De-indexing of Commercial Rent: When Prior Works Do Not Count

Imagine: you are the owner of a commercial premises in Laval, let to a florist. Ten years ago, you invested €50,000 to enlarge the sales area. The rent was revised upwards at the time. Today, the lease is coming to an end and you hope for a new de-indexing (an increase beyond the legal index) to recoup your investment. But your tenant refuses, arguing that these works are already 'consumed'. Who is right?

This question was answered by the Court of Cassation on 4 March 1998 in the case Société immobilière de Paris v. Société Foncier Madeleine (No. 96-14.943). A decision that remains authoritative and that every landlord or tenant in Mayenne should know. In short: improvements made under a previous lease cannot justify a new de-indexing upon the next renewal. In other words, a landlord cannot 'sell the same bearskin twice'.

But what does this mean for you in practice? Let's delve into the details.

The Facts: A Story That Happens Every Day

In the early 1980s, the Société immobilière de Paris (whose rights were later acquired by the Société Foncier Madeleine) granted a lease of commercial premises in Paris. During the course of the lease, the tenant carried out substantial works that increased the commercial area. In 1981, the lease was renewed, and the rent was set at a de-indexed price (i.e., above the reference index) precisely because of these improvements.

Years passed. In 1991, a new renewal. The landlord again requested a de-indexed rent, still relying on the same works. The tenant refused, considering that these improvements had already been integrated into the previous rent and could no longer justify a new de-indexation. The Paris Court of Appeal ruled in favour of the tenant: it rejected the landlord's claim. The landlord appealed to the Court of Cassation, arguing that the lower court had failed to draw the legal consequences of its own findings.

The Court of Cassation upheld the appeal judgment, but on slightly different grounds: it considered that the Court of Appeal had indeed violated Articles 23-3 and 23-6 of the Decree of 30 September 1953 (now Articles L. 145-33 and L. 145-34 of the Commercial Code) by not noting that the works had been carried out under the lease preceding the expired lease. In other words, the judges should have found that the increase in area was an improvement within the meaning of Article 23-3, but that this improvement could no longer serve as a basis for a new de-indexation because it had already been taken into account in the previous renewal. The landlord was therefore unsuccessful.

The Reasoning of the Court — Analysed

To understand, we must return to the texts. Article 23-3 of the 1953 Decree (now L. 145-33 of the Commercial Code) provides that the rent of commercial leases may be set at the rental value (i.e., de-indexed) in the event of a significant change in local commercial factors, a change in the use of the premises, or improvement works carried out by the tenant. Article 23-6 (now L. 145-34) specifies that upon renewal, the rent cannot be increased beyond the variation in the index, subject to exceptions.

The Court of Cassation has repeatedly held that improvements can justify a de-indexation only once: the principle of unity of cause. In other words, if a landlord has already obtained a de-indexed rent due to works, he cannot reuse the same works for a new de-indexation at the next renewal.

In this case, the Court of Appeal had rejected the landlord's claim on the ground that the 1981 renewal had already been at a de-indexed price and that this de-indexation could only have occurred because of the disputed improvements. The Court of Cassation approved the result (the rejection) but criticised the reasoning: the Court of Appeal should have noted that the works dated from the lease preceding the expired lease, and therefore could not be invoked a second time. In short, the landlord was wrong to try to 'prolong' the effect of his works.

What few people know is that this solution protects the tenant against abusive increases, but it also requires the landlord to time his investments well: if you carry out works during the lease, you can only invoke them at the first renewal following their completion. After that, they are legally 'amortised'.

What This Means for You — In Practice

If you are a landlord: You must know that improvement works (enlargement, compliance, etc.) only entitle you to one de-indexation, at the first renewal after their completion. After that renewal, you can no longer invoke them. Concrete example: Mr. Martin, owner of a 50 sqm shop in Laval, spends €30,000 to increase it to 80 sqm in 2020. The lease is renewed in 2023: he can request a de-indexed rent. But in 2033, at the next renewal, he can no longer rely on the same works to justify a new increase.

If you are a tenant: You are protected against double increases. If your landlord demands a de-indexed rent by invoking works carried out more than 9 years ago (the term of a commercial lease), you can resist. Check the date of the works and the date of the last renewal. If the works have already been used, the landlord must find another cause (change in commercial factors, change of use, etc.).

If you are a buyer of a business: Be careful: the history of works and renewals may escape you. Ask your notary or lawyer to check whether the current rent is de-indexed and for what reason. You could inherit an artificially low rent (if the previous de-indexation was unjustified) or, conversely, suffer an increase if the landlord invokes works that you did not carry out.

Four Tips to Avoid This Type of Dispute

• Keep all evidence of works: invoices, building permits, photos. Without proof, you will not be able to demonstrate the improvement. Keep them for at least 20 years (the limitation period for commercial leases).
• Anticipate the timing of de-indexation: If you invest, do so early enough so that the works are completed before the renewal. Otherwise, you will have to wait for the next renewal, but be careful: if the lease is already renewed in the meantime, the works could be 'lost'.
• Negotiate in writing: At renewal, include in the lease the reason for the de-indexation (e.g., 'due to the enlargement of 30 sqm carried out in 2022'). This will avoid any subsequent dispute.
• Consult a lawyer before undertaking works: A professional in commercial law in Laval or Mayenne can advise you on the leasing strategy: is it better to invest in works or to request a lower rent in exchange for a longer lease?

Further Reading: Related Case Law and Developments

The 1998 solution has been confirmed several times. For example, in a Court of Cassation decision of 16 May 2000 (No. 98-13.672), the judges recalled that 'improvements made during a prior lease cannot be invoked to justify a de-indexation upon the next renewal'. Similarly, the Court of Cassation (3rd Civ., 11 January 2006, No. 04-17.549) specified that de-indexation for works can only be requested at the first renewal following their completion.

However, a notable development concerns the notion of 'improvement works'. Since the Pinel Law of 2014, works of compliance (accessibility, safety) can also justify a de-indexation, but always with the same rule of unity.

What this means for the future: landlords must be more strategic in their investments, and tenants must remain vigilant about the history of rents. In Laval as elsewhere, the tendency of the courts is to protect the tenant against repeated unjustified increases.

In Practice: What to Do

Checklist for the landlord considering works:

1. Identify the end date of the current lease.
2. Carry out the works at least 6 months before the renewal to ensure they are completed.
3. Notify the tenant of your intention to request a de-indexation (by registered letter with acknowledgement of receipt) at least 6 months before the expiry.
4. Keep all supporting documents (invoices, permits, photos, architect's certificate).
5. At renewal, include in the deed the amount of the de-indexed rent and the precise reason.

FAQ:

• Can I request a de-indexation if the works were carried out by the previous tenant? No, only the tenant who carried out the works can invoke them, or the landlord if he financed the works. But the unity rule still applies.
• What happens if the lease was renewed without mention of de-indexation despite existing works? You have lost the opportunity to invoke them for that renewal. You will have to wait for the next one, but only if the works are still considered 'recent' (case law accepts up to 9 years).
• Can maintenance works (painting, repairs) justify a de-indexation? No, only improvement works (which increase the rental value) qualify. Routine maintenance works do not count.
• Can I challenge a de-indexation if my landlord obtained it for prior works? Yes, if you prove that those works were already used for a previous de-indexation. Gather the history of leases and rents.
• What is the time limit to act? You have 2 years from the renewal to challenge the de-indexed rent (Article L. 145-60 of the Commercial Code). After that, the rent is final.

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 →