Disguised finance lease: when a lease with a promise to sell becomes a finance lease contract

Imagine the scene: in Falaise, a trader signs a lease for his premises, with a promise to sell stating that the rent paid will be deducted from the purchase price. Five years later, he wants to assign his right to the promise to a third party. The seller objects, arguing that this arrangement is not a simple lease but a finance lease (lease with an option to purchase), subject to strict rules.

Who is right? How far can you link a lease and a sale without falling into the classification of a finance lease? And above all, does this classification really change things for the parties?

The Court of Cassation, in a judgment of 19 October 2011 (No. 10-13.651), ruled: when the two deeds are inseparable and the rent is deducted from the price, the transaction constitutes a finance lease, even if the assignment of the promise does not benefit the original tenant. A decision that disrupts common arrangements in commercial property.

The facts: a story that happens every day

In 1998, a company owning a building for professional use signs with a tenant a notarised deed in two parts: a standard commercial lease, and a unilateral promise to sell. The particularity? The rent paid during the lease will be deducted from the sale price if the tenant exercises the option. An arrangement apparently advantageous for the lessee, who builds up forced savings.

In 2000, the original tenant sublets the property to another company (SARL Immo), then assigns the promise to sell to it. The owner disputes this: in his view, this assignment violates the rules of finance lease, because the sub-tenant was not the original beneficiary of the promise. He sues both companies to have the assignment annulled and the lease terminated.

The Caen Court of Appeal rules in favour of the owner: it reclassifies the whole as a finance lease, and applies Article L. 313-7 of the Monetary and Financial Code (which governs finance leases). The tenants appeal to the Court of Cassation, arguing that the assignment of the promise to a third party was not prohibited by that text. But the Court of Cassation confirms: it does not matter that the assignee is different from the original tenant, the transaction remains a finance lease.

The court's reasoning — analysed

To understand, we must go back to the legal definition of a finance lease: according to Article L. 313-7 of the Monetary and Financial Code, it is a transaction involving the lease of a building for professional use, accompanied by a promise to sell (or an option to purchase) in favour of the tenant, and in which the rent is intended to be deducted from the sale price. In short, it is a lease with an option to purchase.

In this case, the Court of Appeal identified three elements: first, the lease and the promise were contained in the same notarised deed, which shows their close link. Second, the rent was deductible from the sale price, which is the hallmark of a finance lease. Finally, the parties had provided that the promise could be assigned, but that did not change the nature of the original contract.

The owner argued that assignment to a sub-tenant was prohibited, because Article L. 313-7 would require that the sale benefit the original tenant. The Court of Cassation dismisses this argument: the text does not say that. It only requires a promise to sell in favour of the tenant, but nothing prevents the tenant from assigning his right to a third party. However, this assignment does not cause the contract to lose its classification as a finance lease.

What is interesting is that the Court does not merely rely on the letter of the text: it examines the economic substance of the contract. If the rent is deducted from the price, then the transaction serves to finance the acquisition, like a finance lease. The judges look at the substance, not just the form.

What this means for you — practically

For landlord owners, this decision is a warning: if you sign a lease with a promise to sell and the rent is deductible, you are entering into a finance lease, even if you call it something else. This implies specific obligations: for example, the finance lease must be concluded for a period at least equal to the amortisation period of the property, and it is subject to publicity rules. You cannot freely take back the property at the end of the lease as long as the option has not been exercised.

For tenants, it is a protection: if you benefit from such an arrangement, you are considered a finance lessee, with a right to exercise the option at any time during the lease. But beware: if you assign your right to a third party, you cannot circumvent the rules of finance lease. Concrete example: in Lisieux, a craftsman rents a premises for €1,000 per month for 5 years, with a promise to sell at €100,000 and deduction of rent. After 3 years, he wants to sell his promise to a colleague. The decision says this is possible, but the owner may require compliance with the conditions of the finance lease (in particular the landlord's consent if the contract so provides).

For purchasers of such a promise, check the classification retained in the deed: if it is a finance lease, you must ensure that the landlord has been informed of your entry into the contract, and that the rent continues to be deducted from the price. Otherwise, you risk an action for nullity.

If you are in this situation, you should: reread your contract, check whether the rent is deducted from the price, and if so, consult a lawyer to determine whether your arrangement complies with finance lease law. The time limits for taking action are those of general law: 5 years from the discovery of the dispute.

Four tips to avoid this type of dispute

• Clearly separate the deeds: if you want a lease with an option to purchase, draft a finance lease contract in accordance with Article L. 313-7. Do not mix a standard lease and a promise to sell in the same document, unless you accept the classification.
• Specify the treatment of rent: if the rent is not deductible from the price, state this expressly. A simple deduction clause transforms the transaction into a finance lease, even if you do not wish it.
• Anticipate assignments: if you plan to assign the promise to a third party, include a clause requiring the landlord's approval in the contract. Otherwise, the owner could oppose the assignment by invoking the finance lease.
• Use a notary or specialist lawyer: a complex arrangement like this requires bespoke drafting. In Falaise as in Lisieux, legal professionals can save you years of litigation.

Further analysis: related case law and developments

This decision is part of a line of Court of Cassation cases that favour economic reality over legal form. Already in 2005 (Civ. 3e, 2 March 2005, No. 03-19.542), it had ruled that a lease with a promise to sell and deduction of rent constituted a finance lease. Here, it adds that assignment to a third party does not change this.

However, earlier case law was more hesitant on the inseparable nature of the deeds. Some courts of appeal considered that if the deeds were separate, they could be classified separately. The 2011 judgment clarifies: even if the deeds are physically separate, their economic link (deduction of rent, option to purchase) is sufficient to reclassify them as a whole.

For the future, courts will continue to reclassify arrangements that attempt to circumvent the status of finance lease. Property professionals must therefore be cautious: a simple lease with a promise to sell and deduction of rent is now almost automatically considered a finance lease.

In practice: what to do

Here is a 5-point checklist if you are involved in such an arrangement:

1. Identify the classification: does your contract mention deduction of rent from the price? If so, it is likely a finance lease.
2. Check compliance: the finance lease must be in writing, for a minimum term (often 9 years), and registered. Ensure these formalities are complied with.
3. In case of assignment: obtain the landlord's written consent if the contract so provides. Even in the absence of a clause, inform him to avoid a dispute.
4. In case of dispute: gather all deeds (lease, promise, amendments) and consult a lawyer. The time limits for taking action are 5 years from knowledge of the problem.
5. For the future: if you want to avoid the classification of finance lease, remove any clause deducting rent from the sale price. Otherwise, accept it and draft a proper finance lease contract.

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