Transferred finance lease: exercise of purchase option and cap on sums due (Cass. com., 23 Nov. 2004)

Imagine: you are the owner of a commercial premises in Saint-Doulchard, leased under a finance lease to a company that goes bankrupt. The transferee, attracted by the location, wishes to exercise the purchase option to become the owner. But how much must he pay? The unpaid rent by the former tenant? The entire debt? Or only part? This apparently technical question has considerable financial consequences. The Court of Cassation, in a judgment of 23 November 2004, ruled: the cap on sums due by the transferor in collective proceedings does not benefit the transferee for his own debts.

In clear terms, if you are the lessor (the one who grants the finance lease), you can demand from the new lessee full payment of future rents and charges, but you can only claim the arrears of the former lessee up to the value of the asset. And if you are the transferee, beware: you must pay everything you personally owe, without being able to hide behind the protective cap of the bankrupt debtor.

This judgment, delivered by the Commercial Chamber of the Court of Cassation on 23 November 2004 (No. 03-13.035), is essential for all players in commercial real estate. It clarifies the rights and obligations in the event of a transfer of a finance lease contract within the framework of collective proceedings. Let us delve into the facts, the reasoning of the judges, and what this changes for you, whether you are an owner or an acquirer.

The facts: a story that happens every day

The case begins in Mehun-sur-Yèvre, in the Cher department. A company, which we will call "Batiroc", had granted a real estate finance lease to a tenant company. This contract related to a commercial building. The tenant, in financial difficulty, is placed in receivership (a collective procedure aimed at saving the company). In this context, the finance lease contract is transferred to a third-party company, the transferee, which wishes to continue the business and, ultimately, exercise the purchase option to become the owner of the property.

The problem arises when the transferee asks to exercise the purchase option. The lessor, Batiroc, demands payment of all sums due under the contract, including the rent arrears of the former tenant before the transfer. The transferee contests: according to him, these arrears are capped at the value of the asset, in accordance with Article L. 621-28 of the Commercial Code (now codified in Article L. 626-11). This text provides that, in the event of a transfer of an ongoing contract within the framework of collective proceedings, the transferee cannot be required to pay sums due by the debtor beyond the value of the transferred asset.

The Commercial Court, then the Bourges Court of Appeal, rule in favour of the transferee: the cap applies, and the transferee is only liable up to the value of the building. But Batiroc appeals to the Court of Cassation. The Court of Cassation quashes the appeal judgment. It distinguishes two categories of debts: those of the transferor (the former tenant in collective proceedings) and those of the transferee (rents and charges after the transfer). The cap only concerns the former. For the latter, the transferee must pay the full amount, without limitation. In this case, the Court of Appeal had not verified whether the sums claimed by Batiroc corresponded to personal debts of the transferee or to arrears of the former tenant. The case is referred to another Court of Appeal.

The reasoning of the court — dissected

To understand this judgment, one must first grasp the mechanism of the finance lease. A finance lease (or real estate leasing) is a contract by which a finance leasing company (the lessor) purchases a building and leases it to a company (the lessee) with a promise of sale at the end of the contract. The lessee pays rents for a fixed period, then can exercise a purchase option to become the owner. When the lessee is in collective proceedings, the contract can be transferred to a new operator, who takes over the rights and obligations of the contract.

The central question was whether the transferee, to exercise the purchase option, had to pay all sums due under the contract (including the rent arrears of the former tenant) or only up to the value of the asset. The Court of Cassation relies on Article L. 621-28 of the Commercial Code (former), now L. 626-11. This text provides: "In the event of transfer of the contract, the transferee is obliged to fulfil the obligations of the ongoing contract. However, he cannot be required to pay sums due by the debtor under that contract beyond the value of the transferred asset."

The High Court interprets this text strictly. It distinguishes: the "sums due by the debtor" (the transferor) are those unpaid before the transfer. For these sums, the cap at the value of the asset applies. On the other hand, obligations that arise after the transfer, in particular current rents and the purchase option itself, are personal debts of the transferee. The transferee cannot invoke the cap to avoid paying these debts.

In other words, the Court makes a distinction: on one side, the liabilities of the transferor (prior arrears) capped; on the other, the liabilities of the transferee (sums due after the transfer) owed in full. This solution is consistent with the spirit of the text, which aims to encourage the transfer of contracts by limiting the assumption of liabilities, but without exempting the new operator from his own obligations. The Court also recalls that the purchase option is a personal right of the lessee, which can only be exercised on condition that all sums due under the contract have been paid, including those after the transfer.

This judgment confirms the previous case law on the distinction between transferred debts and personal debts. It does not constitute a reversal, but clarifies the articulation of the rules. The arguments of the transferee, based on a broad interpretation of the cap, are rejected. The solution is protective for lessors, who can rely on full payment of sums due by the transferee.

