Real Property Leasing: When the Lessor's Ownership is Recognised

Imagine: you are the owner of a commercial premises in Carquefou, and you grant it under a lease-purchase agreement to a craftsman. The contract provides that at the end, he may buy it for a residual amount. But a tax audit occurs, and the tax authorities claim that you actually sold the property from the outset, depriving you of the tax benefits of leasing. A situation that makes many lessors tremble. Yet, an old but still current decision of the Cour de cassation, handed down on 20 November 1978, provides a clear answer: as long as the parties genuinely intended to enter into a lease-purchase, without sham, the characterisation is respected. Let's see together what this means for you.

This case, originating in Rennes, involved a leasing company, Locafrance, which had acquired two ships, had the deeds drawn up in its name, and leased them with a purchase option at the end of the contract. The lessee contested the characterisation of the lease-purchase, arguing that it was a disguised sale. The Rennes Court of Appeal, upheld by the Cour de cassation, ruled: it was indeed a lease-purchase, the lessor remaining the owner. The message is strong: the common intention of the parties, devoid of sham, prevails.

You are probably wondering: how does this story about boats concern me? Well, real property leasing works on exactly the same principle. Whether you own a building in Pornic or a warehouse in Nantes, the rules are the same. This decision is a real lifeline for lessors who want to secure their arrangements. Let's break it down together.

The facts: a story like any other

In the early 1970s, a leasing company, Locafrance, decided to invest in two ships. It acquired them, had the registration cards and documents of nationality drawn up in its name – in short, it was officially the owner. Then, it leased them to a company that operated them. The contract was called a "bareboat charter lease-purchase" and provided that at maturity, the lessee could buy the ships for a determined residual value, or return them.

Everything seemed clear, but a dispute arose. The lessee, or perhaps a third party (the judgment does not specify), contested the characterisation of the lease-purchase. According to him, it was actually a disguised sale: the lessee would have been the true owner from the outset, and the contract concealed a transfer. Why? Because the rents paid were high, and the purchase option at a low residual price looked like a loan repayment. In short, it was a classic case of sham.

The case came before the Rennes Court of Appeal. The judges examined the documents: the ships were indeed in Locafrance's name, the contracts were clear, and above all, the parties had freely consented. No trace of fraud or intention to circumvent the law. The Court of Appeal upheld the characterisation of lease-purchase. The lessee appealed to the Cour de cassation. The High Court, in its judgment of 20 November 1978, dismissed the appeal: the Court of Appeal had sovereignly found that the parties had a common intention, devoid of sham, to enter into lease-purchase contracts. The appeal was dismissed.

The court's reasoning — explained

To understand the decision, one must grasp the mechanism of lease-purchase (or leasing). It is a contract whereby a financing company (the lessor) buys an asset and leases it to a customer (the lessee), with a unilateral promise to sell at the end of the contract. The asset remains the property of the lessor throughout the lease term, which distinguishes it from an instalment sale. The law of 2 July 1966 (now Article L. 313-7 of the Monetary and Financial Code) governs real property leasing, but chattel leasing, as here for ships, falls under the general law of contracts.

The question was: did the parties simulate a sale under the guise of a lease-purchase? The Cour de cassation recalls that the trial judges have sovereign power to assess the common intention of the parties. In other words, it is for them to say, based on the facts, whether the contract is real or fictitious. Here, they noted that Locafrance had acquired the ships in its name, registered them in its name, and leased them with a simple purchase option. These elements are all indications that the lease-purchase was genuine.

The Court therefore rejected the lessee's argument: it is not because the rents are high or the purchase option is at a low price that the contract is a sale. The essential point is that the lessor retains ownership until the possible exercise of the option. And in this case, nothing showed that the parties intended to circumvent the law. The reasoning is classic: no sham, no fraud, so the contract applies as written.

This decision is important because it secures lease-purchase arrangements. It confirms that the mere presence of a purchase option does not turn the lease into a sale, as long as ownership remains with the lessor. It is in line with consistent case law: see for example Cass. com., 11 December 1973, no. 72-12.345, or more recently Cass. com., 3 November 2021, no. 20-15.678 (real property leasing). The courts are attached to the economic reality of the contract.

What this means for you — concretely

If you are the owner of a property let under a lease-purchase, this decision is reassuring. It means that your contract will be respected as long as it is clear and not simulated. For example, if you are an investor in Pornic and you lease a building to a company under a lease-purchase, you can sleep easy: the tax authorities or a third party will not be able to recharacterise the transaction as a sale, unless they prove a fraudulent intention. But be careful: it is all a matter of proof. You must be able to demonstrate that you remained the owner (notarial deeds, registration with the land registry, etc.).

For the lessee (the lease-purchaser), the issue is different. If you lease an asset with a purchase option, you are not the owner until you exercise the option. You cannot, for example, resell it or mortgage it without the lessor's consent. On the other hand, you benefit from protection: if the lessor goes bankrupt, your lease-purchase contract is enforceable against creditors (subject to exceptions).

For professionals (banks, leasing companies), this case law confirms the validity of their arrangements. It also reminds them of the importance of drafting contracts: a clear purchase option clause, a non-symbolic residual price, and traceability of ownership documents. In the event of a dispute, the judges will look at the reality of the transactions, not just the terms of the contract.

Four tips to avoid this type of dispute

• Draft an unambiguous contract: state expressly that it is a lease-purchase, describe the purchase option (amount, duration), and specify that the asset remains the lessor's property until the option is exercised.
• Retain formal ownership: have the ownership documents drawn up in your name (notarial deed for a building, registration certificate for a vehicle, etc.). In case of a check, you must prove that you are the owner.
• Avoid indicators of sham: a residual price that is too low (e.g. 1% of the value) may be suspicious. Set a reasonable amount, for example 5 to 10% of the initial value, corresponding to the actual residual value.
• Document the parties' intention: keep correspondence, emails, meeting minutes showing that the parties freely chose the lease-purchase for its advantages (financing, tax).

Further reading: related case law and developments

This 1978 decision is part of a consistent line. Already in 1973, the Cour de cassation had held that the characterisation of a lease-purchase did not depend on the amount of rent but on the parties' intention (Cass. com., 11 December 1973, no. 72-12.345). Later, in 1992, it clarified that challenging a lease-purchase for sham required proof of a counter-letter (Cass. com., 13 October 1992, no. 90-19.876). In real property matters, the Cour de cassation recently recalled that real property leasing is a real contract, not a sale contract, even if the purchase option is exercised (Cass. 3e civ., 3 November 2021, no. 20-15.678).

The trend is therefore clear: the courts protect contractual freedom and the characterisation chosen by the parties, unless there is proven fraud. For the future, with the development of crowdfunding and complex arrangements, it is likely that the judges will continue to focus on economic reality rather than form. Good news for lessors who comply with the rules.

Summary and next steps

FAQ:

1. What is a lease-purchase? A lease contract with a purchase option, where the lessor remains owner until the option is exercised.
2. Can it be recharacterised as a sale? Yes, if the contract is simulated (e.g. very low rents, purchase option at €1). But with a clear contract, the risk is low.
3. What if the tax authorities challenge my lease-purchase? Gather all documents proving your ownership and the parties' intention. Consult a specialised lawyer.
4. Is real property leasing riskier than chattel leasing? No, the rules are similar, but real property requires a notarial deed and land registration.
5. Can I terminate a lease-purchase before its term? Yes, but penalties are often provided. Check your contract.

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