Assignment of Company Shares and Commercial Lease: a Fundamental Distinction (Cass. 1988)

Picture the scene: in Beausoleil, in the hinterland of Nice, a group of shareholders runs a prosperous business in leased premises. The landlord, satisfied with the rent, nevertheless slipped a special clause into the lease: in the event of an assignment of the shares, he demands a flat sum. The shareholders decide to assign their shares to a newcomer. The landlord claims his due. Conflict ensues. Who is right?

This question is asked every year by hundreds of business owners and landlords. Does changing the shareholders of a SARL or SAS that leases commercial premises amount to changing the tenant? Can the landlord demand compensation or refuse such an operation? The financial stakes are enormous: between the leasehold interest, which can be worth tens of thousands of euros, and the investments made by the operator, a mistake in classification can ruin a transfer.

The judgment of the Court of Cassation of 22 June 1988 (No. 86-19.366) put an end to the debate: the assignment of shares is not an assignment of the lease. This decision, still in force, protects the freedom of shareholders to leave or enter a company without the landlord being able to interfere. But beware, abusive clauses still exist, and the pitfalls are numerous. Full analysis below.

The Facts: a Story That Happens Every Day

In this case, a trading company was the tenant of premises used for commercial purposes. The lease, signed between the company (represented by its shareholders) and the landlord, contained a special clause: in the event of an assignment of the lease, the landlord would receive compensation, described as "lower" compared to the rent. But what about the assignment of shares?

The company was owned by several shareholders. One of them, Mrs X., decided to assign her shares to a third party. The landlord, relying on the clause in the lease, considered that this assignment of shares amounted to an assignment of the lease and demanded payment of the compensation. Mrs X. refused, arguing that changing the shareholder did not change the tenant: the company remained the same legal entity. The dispute began.

The court of first instance, and then the Court of Appeal of Nice, had to decide. The Court of Appeal initially ruled in favour of the landlord, holding that the assignment of shares resulted in a change of control of the company, which justified the application of the clause. But the Court of Cassation, seised by Mrs X., quashed that judgment. The supreme judges recalled the fundamental principle: a company is a legal entity distinct from its shareholders. The assignment of shares does not alter the identity of the tenant, which remains the company. Therefore, the clause could not apply.

The Reasoning of the Court — Explained

The Court of Cassation relied on a clear legal principle: the legal personality of a company is distinct from that of its shareholders (Article 1842 of the Civil Code). Thus, the assignment of shares does not affect the company itself; it merely changes the identity of its members. Since the lease is a contract binding the landlord and the company, a change of shareholders does not constitute a novation (replacement of one obligation by a new one) nor an assignment of contract.

The High Court also recalled that the clauses of a commercial lease must be interpreted strictly. A clause that provides for compensation in the event of an "assignment of the lease" cannot be extended to the assignment of shares, because these are two legally distinct transactions. The intention of the parties, even if it was to cover this case, must be clearly expressed. In this case, the clause did not mention the assignment of shares, so it could not apply.

In doing so, the Court of Cassation confirmed a consistent line of authority: since the 1980s, the courts have protected the free transferability of shares. No landlord's consent is required for the assignment of shares, unless there is an express and unambiguous clause to the contrary. This solution favours trading companies, which can thus restructure without fear of the landlord's veto.

But beware, there is a downside: if the landlord can demonstrate that the assignment of shares has the effect of changing the effective control of the company and that this change is likely to compromise its interests (for example, insolvency of the new shareholder), it may rely on abuse of right or fraud. However, the burden of proof lies on the landlord, and this is a narrow path.

What This Means for You — in Practice

For landlords, this judgment is a warning: you cannot automatically demand compensation or your consent upon an assignment of shares. If you wish to control changes of shareholders, you must provide for this expressly in the lease, by a specific and unambiguous clause. Example: "Any assignment of shares resulting in a change of control of the tenant company is subject to the landlord's approval, on pain of termination of the lease." Without this, your request will be rejected.

For tenants, the news is excellent: you can assign your shares freely, without having to ask the landlord for permission. This facilitates business transfers, the entry of new investors, or the departure of shareholders. However, check your lease: if there is an approval or pre-emption clause, you will be bound to comply. For example, in Cagnes-sur-Mer, a client was able to sell his shares in a catering SARL without the landlord being able to oppose it, because the lease was silent on the subject. The saving? More than €15,000 in potential compensation.

For purchasers of shares, be aware that you become a shareholder of the tenant company, but you are not personally bound by the lease. The company remains solely liable for the rent. However, ensure that the company has the necessary funds and that the lease is not threatened by particular clauses. A legal audit of the lease is strongly recommended before any acquisition of shares.

Four Tips to Avoid This Type of Dispute

• Draft a clear approval clause: If you are a landlord and wish to control assignments of shares, insert a clause in the lease stating that any assignment of shares, direct or indirect, changing the control of the tenant company, is subject to your prior approval. Specify the consequences of non-compliance (termination, penalty).
• Check the lease before assigning shares: As a shareholder, do not assume that the assignment is free. Read the lease carefully. If an approval clause exists, comply with it. If it is ambiguous, ask a lawyer to interpret it. Better to prevent than to cure a costly dispute.
• If the clause is abusive, challenge it: Some landlords insert clauses that totally prohibit the assignment of shares, which is unlawful because it infringes the freedom of association. If you are faced with such a clause, know that it can be annulled as abusive (Article L. 145-15 of the Commercial Code). An interim application can quickly remove the clause.
• Document the value of the shares: When assigning shares, execute a written deed, value the shares and inform the landlord by registered letter, even if his consent is not required. This proves your good faith and may deter litigation.

Further Reading: Related Case Law and Developments

The 1988 judgment is regularly cited by the courts. For example, in a judgment of the Court of Cassation of 5 March 2013 (No. 11-28.574), the judges reaffirmed that the assignment of shares in a SCI that owns commercial premises is not an assignment of the leasehold interest (it was a case of sale of the shares of the SCI, not assignment of shares of the tenant company, but the principle is similar).

However, there is a limit: if the assignment of shares has the object or effect of circumventing an approval clause stipulated in the lease, the judges may recharacterise the transaction as a disguised assignment of the lease. This is the theory of fraud. But this characterisation is rare and must be proved by the landlord. The trend of case law is therefore very protective of tenant companies, and has been for more than thirty years.

In the future, with the proliferation of single-member companies (EURL, SASU), the question arises as to whether the assignment of the sole share can be equated to an assignment of the lease. The answer is no, because the company remains distinct from the sole shareholder. However, some courts might be tempted to look at the economic reality. Watch this space.

Checklist Before Taking Action

• Before assigning shares: 1. Re-read the commercial lease and check for an approval clause. 2. If there is an approval clause: seek the landlord's written consent. 3. If no clause: inform the landlord by ordinary letter. 4. Have the assignment deed signed by a notary or solicitor.
• Before acquiring shares: 1. Obtain a copy of the lease and check its term, rent and clauses. 2. Ensure the company is up to date with its rent and charges. 3. Check that there is no approval clause or, if there is, that approval has been given.
• If you are a landlord: 1. Draft an approval clause specific to share assignments. 2. In the event of an unapproved assignment, you can sue for termination of the lease, but the risk is that the judge may annul the clause if it is too strict.

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 →