Assignment of a lease by a company in formation: when are the shareholders discharged?

Imagine: you are in Brest, you have just formed a company with two friends to run a business. One of you signs the commercial lease before the company's final registration. Who is liable if the rent is not paid? You personally, or the company once formed? This is precisely the question that arose in this case, and the French Supreme Court ruled on it in 2005.

This decision, which went relatively unnoticed, is nevertheless crucial for any property or commercial project owner. It concerns the fate of undertakings given "on behalf of a company in formation" – a common scenario when one wants to move quickly and reserve premises before having all the paperwork. The rule is simple: if the articles of association clearly provide for it and the company adopts the undertaking within the prescribed period, the shareholders are freed from any debt. But beware, the judges are strict regarding compliance with formalities.

So, how can one secure an assignment of a leasehold interest (the right to occupy commercial premises) when your company is not yet registered? What are the pitfalls to avoid? The ruling of 13 December 2005 (No. 04-12.528) provides valuable keys. Analysis.

The facts: a story that happens every day

Mr X, a shareholder of a company in formation in Morlaix, signs a notarised deed of assignment of a leasehold interest on behalf of the future company. The articles of association, drafted before registration, contain a clear clause: they give express authority to Mr X to acquire this leasehold interest, and specify that all documents subscribed in this respect will be adopted by the company by the mere fact of its registration, within a certain period. The company is registered within the prescribed period and adopts the undertaking. But the seller of the leasehold interest (the assignor) is not paid in full. He then turns against the shareholders personally, arguing that the company did not validly adopt the deed due to a lack of special authority given to all shareholders.

The dispute goes up to the Court of Appeal, then to the Supreme Court. The assignor argues that only Mr X had the special authority, and that the other shareholders are not bound. He therefore seeks their joint and several liability for payment of the balance of the assignment price. The company, for its part, argues that the adoption was regular and that the shareholders are discharged.

The French Supreme Court rules in favour of the company. It recalls that when the articles of association confer express authority on a shareholder to acquire a leasehold interest, and the company adopts the undertaking within the statutory period, the assignment is deemed to have been contracted from the outset by the company. The shareholders are therefore discharged, regardless of the fact that only one had special authority. The assignor's claim is dismissed.

The court's reasoning — dissected

The French Supreme Court relies on the rules of agency and adoption of undertakings by a company in formation. Under French law, a company has no legal existence before its registration with the Trade and Companies Register (RCS). However, it is common for deeds to be concluded before this formality. The law (Article L. 210-6 of the Commercial Code) allows the company to adopt these deeds after its registration, provided they were concluded on its behalf and with express authority.

Here, the articles of association contained an express authority given to Mr X to acquire the leasehold interest. This authority was special, clear and limited to this deed. The company was registered within the period prescribed by the articles of association (a certain number of months), which triggered the automatic adoption of the undertaking. The Court deduces that the assignment is deemed to have been contracted from the outset by the company, in accordance with Article 1843 of the Civil Code (which governs companies in formation).

The important point: the Court dismisses the assignor's argument that the authority had to be given to all shareholders. It states that as long as the special authority appears in the articles of association and has been complied with, the adoption is total and indivisible. It does not matter that only one shareholder was invested with the authority. In doing so, the Court confirms a case law favourable to the legal certainty of shareholders, while protecting the assignor who must check the articles of association before contracting.

This decision is a rigorous but logical application of company law. It is neither a reversal nor an evolution: it follows a consistent line of the Commercial Chamber. But it forcefully reminds us of the importance of drafting the articles of association and complying with deadlines.

What this means for you — practically

For a founding shareholder: this decision is a lifeline. If you sign a lease or an assignment of a leasehold interest before registration, and the articles of association give you express authority, you are not personally liable if the company adopts the deed within the period. Example: in Brest, you sign a lease for a 100 m² premises at €1,500 per month. The company is registered two months later, as planned. If the rent is not paid, the landlord cannot go after your personal assets – he must turn to the company.

For a landlord or assignor: beware of appearances. Before concluding with a company in formation, demand to see the articles of association and verify that the authority is express, special and limited. If this is not the case, or if the adoption period is not respected, you may be able to turn against the shareholders personally. Imagine an assignor in Morlaix who sells a leasehold interest for €50,000. If the company is not formed, he can claim the amount from the signing shareholder, or even from all if the authority was insufficient.

For a real estate professional: when assigning a leasehold interest, you must systematically check the stage of formation of the acquiring company. A notary or lawyer must ensure that the articles of association contain a valid authority clause. Otherwise, the assignment could be challenged, with serious financial consequences.

In practice, this case law secures standard corporate structures. But it tolerates no deviation: a vague authority or a missed deadline, and the shareholders remain personally liable.

Four tips to avoid this type of dispute

• Draft precise articles of association before any signature: include an express authority clause for the acquisition of the leasehold interest, naming the authorised shareholder and describing the deed precisely. Avoid general wording such as "all powers to acquire assets".
• Strictly comply with the adoption period: the articles of association must set a period for registration (e.g., 3 months). If this period is exceeded, the adoption will not occur automatically and the shareholders will remain personally liable.
• Register the company without delay: as soon as the deed is signed, start the formalities. A delay of a few days can change everything. In Brest, court registry deadlines may vary; plan ahead.
• Inform the counterparty of the company's status: provide the landlord or assignor with a copy of the articles of association and a sworn statement regarding the authority. This avoids later disputes. If in doubt, call a lawyer to validate the clause.

Further reading: related case law and developments

This decision is part of a consistent line of case law from the Commercial Chamber of the French Supreme Court. A ruling of 10 July 2001 (No. 99-13.217) had already held that the adoption of undertakings by a company in formation is valid if the articles of association contain a special authority and the company is registered within the period. The 2005 decision merely confirms this solution, specifying that the authority may be given to a single shareholder.

Conversely, if the authority is absent or too general, the courts consider that the undertaking has not been validly adopted. For example, a ruling of the Paris Court of Appeal of 15 March 2012 held shareholders personally liable for a lease signed without express authority in the articles of association. The trend is therefore clear: formal rigour is essential.

For the future, judges are expected to remain demanding regarding the specificity of the authority. Simplistic arrangements will be sanctioned. The lesson to be learned: in matters of leasehold interests, the precision of the articles of association is your best protection.

Checklist before acting

FAQ: 5 practical questions

1. Can I sign a lease in the name of a company that is not yet formed? Yes, but only if the articles of association contain an express authority for this deed, and the company is registered within the prescribed period. Otherwise, you incur personal liability.
2. What if the registration period is exceeded? Automatic adoption does not occur. You must then have the deed ratified by a collective decision of the shareholders after registration, or redo the deed. In this case, you remain personally liable until regularisation.
3. Must the authority mention a specific amount? Ideally, yes. The authority must be special, i.e., describe the deed (assignment of leasehold interest) and if possible the price. A too vague authority ("acquire any property") risks being deemed insufficient by a court.
4. Am I protected if I am a shareholder but not the signatory? Yes, if the adoption is regular. The 2005 decision confirms this: adoption discharges all shareholders, even those who did not sign. But if adoption fails, only the signatories are liable, unless there is a general authority.
5. What is the cost of regularisation? Compliance costs (amendment of articles of association, notarised deed, etc.) can range from €500 to €2,000 depending on complexity. This is little compared to a personal liability award that can reach tens of thousands of euros.

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