the right to renewal

You have just acquired a commercial lease in Le Lude, a pretty commune in the Sarthe. You have obtained the owner's agreement to open a clothing boutique there, whereas the previous tenant ran a bakery. Everything seems in order. But three years later, at the expiry of the lease, the owner refuses to renew. Why? Because you have not been operating long enough to his liking. You thought you could add the baker's years of activity to yours? Wrong. The Court of Cassation has ruled: without the transfer of the business assets, the clock resets to zero. This 1981 decision remains an absolute reference for all owners and tenants of commercial premises. So what exactly does this judgment say? And how can you avoid finding yourself in this situation? Analysis.

The question every owner who lets a commercial property asks: will my tenant be entitled to the automatic renewal of his lease? The answer depends on the duration of actual operation of his business assets on the premises. But beware: if the tenant has changed without the business assets being transferred, the predecessor's period of operation does not count. This is the classic trap of assignments of lease without business assets.

In this case, the Court of Cassation upheld the following reasoning: when an assignee takes over only the right to the lease (and not the assignor's business assets) and carries on a new activity authorised by the landlord, there has been no 'de-specialisation' of the existing business assets, but the creation of entirely new business assets. Consequently, the assignee cannot add the assignor's period of operation to his own to reach the three years required by Article L. 145-8 of the Commercial Code. If he has not operated for at least three years at the lease expiry date, he loses any right to renewal. A lesson for every professional to ponder.

The facts: a story that happens every day

Mr X is the owner of a commercial property in Mamers, in the Sarthe. He lets this property to a company which operates a bakery business there. The lease expires on 1 July 1976. Before that date, the tenant assigns his right to the lease to a new trader, Mr Y, without assigning the bakery business to him. Mr Y, with the owner's written consent, sets up a clothing sales activity on the premises, completely different. The owner expressly authorises this new activity.

Mr Y operates his clothing business for two and a half years. At the expiry of the lease, he requests renewal of his commercial lease. The owner refuses, considering that Mr Y has not operated his business on the premises for at least three years, a condition necessary to benefit from the right to renewal. Mr Y then sues the owner before the Tribunal de Grande Instance, claiming the benefit of renewal. He argues that he should be able to add the previous tenant's period of operation (the bakery) to his own, since he is operating in the same premises and with the landlord's authorisation.

The court rules in favour of the owner. Mr Y appeals. The Court of Appeal upholds the judgment: no right to renewal. Mr Y then appeals to the Court of Cassation. He argues that the assignment of the lease with authorisation to carry on a new activity amounts to a de-specialisation of the business assets, and therefore the assignor's period of operation must be taken into account. The Court of Cassation dismisses his appeal on 6 October 1981, upholding the Court of Appeal's decision.

The court's reasoning — explained

The Court of Cassation relies on Article L. 145-8 of the Commercial Code (formerly Article 4 of the Decree of 30 September 1953). This provision states that the tenant of a commercial lease is entitled to renewal of his lease if he proves that he has operated his business on the premises for at least three years at the lease expiry date. The business must be the same: if the tenant changes activity or if the business is assigned without being the same, the three-year period resets to zero.

In this case, the Court of Appeal had found that the baker's business had been 'formally excluded' from the assignment. The assignment only covered the right to the lease. Mr Y had created entirely new business assets (clothing) with the owner's authorisation. There had therefore been no de-specialisation (change of activity within the same business), but creation of new business assets. Consequently, the baker's period of operation could not be added to Mr Y's.

The Court of Cassation upholds this reasoning. It considers that the lower courts correctly deduced that Mr Y could not aggregate the periods of operation and that at the end of the lease, he did not prove three years of operation. No right to renewal, therefore no eviction compensation. The landlord can freely recover his premises.

This decision is a confirmation of consistent case law: the right to renewal is attached to the business, not to the premises. If you change the business, the clock resets to zero, even if you remain in the same walls.

