Assignment of Lease: Beware the Tax Trap of Successive Lettings

Imagine the scene: you have just signed a commercial lease for premises located on Rue des Plages in Biscarrosse. You are relieved, the contract is in hand, the business can start. But a few months later, the tax authorities demand several thousand euros from you in respect of lease assignment duties. Why? Because before you, another tenant occupied the premises. The authorities consider that there has been an indirect transfer of the right of enjoyment. You are stunned: the previous lease had been terminated, years had passed, the conditions were completely different. Is this normal?

This question, which any owner or commercial tenant may one day ask, was decided by the French Supreme Court (Cour de cassation) in 1973 in a ruling that is still authoritative today. And the answer is clear: no, the mere succession of occupants is not enough to characterise a taxable assignment of lease. There must still be a legal link between the deeds. A decision which, although old, continues to protect taxpayers against extensive interpretations by the tax authorities.

In this article, I will dissect this decision, explain why it was made, and above all give you the keys to avoid a tax reassessment in a similar situation. Whether you are a landlord, tenant or real estate professional in Mimizan or elsewhere, these principles are directly relevant to you.

The facts: a story that happens every day

We are in Nice, in the 1960s. The company Thermo-Frigor is the tenant of commercial premises. It decides to terminate its lease amicably with the owning civil real estate company (SCI). Some time later, the same SCI grants a new lease to the company Nicoise de Commercialisation. Nothing more ordinary, apparently.

But the tax authorities see things differently. For them, this succession in the premises actually conceals a disguised assignment of lease. They therefore notify the new tenant of a notice of recovery of lease assignment duties, calculated on the basis of Article 687, paragraph 3 (old) of the French General Tax Code (CGI). This article provides that registration duties are due for all deeds which have the effect, direct or indirect, of transferring the right of enjoyment of buildings or commercial premises.

The company Nicoise de Commercialisation contests. It argues that the previous lease had been terminated long ago, that the two leases differed in duration, use and price, and that no legal link existed between the two transactions. The case goes up to the French Supreme Court.

The reasoning of the court — dissected

The French Supreme Court quashes the decision of the Court of Appeal which had upheld the tax authorities. Why? Because the lower court judges had merely noted that there had been a succession in the premises to infer that there had been a transfer of the right of enjoyment. However, Article 687, paragraph 3 (old) of the CGI requires more: it must be examined whether there is a factual or legal link between the successive deeds.

In this case, the taxpayer demonstrated that the leases were completely different (duration, use, price) and that a long period had elapsed between the two occupations. Therefore, the mere succession is not enough to characterise a taxable assignment. The Court refers the case to another Court of Appeal to examine these elements.

This reasoning is fundamental: it recalls that the tax authorities cannot presume an assignment of lease simply because a new tenant occupies the premises after a previous one. They must prove that there is an intention to transfer the lease, or at least a legal continuity between the two contracts. This is essential protection for new entrants, who could otherwise be charged duties on a transaction in which they did not participate.

The decision does not create a reversal, but it clarifies and limits the scope of the text. Before this ruling, some courts might have been tempted to equate any succession with an assignment. Now, the rule is clear: the legal link is necessary.

What this changes for you — concretely

If you are the owner of commercial premises in Mimizan and you change tenants, you must be vigilant: the mere fact of re-letting after an amicable termination does not constitute an assignment of lease. But be careful, if you organise a handover between the old and new tenant (for example, an addendum or a deed of assignment), registration duties will be due. The applicable rate is 3% of the assignment price (or the value of the lease right) for commercial leases, with an allowance of €23,000.

For a tenant entering premises, the decision protects you: if the lease is new and independent, you should not pay assignment duties. However, if the tax authorities demand sums from you, you can contest by demonstrating the absence of a link with the previous lease (difference in duration, rent, use, etc.).

Let's take a concrete example: premises in Biscarrosse are rented at €1,200/month for 9 years. The lease is terminated after 3 years. One year later, a new lease is signed with another tenant, for €1,500/month and 6 years. The tax authorities cannot demand assignment duties because the conditions are different and no link exists. On the other hand, if the new lessee takes over the same lease with the landlord's agreement, duties will be due.

Four tips to avoid this type of dispute

• Keep all deeds: keep a copy of the previous lease, the termination deed, and the new contract. In the event of a tax audit, you will be able to demonstrate the differences.
• Have the termination recorded by notarial deed: if the old tenant leaves, a notarised deed of amicable termination clearly establishes the rupture of the legal link.
• Avoid substitution clauses: in the new lease, do not mention that the lessee succeeds the old tenant or takes over its rights. Use a completely independent contract.
• Respect a waiting period: if possible, let several months pass between the end of the first lease and the start of the second. The longer the delay, the harder it will be for the tax authorities to argue that there was an assignment.

In-depth: related case law and developments

This 1973 ruling has been confirmed subsequently. For example, in a ruling of 10 December 1980 (No. 79-13.429), the French Supreme Court held that an assignment of lease can only be retained if the deed has the effect of transferring the right of enjoyment, not the mere physical occupation. Similarly, the French Council of State (Conseil d'État) recalled in 1995 (No. 143440) that the legal link must result from an agreement between the parties.

The trend is therefore consistent: judges protect taxpayers against abusive assimilations. However, be careful: if the new tenant is a company linked to the old one (subsidiary, same director), the link may be more easily retained. Similarly, if the new lease reproduces the same essential clauses, the risk of reclassification increases.

Checklist before acting

• 1. Do I have a link with the old tenant? If yes (assignee, associate), the risk of duties is high.
• 2. Is the new lease identical in duration, rent, use? If yes, the tax authorities may consider that there is an assignment.
• 3. Has a significant period elapsed? Several months or years work in your favour.
• 4. Do I have a termination deed? Yes? You can prove that the first lease is extinguished.
• 5. Has my notary checked the tax risk? Have him review the file before signing.

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 →