Transfer of Shares and Dissolution: A Disguised Assignment of Lease (Cass. 1970)

Imagine: you own a commercial property in Saint-André-les-Vergers. You sign a lease with a company, SARL Brasserie Caulaincourt. One day, you learn that the manager has transferred all the shares to a third party, then dissolved the company. The new owner of the walls continues to operate the business without having sought your permission. You wonder: is this legal? Is your lease, which prohibits any assignment without your involvement, respected? This situation, more common than you might think, was decided by the French Supreme Court in 1970. The answer is clear: such an operation constitutes a disguised assignment of lease, and non-compliance with contractual clauses may lead to termination of the lease. But why did the judges consider it an assignment? And above all, how can you protect yourself as a landlord or tenant?

The Facts: A Story That Happens Every Day

In La Chapelle-Saint-Luc, a lady, manager of SARL Brasserie Caulaincourt, leased a commercial property to a landlady, Mrs. Y. The lease contained a standard clause: any assignment of the leasehold interest must be made by notarial deed with the involvement of the landlord, subject to automatic termination (forfeiture clause, i.e., a clause providing for the end of the lease in case of breach). One day, the manager transferred all the shares of the SARL to a third party. This transfer led to the dissolution of the company, since all assets and rights were vested in a single shareholder. In practice, the new owner of the shares continued to operate the bar, but without following the lease assignment procedure. The landlady, considering herself wronged, sued the assignee to have the lease terminated. The court of Troyes ruled in her favour, but the assignee appealed to the Supreme Court, arguing that the transfer of shares and dissolution did not constitute an assignment of lease in the legal sense.

The Court's Reasoning — Analysed

The Supreme Court, in its judgment of 5 February 1970, dismissed the appeal. It held that "the act by which a company, tenant of a commercial property, transfers all its shares to a third party, which leads to its dissolution, constitutes an assignment of lease." Indeed, the devolution (transmission) of all the company's assets to the manager, who became the sole shareholder, had the effect of indirectly transferring the leasehold interest to the assignee of the shares. However, the lease provided that any assignment must be made by deed with the involvement of the landlord, and this clause was sanctioned by a forfeiture clause. Non-compliance with this formality therefore results in termination of the lease. The judges relied on the contractual prohibition against assigning the lease without the landlord's consent, and on the principle that one cannot circumvent a clause by using a legal arrangement (share transfer + dissolution) that achieves the same result. This decision is in line with a consistent line of case law protecting the landlord's right to control the entry of a new tenant. It reminds us that form should not prevail over substance: regardless of whether the operation is legally a share transfer, if economically it is equivalent to an assignment of lease, the rules of the lease apply.

What This Means for You — Practically

For landlords, this decision is a powerful tool. If your lease contains a clause prohibiting assignment without your involvement, and your tenant attempts to circumvent you by transferring its shares and then dissolving the company, you can seek termination of the lease. Concrete example: in La Chapelle-Saint-Luc, a commercial lease of €1,200 per month, with a forfeiture clause. If the tenant transfers its shares without notifying you, you can recover the premises and claim damages (e.g., 6 months' rent = €7,200). For tenants and purchasers, beware: if you buy all the shares of a tenant company, you must imperatively check whether the lease requires the landlord's consent. Otherwise, you risk termination of the lease and loss of your business. If you are in this situation, you should: 1) re-read your lease and identify the clauses on assignments, 2) inform the landlord of the transaction before signing, 3) if necessary, have the landlord involved in the share transfer deed to remove any ambiguity. Do not neglect this step: a simple registered letter can save you years of litigation.

Four Tips to Avoid This Type of Dispute

• Include an anti-circumvention clause in the lease: expressly provide that any transfer of shares or change of control of the tenant company is subject to your prior consent, subject to termination.
• Require a notarial deed with your involvement: whether for a direct assignment of lease or a share transfer, have a notarial deed drawn up and sign it in person. Do not settle for a simple oral agreement or a private deed.
• Verify the identity of the assignee: if you are a tenant, before acquiring shares, request a copy of the lease and check the assignment clauses. Consult a lawyer to determine whether the proposed transaction complies with the contract.
• Act quickly in case of breach: if you discover an unauthorised assignment, send a formal notice (registered letter with acknowledgement of receipt) to regularise the situation within a short period (e.g., 15 days). If this fails, apply to the judicial court to have the termination declared and claim damages.

Further Reading: Related Case Law and Developments

This 1970 decision is part of a consistent line of Supreme Court case law. Already in 1965, a judgment had held that the transfer of all shares of a tenant civil real estate company (SCI) constituted an assignment of lease. More recently, the Commercial Chamber confirmed this approach in 2015 (No. 14-10.001): the transfer of majority shares of a company operating a business, insofar as it results in a change of control, is assimilated to an assignment of lease if the contract so provides. The trend is therefore towards enhanced protection of the landlord against arrangements aimed at evading lease clauses. In the future, courts will continue to analyse the economic reality of the transaction rather than its legal form. Real estate professionals must therefore be particularly vigilant when drafting leases and assignment deeds.

Frequently Asked Questions

• What should I do if I have already transferred my shares without complying with the lease clause? Immediately contact the landlord to regularise the situation. Propose to sign an amendment to the lease with the landlord's involvement. If the landlord refuses, you risk judicial termination of the lease and damages.
• Can I transfer 99% of the shares without being considered as assigning the lease? No, if the transfer leaves you without effective control or allows a third party to exercise control, the judges may treat it as an assignment of lease. It is better to seek the landlord's consent.
• What are the time limits for legal action? You have 5 years from the discovery of the unauthorised assignment to bring an action for termination of the lease (general limitation period). However, to avoid any ambiguity, act within 3 months of learning of the facts.
• Is the cost of proceedings high? Lawyer and bailiff fees vary depending on complexity, but expect between €1,500 and €5,000 for interim proceedings (urgency). This should be weighed against the value of the lease and the rent.
• Can a forfeiture clause be held abusive? In commercial leases, forfeiture clauses are valid if they are clear and not disproportionate. However, a judge may set them aside in case of bad faith on the part of the landlord or manifest disproportion.

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