What this means for you — practically

For landlord owners: this decision is a powerful weapon. If you authorise an assignment of lease without assignment of the business, and the new tenant carries on a different activity, you can refuse renewal after three years if the assignee has not himself operated for three years. Concrete example: in Mamers, an owner lets a property to a bookseller for 10 years. The bookseller assigns his lease to a hairdresser, without selling the business. The owner authorises the new activity. The hairdresser operates for 2 years, then requests renewal. Refusal possible, because he only has 2 years of operation.

For assigning tenants: if you sell your business, ensure that the assignment of the lease includes the business. Otherwise, you deprive the purchaser of the right to renewal for three years, which reduces the value of your lease. A lease without a right to renewal is worth less.

For assignee tenants: before signing, check whether the business is being assigned to you or not. If only the lease is assigned, you start from zero. If the lease expires in less than three years, you will not be entitled to renewal. Negotiate with the landlord an extension of the lease or a promise of renewal.

In figures: a commercial lease in Le Lude, with an annual rent of €12,000, if renewal is refused, the tenant loses his business and must leave the premises. Eviction compensation can amount to several years' rent. But here, no compensation: the tenant had no right to renewal. The loss can be total.

Four tips to avoid this type of dispute

• When assigning a lease, have a complete transfer of business assets deed drafted. Do not limit it to the right to the lease. Include intangible elements (clientele, trade name) and tangible elements (equipment, goods). Thus, the assignee takes over the same business and can aggregate the periods of operation.
• Obtain the landlord's written consent for any new activity. Even if you take over the business, an unauthorised change of activity may be considered a breach. But above all, if the business is not assigned, the landlord's written authorisation for the new activity is not enough to trigger de-specialisation: a lease amendment specifying that the activity is authorised within the same business is required.
• Check the lease expiry date before acquiring a right to a lease. If less than three years remain before expiry, and you do not take over the business, you will be unprotected. Negotiate a new lease or a promise of renewal with the landlord simultaneously with the assignment.
• Consult a lawyer specialising in property law before any assignment. A professional can analyse the situation, draft the documents accordingly and avoid years of litigation. In Le Lude as in Paris, the rules are the same: prevention is better than cure.

Further reading: related case law and developments

This 1981 decision is part of a consistent line. One can cite the Court of Cassation judgment of 3 May 1978 (No. 76-15.678) which had already held that the assignment of only the right to the lease, without the business, does not allow the assignee to rely on the assignor's period of operation. More recently, the Court of Cassation recalled in a judgment of 24 September 2013 (No. 12-22.580) that the right to renewal is attached to the business, not to the premises. The trend is therefore constant: judges protect the landlord against attempts to circumvent the three-year rule.

On the other hand, if the assignee takes over the business and the landlord authorises a change of activity, there is de-specialisation of the business, and the three-year period continues to run. This is the essential nuance. This case law is still relevant: it was confirmed by the Pinel Law of 2014 which relaxed the conditions for de-specialisation, but without calling into question the principle that the right to renewal is linked to the business.

For the future, it is likely that the courts will continue to apply this rule strictly. The legislature did not wish to modify this point, as it protects the owner against tenants who would change activity without consideration.

What you absolutely must remember

FAQ:

1. Can I aggregate my period of operation with that of the former tenant if I took over his lease? Yes, if you also took over his business (clientele, sign, equipment). No, if you only took over the right to the lease and carried on a different activity.
2. What if the lease expires less than three years after the assignment? Negotiate with the owner an extension of the lease or a promise of renewal. Otherwise, you risk having to leave the premises without compensation.
3. Is the owner's consent to my new activity enough to protect me? No. The consent avoids termination for change of activity, but does not give you the right to aggregate periods of operation if the business has not been assigned.
4. What is the deadline to request renewal of a commercial lease? You must request renewal at least six months before the lease expiry, by bailiff's service or registered letter with acknowledgement of receipt.
5. What happens if the owner refuses renewal? If you are entitled to renewal (3 years' operation of your business), the owner must pay you eviction compensation equal to the market value of the business. Otherwise, you must leave without compensation.

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 →