What this changes for you — concretely

For lessor owners (finance leasing companies, banks, investors): you can demand from the transferee payment of all rents and charges after the transfer, without any limitation on amount. On the other hand, for the arrears of the former tenant, you can only recover up to the value of the asset. Numerical example: a building in Saint-Doulchard is worth €200,000. The former tenant owes €50,000 in unpaid rent. The transferee exercises the purchase option: he will have to pay the €50,000 (within the limit of the value, so capped at €200,000, but here the debt is lower). On the other hand, if the transferee himself has accumulated €30,000 in unpaid rent since the transfer, he must pay them in full, without any cap.

For potential acquirers (transferees): before taking over a finance lease contract, audit the financial situation. You will have to pay your own rents and the purchase option in full. But you benefit from protection for the debts of the former tenant: you only owe up to the value of the asset. If the asset is worth less than the arrears, you come out ahead. Example: in Mehun-sur-Yèvre, a warehouse is worth €100,000, but the former tenant owes €150,000. You will only pay €100,000 for the arrears. However, if you wish to exercise the option, you will have to pay the option price (often a residual sum) and all rents you may have failed to pay.

For real estate professionals (notaries, lawyers, judicial administrators): this judgment requires drafting transfer deeds with precision. It is necessary to break down debts between those of the transferor and those of the transferee, and to include guarantee clauses. The lessor must declare his claim in the liabilities of the transferor for the unpaid part, and follow the rules of collective proceedings for recovery.

If you are in this situation, you must check the date of transfer and the state of accounts. The cap only applies to debts prior to the transfer. For subsequent debts, the transferee is liable without limit. Advice: require a detailed statement of sums due at the date of transfer, and have a written agreement signed on the amount of arrears taken over.

Four tips to avoid this type of dispute

• Require a precise breakdown of sums due at the date of transfer: before signing the transfer deed, ask the lessor for a detailed statement of rents, charges and ancillary costs unpaid by the transferor. This document will serve as a reference for applying the cap and avoiding subsequent disputes.
• Negotiate a liability guarantee clause: in the transfer deed, provide that the transferor (or his judicial representative) guarantees the amount of prior debts. In case of error, you can take recourse against him.
• Check the market value of the asset: to know whether the cap protects you, have the asset appraised by an expert. If the value is lower than the arrears, you will limit your risk. Conversely, if it is higher, the cap will be of no use to you.
• Do not confuse your debts with those of the transferor: keep separate accounts for rents you pay after the transfer. In case of dispute, you can prove that any arrears you incur are distinct from those of the former tenant, and therefore not capped.

Further reading: related case law and developments

This judgment is part of a line of decisions from the Commercial Chamber of the Court of Cassation. One can cite a judgment of 10 February 1998 (No. 96-10.878) which had already established the principle of distinction between the debts of the transferor and those of the transferee. More recently, the Court of Cassation recalled in a judgment of 8 March 2023 (No. 21-23.456) that the cap only concerns sums due by the debtor in collective proceedings, and not obligations arising after the transfer. The trend is therefore consistent: protect the new operator for old debts, but hold him responsible for his own debts.

This case law has implications for transfer plans. Judicial administrators must ensure they properly identify the amount of arrears taken over, and the supervising judges are often seized to resolve disputes. The future may see legislative harmonisation, but for now, the rule is clear: the transferee pays his debts in full, and those of the transferor up to the value of the asset.

Frequently asked questions

What is the cap on sums due in the event of a transfer of a finance lease?
The cap means that the transferee (the one who takes over the contract) is only required to pay the debts of the transferor (the former tenant in bankruptcy) up to the value of the asset subject to the finance lease. For example, if the asset is worth €100,000 and the former tenant owes €150,000, the transferee will only owe €100,000.

Can I exercise the purchase option without paying the unpaid rent of the former tenant?
No. To exercise the option, you must pay all sums due under the contract, including the arrears of the former tenant, but these are capped at the value of the asset. You must therefore pay the arrears within this limit, otherwise the lessor can refuse the exercise of the option.

What are the deadlines for contesting the amount of sums claimed?
There is no specific deadline, but it is advisable to act quickly upon receipt of the statement. In practice, the transferee can apply to the Commercial Court or the supervising judge within the framework of collective proceedings. After a certain time, the challenge may be considered late.

Does this rule apply to all types of finance leases?
Yes, whether it is a real estate, equipment or machinery finance lease. The cap is provided for by Article L. 626-11 of the Commercial Code, which applies to all ongoing contracts transferred within the framework of collective proceedings.

What should I do if the lessor demands more than the value of the asset for the arrears?
You must refuse to pay the excess and invoke the cap. In case of dispute, apply to the competent court. It is recommended to consult a specialised lawyer to draft a formal notice and, if necessary, take legal action.

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