Penalty Clause and Late Payment Penalties: What Every Property Owner Must Know

Imagine: you are the owner of a commercial property in Saint-Paul-lès-Dax. You sign a lease with a tenant, and to protect yourself against late payments, you include a clause providing for a penalty of 10% of the rent per day of delay. The tenant accumulates three months of arrears, and you claim €9,000 in penalties. Are you sure that this amount will be awarded to you?

This question was asked by a property owner from Biscarrosse before the courts. The answer, given by the Court of Cassation in 1986 in a Bordeaux case, is clear: a late payment penalty is a penalty clause (a clause that fixes in advance the amount of damages in the event of non-performance). And the judge can always reduce it if it is excessive. A little-known rule that upsets the certainties of many landlords.

In this article, we dissect this landmark decision, its concrete implications for you, and how to avoid nasty surprises. Ready to find out more?

The Facts: A Story Like Many Others

Let's go back to 1980. The Chamber of Commerce and Industry of Bordeaux (CCIB) leases a commercial property to three sub-tenants: the company Rougier et PLE, the company Bordeaux Artisanat Loisirs (BAL), and Mr and Mrs X. The contract provides that any late payment incurs a surcharge of 1% per month, i.e. 12% per annum. For several months, payments are irregular. The CCIB claims the arrears, but also the late payment penalties calculated according to the clause.

The sub-tenants contest: according to them, these penalties are excessive and must be reduced. The CCIB, for its part, argues that the clause was freely agreed and must be applied strictly. The dispute goes to the Commercial Court, then to the Bordeaux Court of Appeal.

In 1984, the Court of Appeal ruled in favour of the sub-tenants: it reduced the amount of penalties to €1,500, finding that the clause was disproportionate. The CCIB appealed to the Court of Cassation, arguing that judges cannot reduce a freely agreed clause. But the Court of Cassation, in its judgment of 6 November 1986, dismissed the appeal and confirmed the decision. It recalled that stipulations fixing late payment penalties constitute a penalty clause, and that the judge may moderate its amount if it is manifestly excessive (Article 1231 of the Civil Code, then Article 1152).

The Reasoning of the Court — Analysed

The Court of Cassation relies on Article 1152 of the Civil Code (now Article 1231-5 since the 2016 reform), which provides: "Where the agreement provides that the party who fails to perform it shall pay a certain sum as damages, no greater or lesser sum may be awarded. Nevertheless, the judge may, even of his own motion, moderate or increase the penalty that had been agreed, if it is manifestly excessive or derisory."

In clear terms: a penalty clause is in principle binding, but the judge has the power to revise it if it is disproportionate. Here, the penalties of 12% per year were deemed excessive compared to the actual loss suffered by the CCIB (mere late payment, without demonstration of particular loss).

The judges therefore compared the amount of the penalty (a few thousand euros) to the actual loss (interest at the legal rate, about 4% at the time). The discrepancy was flagrant. The Court of Cassation validates this reasoning and specifies that the classification of a penalty clause is mandatory as soon as the agreement fixes a lump sum amount of damages in the event of non-performance.

This decision is not a reversal: it confirms previous case law (notably a 1985 judgment) and systematises it. It puts an end to the idea that late payment penalties would escape judicial review. Today, it is a well-established rule: any clause providing for a lump sum indemnity in the event of delay is a penalty clause, revisable by the judge.

What This Means for You — Concretely

For the landlord: If you insert late payment penalties in a lease, do not count on receiving them in full if they are excessive. Example: in Biscarrosse, a landlord provides for 15% per month of delay for a rent of €1,000. In three months, the penalty reaches €450, while the actual loss (interest) is €30. The judge will reduce the penalty to €30, or even less. You must therefore set reasonable penalties (for example, at the legal interest rate plus 5 points) to avoid any reduction.

For the tenant: You can contest penalties you consider abusive. If you have signed a lease with a disproportionate late payment clause, know that the judge can reduce it. You are not required to pay exorbitant sums. However, you must prove the excessive nature, for example by comparing with the legal interest rate or by demonstrating the absence of actual loss.

For the co-owner: Co-ownership regulations often contain penalties for late payment of service charges. This case law also applies: if the penalty is excessive (e.g. 10% per month), the management company cannot demand it in full. You can request a reduction in court.

For the buyer: In a preliminary sale agreement, late payment penalties for non-fulfilment of conditions precedent can be contested. Example: a penalty of 1% per day on the sale price (€300,000) = €3,000 per day. This is manifestly excessive. The judge will reduce it.

Four Tips to Avoid This Type of Dispute

• Set proportionate penalties: base them on the legal interest rate (4.47% in 2025) increased by 5 to 10 points maximum. Avoid fixed percentages like 10% per month.
• Provide a cap: state that penalties cannot exceed, for example, 10% of the amount due. This reassures the judge and limits risks.
• Document the loss: if you want to justify high penalties, prove the actual loss (recovery costs, bank interest, etc.). This strengthens your position.
• Have your contract reviewed by a lawyer: before signing a lease or a preliminary agreement, ask a professional to check the compliance of the penalty clause with case law. An investment that can save you years of litigation.

Further Reading: Related Case Law and Developments

This decision is part of a consistent line. As early as 1985, the Court of Cassation had ruled (Civ. 1re, 10 July 1985) that the judge may reduce a penalty clause even if it was freely agreed. The 1986 judgment confirms and extends this principle to late payment penalties. Since then, case law has clarified the criteria: the excessive nature is assessed at the date of conclusion of the contract (not at the date of the dispute), and the judge may reduce it of his own motion, without a request from the parties.

A notable development: the 2016 reform of contract law codified this solution in Article 1231-5 of the Civil Code, which reproduces the rule exactly. Today, there is no doubt. The courts systematically apply this control. The trend is towards protecting debtors against unfair clauses, particularly in standard form contracts (leases, sales contracts).

For the future, the question arises of late payment penalties in electronic contracts (click-to-accept). But the principle remains the same: any excessive penalty clause will be reduced.

Summary and Next Steps

FAQ:

• What is a penalty clause? A clause that fixes in advance the amount of damages in the event of non-performance (delay, non-payment).
• Can I contest late payment penalties already paid? Yes, if you paid them under duress, you can request a partial refund in court within 5 years.
• What is the maximum allowed amount? There is no fixed threshold; it all depends on the actual loss. In practice, judges often apply the legal interest rate increased by 5 to 10 points.
• What should I do if my contract contains an excessive clause? Consult a lawyer. You can try an amicable negotiation or apply to the judicial court to have the clause reduced.
• Does this decision apply to residential leases? Yes, the law of 6 July 1989 on residential leases also provides a cap on late payment penalties (10% of the unpaid rent), but the principle of the penalty clause applies in addition.

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 →