Commercial lease termination and judicial reorganisation: the Cour de cassation rules in favour of the landlord

Imagine: you are the owner of commercial premises in Thonon-les-Bains, let to a trader who accumulates rent arrears. You serve a notice to quit (an act by which you terminate the lease) with refusal of renewal, in accordance with the law. But then your tenant enters judicial reorganisation (a collective procedure designed to save the company). The question arises: can the proceedings you have commenced to validate the notice be blocked by the stay of proceedings (temporary prohibition on taking legal action against the debtor) provided for by law?

This question is encountered by hundreds of landlords each year. And until now, the answer was unclear. But the Cour de cassation (the highest French court) put an end to the uncertainty in a judgment of 3 June 1992 (no. 90-19.687). It held that an action for a declaration of validity of a notice to quit with refusal of renewal for non-payment is not subject to the stay of proceedings. Why? Because that action does not seek to obtain payment of a sum of money, but to establish the termination of the lease. A subtle but crucial distinction.

The facts: a story like many that happen every day

We are in the 1980s. Mrs X, owner of commercial premises in La Roche-sur-Foron, let those premises to Mr and Mrs Y (by a professional lease contract), who run a business there. But the rents are not paid regularly. Mrs X serves formal demands on the tenants several times, and each time they pay within a month — but the delays recur. On 28 January 1985, exasperated, she serves a notice to quit with refusal of renewal for non-payment of a sum of money.

Mr and Mrs Y, to defend themselves, enter judicial reorganisation. The collective procedure in principle triggers a stay of individual proceedings: no creditor may commence or continue legal action to obtain payment of a debt arising before the opening judgment. Mr and Mrs Y therefore rely on this stay to defeat Mrs X's application to validate the notice.

The Court of Appeal of Chambéry, in a judgment of 30 July 1990, ruled in their favour. It held that the action to validate a notice is a proceeding within the meaning of the law, and must be stayed. But Mrs X appealed to the Cour de cassation. The Cour de cassation overturned the appeal judgment and remitted the case to another court, thereby establishing the key principle.

The court's reasoning — analysed

To understand the decision, reference must be made to Article 47 of the Law of 25 January 1985 on judicial reorganisation (now codified in Articles L. 622-21 et seq. of the Commercial Code). This provision states that the opening judgment stays any legal action by creditors seeking to obtain payment of a pre-existing debt. But the Cour de cassation draws a distinction: the action to validate a notice to quit with refusal of renewal does not aim to obtain payment of a sum of money. It seeks only to establish that the lease is terminated due to the tenant's breach (non-payment).

The lower court judges had considered that, since the ground for the notice is non-payment, the action was indeed a proceeding to obtain a sum of money. But the Cour de cassation corrects this: payment of the arrears of rent is a possible consequence of the notice, but the main object of the action is the validation of the notice itself. However, validation of the notice is not a pecuniary claim, but a legal action concerning the existence of the lease. It therefore does not fall within the stay of proceedings.

This reasoning is consistent with constant case law since that date: actions seeking the termination of a contract (for example, a lease) for non-performance are not stayed by judicial reorganisation, because they are not actions for payment. It confirms the distinction between personal actions (which seek to obtain a sum of money) and real or mixed actions (which concern a right or status).

What this means for you — practically

For the landlord: if your commercial tenant is in judicial reorganisation and does not pay the rent, you can serve a notice to quit with refusal of renewal and bring an action to validate that notice without fear of the stay of proceedings. This means you can obtain vacant possession more quickly. For example, if your tenant owes you €15,000 in rent arrears in Thonon-les-Bains, you can act immediately, even after the opening of judicial reorganisation.

For the tenant in judicial reorganisation: caution, this decision is unfavourable to you. You cannot hide behind the stay of proceedings to prevent validation of the notice. If you are in arrears, the landlord can obtain termination of the lease, which may jeopardise the continuation of your business. It is therefore essential to regularise the arrears quickly or negotiate a reorganisation plan with the administrator.

For the purchaser of commercial premises: if you buy premises that are already let, check the tenant's situation. A tenant in judicial reorganisation may lose the lease if the rent is not paid, which may allow you to recover the premises vacant more easily. Conversely, if you are the purchaser of a business, beware: the lease is an essential element, and its loss may devalue the business.

Concretely, a landlord in La Roche-sur-Foron who served a notice in January 1985 was able, thanks to this judgment, to obtain validation of the notice despite the tenant's judicial reorganisation, and thus recover the premises to re-let to another trader.

Four tips to avoid this type of dispute

• Draft a solid lease: include a forfeiture clause (a clause allowing automatic termination of the lease in case of non-payment) and comply with the legal formalities (1-month period after a formal demand for payment).
• Act quickly in case of arrears: do not let several months of rent accumulate. At the first delay, send a formal notice by registered letter with acknowledgement of receipt.
• Monitor your tenant's financial health: regularly request supporting documents (balance sheets, Kbis extract) to anticipate a possible judicial reorganisation.
• Consult a specialist lawyer: before bringing an action to validate a notice, seek assistance to avoid procedural nullities (for example, a notice served without respecting the 6-month notice period).

Further reading: related case law and developments

Before the 1992 judgment, some courts of appeal considered that an action to validate a notice was a disguised action for payment. For example, the Paris Court of Appeal, in a judgment of 14 November 1989, stayed such an action. But the Cour de cassation put an end to this divergence in 1992, clearly establishing the distinction.

Since then, case law has been constant: actions for termination of a lease for non-payment are not stayed by judicial reorganisation (Cass. com., 12 November 1997, no. 95-18.412). The trend is therefore favourable to the landlord, who can thus preserve his rights despite the tenant's difficult situation. This solution has been confirmed in the context of safeguard and judicial liquidation.

In the future, it is possible that the legislature will intervene to further protect tenants in difficulty, but for now the rule is clear: the landlord can act.

In practice: what to do

FAQ:

1. My tenant is in judicial reorganisation and is no longer paying rent. Can I serve notice to quit?
Yes, you can serve a notice to quit with refusal of renewal for non-payment. The action to validate this notice is not stayed by judicial reorganisation.

2. What if the tenant contests the validity of the notice?
You must apply to the tribunal judiciaire (formerly the tribunal de grande instance) to have the validity of the notice declared. You can do so even after the opening of judicial reorganisation.

3. Does the notice have to comply with a notice period?
Yes, a notice to quit for non-payment must be served at least 6 months before the expiry date of the lease, unless otherwise agreed. However, in case of arrears, you can also use the forfeiture clause which allows immediate termination after a formal demand for payment remains unsuccessful for 1 month.

4. Can I also claim the arrears of rent despite the judicial reorganisation?
Yes, but for rent due before the opening judgment, you must declare your claim to the insolvency practitioner. For rent falling due after, it is payable when it falls due.

5. What happens if the tenant is in judicial liquidation?
The lease is automatically terminated after a period of 3 months following the liquidation judgment, unless the administrator decides to continue the lease. In that case, subsequent rent is payable.

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 →