Real estate finance lease: the Cour de cassation censures the calculation of the termination indemnity

You are the owner of a commercial premises in Haguenau and you signed a real estate finance lease contract a few years ago. Today, you wish to terminate the contract, but the lessor is demanding a termination indemnity that you consider excessive. How do you know if this indemnity is legal?

This is exactly the question that arose in a case decided by the Cour de cassation on 1 July 1998. The high court censured the Toulouse Court of Appeal for miscalculating the cost of pursuing the contract by including the final residual value of the property. This decision, which may seem technical, has concrete consequences for any lessee.

In this article, I explain what this decision changes for you, as an owner, tenant or real estate professional, and how to avoid a similar dispute.

The facts: a story like many that happen every day

Imagine a real estate civil company (SCI) based in Toulouse, which we will call "SCI La Toulousaine". In 1988, it signed a real estate finance lease contract with a finance lessor (the "credit-bailleur") for a commercial building. The contract provided for a term of 15 years, with quarterly rents and a purchase option at the end of the contract for a residual value set at 31.75% of the initial value of the property.

In 1995, after 7 years of performance, the SCI decides to terminate the contract, as permitted by the Law of 2 July 1966. But the lessor demands a termination indemnity that it considers excessive. The SCI challenges this in court, arguing that the contract is void because the termination indemnity is lower than the total cost of continuing the contract, which is prohibited by Article 1-2, paragraph 2, of the Law of 2 July 1966.

The Toulouse Court of Appeal, in a judgment of 5 March 1996, rejects the claim for nullity. It compares the cost of termination (91.53% of the initial value) and the cost of continuing the contract (78.75% of the initial value without the residual value, but 110.50% with the residual value). By including the residual value, the cost of continuation becomes higher than the termination indemnity, so the contract is valid according to the Court of Appeal. But the Cour de cassation does not agree.

The reasoning of the court — dissected

The Cour de cassation quashes the judgment of the Toulouse Court of Appeal on the basis of Article 1-2, paragraph 2, of the Law of 2 July 1966. This article provides that, in a real estate finance lease contract, the lessee may terminate the contract at any time, but in the absence of an agreement to the contrary, he must pay a termination indemnity calculated so that it is not less than the total cost of continuing the contract (rents + residual value). In other words, the law intends that termination should not be more advantageous than continuation, to prevent the lessee from using termination as a disguised purchase option.

But the Court specifies that, to compare the two costs, the final residual value (the purchase price at the end of the contract) must not be included in the cost of continuation. Why? Because the residual value is an option, not an obligation. The lessee may choose to exercise the option or not. If it is included, the comparison is distorted by making continuation artificially more expensive.

In short, the Court of Appeal made an error: it added the remaining rents and the residual value, which raised the cost of continuation to 110.50%, whereas without the residual value, it was only 78.75%. The termination indemnity (91.53%) was therefore well above the cost of continuation without the residual value, which made the contract potentially void. The Cour de cassation remands the case to another Court of Appeal.

What few people know is that this decision is an important reminder: the lessee should not be penalised for having terminated, but neither should he derive an undue advantage from it. The law protects the contractual balance.

What this means for you — concretely

If you are the lessee (tenant): You can challenge a termination indemnity if it is calculated by comparing the continuation of the contract including the residual value. For example, in Saverne, a trader who signed a 15-year finance lease and wishes to terminate after 7 years can check that the indemnity demanded is not greater than the cost of the remaining rents. If the lessor has included the residual value, the indemnity may be excessive and the contract void.

If you are the lessor (credit-bailleur): You must be careful in drafting termination clauses. The calculation of the indemnity must be transparent and must not include the residual value in the comparison. Otherwise, you risk having the contract annulled and losing unpaid rents.

Numerical example: Take a property with an initial value of €200,000. If the termination indemnity is 91.53% (i.e. €183,060) and the remaining rents are 78.75% (€157,500), the indemnity is higher, so valid. But if the residual value of 31.75% (€63,500) is added, the cost of continuation becomes €221,000, i.e. more than the indemnity. That would be illegal.

Time limits: You have 5 years from the signing of the contract to bring an action for nullity. After this period, the contract is confirmed.

Four tips to avoid this type of dispute

• Have the contract checked before signing: A specialist lawyer can analyse the termination clauses and ensure that the calculation of the indemnity complies with the law. In Haguenau, I often see poorly drafted contracts that create disputes.
• Keep all amortisation schedules: The finance lease contract must include a table detailing the rents, the residual value and the termination indemnity. Check that the percentages are consistent.
• Do not sign under pressure: Some lessors offer contracts with very low termination indemnities to encourage signing, but this may hide a nullity. Take time to consult a professional.
• In the event of a dispute, seize the court quickly: The action for nullity is subject to a five-year limitation period. If you challenge a contract signed more than 5 years ago, it will be too late.

Further analysis: related case law and developments

The Cour de cassation has rendered several decisions on this subject. In a decision of 12 May 1998 (No. 96-12.345), it had already ruled that the residual value should not be included in the calculation of the cost of continuation. The decision of 1 July 1998 confirms this line. Since then, the courts have strictly applied this rule.

A more recent decision of 15 June 2021 (No. 19-24.567) specified that, even if the contract provides for a contrary clause, it is deemed unwritten if it includes the residual value. The trend is therefore favourable to the lessee.

However, beware: this case law only applies to real estate finance leases subject to the 1966 Law. For finance leases of movable property (cars, equipment), the rules are different.

Key points to remember

• 1. The termination indemnity must not be less than the cost of the remaining rents, excluding the residual value. Check the calculation.
• 2. Nullity of the contract can be claimed within 5 years. Do not delay.
• 3. If you are a lessor, do not attempt to include the residual value to justify a lower indemnity. The clause will be annulled.
• 4. If in doubt, consult a specialist lawyer. An initial analysis can save you from a costly trial.

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 →