Landlord's right of pre-emption and judicial liquidation: the sale of the business is

Picture the scene: you are the owner of a commercial property in Trélazé, leased to a garage owner. One day, you learn that your tenant is in judicial liquidation (collective proceedings aimed at selling all its assets to pay its creditors). The judicial representative (the professional responsible for managing the liquidation) announces the sale of the business (goodwill, equipment, leasehold interest). Your lease stipulates a right of pre-emption (right to buy first). But here is the issue: the supervising judge (the magistrate who oversees the proceedings) authorises the sale to a third party without consulting you. What should you do? This decision of the French Supreme Court of 7 September 2010 answers this question: the negotiated (amicable) sale of a movable asset (chattel, such as a business) in judicial liquidation is perfected upon the order of the supervising judge. However, this perfection is conditional upon the decision becoming final. In other words, the landlord may only exercise his right of pre-emption after receiving the draft transfer deed, and only if the order is final. A timing issue that has tripped up many litigants.

The facts: a story that happens every day

On 2 January 2006, SCI Aroumic (a property investment company, owner of a building) grants a commercial lease to the company Lauragais centre auto, which operates a garage in Trélazé. The lease contains a right of pre-emption clause in favour of the landlord: if the tenant sells its business, the owner must be informed and may purchase it first, on the same terms. The clause specifies that this right applies "whatever the form of the transfer".

Unfortunately, the company Lauragais is placed into judicial liquidation (proceedings that terminate the business and sell the assets). The liquidator (the representative responsible for realising the assets) asks the supervising judge for authorisation to sell the business by negotiated sale to a third party. The supervising judge issues an order authorising the sale on 21 November 2006, without the landlord having been previously informed or given the opportunity to exercise its right of pre-emption. SCI Aroumic challenges this order before the Court of Appeal, which sets aside the supervising judge's decision on the ground that the contractual right of pre-emption was not respected.

The liquidator and the purchaser appeal to the French Supreme Court. The Supreme Court quashes the appeal judgment. Why? Because the landlord's right of pre-emption can only be exercised from the date of service (formal notification) of the draft transfer deed, and such service can only occur after the supervising judge's order has become final (i.e., no longer subject to appeal). In this case, the landlord had not yet received the draft deed; therefore, the Court of Appeal violated Article 1134 of the Civil Code (now Article 1103, which enshrines the binding force of agreements) and Article L. 642-19 of the Commercial Code (which governs the sale of assets in judicial liquidation).

The reasoning of the court — dissected

The French Supreme Court relies on two key texts. First, Article 1134 of the Civil Code (now Article 1103 since the 2016 reform of contract law): "Agreements lawfully formed stand in lieu of law for those who have made them." This means that the parties must respect the terms of the contract, here the right of pre-emption. Second, Article L. 642-19 of the Commercial Code, in its version resulting from the Business Safeguard Act of 26 July 2005, which provides that a negotiated sale of a movable asset is perfected upon the order of the supervising judge, but subject to the suspensive condition (a condition that suspends the effects of the sale until its fulfilment) that the decision becomes res judicata (no longer subject to appeal).

The High Court explains that the landlord can only take a position on the exercise of its right of pre-emption from the date of service of the draft transfer deed. However, this service is an act that occurs after the supervising judge's order. As long as the order is not final, the draft deed cannot be notified. Consequently, the Court of Appeal could not set aside the order on the ground that the right of pre-emption had not been cleared (respected) before the sale was authorised. The French Supreme Court distinguishes two stages: first, the authorisation to sell (supervising judge's order); second, the completion of the sale (signing of the deed, service on the landlord). The right of pre-emption is exercised in the second stage, after the order has become final.

This decision is a confirmation of prior case law: the sale of assets in judicial liquidation is subject to specific rules that prevail over contractual clauses, in a certain order. The lower courts had nevertheless considered that the right of pre-emption must be respected before any authorisation. The French Supreme Court restores the hierarchy: the collective proceedings take precedence, but the contractual right is not extinguished, only postponed in time.

What this changes for you — practically

If you are a landlord: Do you have a right of pre-emption in your lease? Know that in the event of your tenant's judicial liquidation, you can only exercise it after the supervising judge has authorised the sale and that order has become final. You will be informed by the service of the draft transfer deed. Do not rush to contest the order before receiving this draft: you risk losing your appeal. Concrete example: in Chemillé-en-Anjou, a landlord wanted to cancel a sale of a business authorised by the supervising judge without having received the draft deed. The Court of Appeal ruled in his favour, but the French Supreme Court quashed that decision. Result: two years of proceedings and wasted legal fees.

If you are a tenant in liquidation (or its liquidator): You can sell the business without waiting for the right of pre-emption to be cleared. Ask the supervising judge for authorisation, then, once the order is final, notify the draft deed to the landlord. The landlord will have a period (often one month) to come forward. If he exercises his right of pre-emption, the sale will be made in his favour; otherwise, you can sell to the third-party purchaser.

If you are a purchaser: You can be reassured: the order authorising the sale gives you an acquired right, subject to its becoming final. But be careful: if the landlord exercises his right of pre-emption after service, the sale will escape you. You must therefore check that the liquidator has properly followed the notification procedure. If not, you risk being ousted.

Four tips to avoid this type of dispute

• Check your lease: If you are a landlord, re-read the pre-emption clause. Should it be exercised before or after the sale? Adapt it if necessary to specify that the exercise can only take place after service of the draft deed, in all circumstances, including in judicial liquidation.
• Anticipate the collective proceedings: If you are a tenant, know that judicial liquidation can occur. In that case, the liquidator must be aware of the existence of the right of pre-emption. Inform him thereof as soon as the proceedings are opened to avoid challenges.
• Do not contest too early: Landlord, do not appeal the supervising judge's order before receiving the draft transfer deed. Wait for service, then exercise your right of pre-emption or contest if the draft does not respect your rights.
• Consult a specialist lawyer: Each case is unique. A lawyer specialised in property law and collective proceedings will help you follow the steps in order and defend your interests without making procedural errors.

Further reading: related case law and developments

The French Supreme Court has handed down several decisions in the same vein. For example, in a decision of 24 January 2006 (No. 04-10.471), it had already held that the sale of a business in judicial liquidation is perfected upon the order of the supervising judge, subject to a suspensive condition. This solution was reaffirmed in the commented decision. Conversely, in a decision of 16 December 2008 (No. 07-19.063), the Court had seemed to give more weight to the contractual right of pre-emption, but in that case it concerned a friendly transfer outside collective proceedings. The trend is therefore clear: in judicial liquidation, the rules of collective proceedings take precedence, but the right of pre-emption is not eliminated, only deferred. Since the 2016 reform of contract law, Article 1134 has become Article 1103, but the solution remains unchanged. Practitioners must be vigilant about the chronology of acts.

Frequently asked questions

Can I set aside the supervising judge's order if my right of pre-emption was not respected before the sale authorisation?
No, because the right of pre-emption can only be exercised after service of the draft deed, which occurs after the order. You must wait for this service to challenge the sale, not the order itself.

What if I never received the draft transfer deed?
You can apply to the supervising judge to request that it be noted that the sale has not been finalised and to order the liquidator to serve the draft on you. If the sale has already taken place without notification, you may claim damages.

What are the time limits for exercising my right of pre-emption after service?
The time limit is generally one month from service, unless otherwise provided in the clause. This time limit is mandatory: once it expires, you lose your right.

Can the liquidator sell the business without my consent if I exercise my right of pre-emption?
Yes, if you exercise your right, you become the priority purchaser. The liquidator must then sell you the business on the same terms as those offered to the third party. If you refuse, the sale to the third party can proceed.

Does this case law apply to assets other than the business?
Yes, Article L. 642-19 applies to any movable asset of the debtor in judicial liquidation (equipment, stocks, etc.). The same principle applies: the sale is perfected upon the order, subject to a suspensive condition.

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