Finance lease: the early termination indemnity is not a penalty (Cass. com., 11 April 2018)

Imagine: you are a property owner in Lourdes and you have granted a finance lease to a trader. The trader goes bankrupt, and his liquidator terminates the contract. You claim the termination indemnity provided for, but the guarantor (often the director) objects that it is an excessive penalty, reduced to a symbolic €1. How far does your right go? This question is asked by hundreds of lessors each year. The Court of Cassation, in a judgment of 11 April 2018, ruled: the early termination indemnity is not a penalty, even if it is a fixed sum. A decision that changes the game for real estate professionals.

Why is this distinction crucial? Because penalties (penalty clauses) can be reduced by the judge if they are manifestly excessive. By excluding the termination indemnity from this category, the Court protects the creditor-lessor and secures finance lease contracts. But beware: this solution only applies to contracts concluded before 1 July 2016, the date of the reform of contract law. Since then, the Civil Code has evolved. So, what should you do if you are concerned? Follow the guide.

This article breaks down the judgment, its practical consequences and gives you the keys to avoid disputes. Whether you are a property owner in Orthez, a tenant in Pau or a professional in Tarbes, you will find concrete advice.

The facts: a story like any other

In 2007, a company (the Monteux La Source water exploitation company) entered into a finance lease with a financial institution to finance equipment. In 2010, it was placed in liquidation. The liquidator, in accordance with Article L. 641-11-1 of the Commercial Code, terminated the finance lease. The contract provided for a termination indemnity equal to the sum of unpaid rents (€42,279.60) and a portion of the rents still to run. The bank claimed this indemnity from the guarantor, an individual. The guarantor contested, arguing that the indemnity was an excessive penalty and should be reduced to €1.

The Commercial Court of Carpentras, and then the Court of Appeal of Nîmes, ruled in favour of the guarantor: for them, the indemnity was a penalty clause, reducible. The bank appealed to the Court of Cassation. The case came before the Commercial Chamber of the Court of Cassation on 11 April 2018. The question is simple: is the early termination indemnity of a finance lease a penalty within the meaning of Articles L. 341-1 and L. 341-6 of the Consumer Code (old version)? If yes, it can be reduced; if not, it is due in full.

Twist: the law evolved in the meantime. The Ordinance of 14 March 2016 amended the Consumer Code, but the judgment concerns the previous version. The Court therefore had to apply the law in force at the time of the contract. A subtlety that matters.

The reasoning of the court — dissected

The Court of Cassation quashed the appeal judgment and held that the termination indemnity is not a penalty. Why? It relied on Article L. 313-9 of the Monetary and Financial Code (CMF), which allows the lessee or its liquidator to terminate the contract early. In return for this right, the contract provides for an indemnity. This indemnity is not a sanction: it is the price of the right to terminate. It compensates the lessor's loss, who loses future rents.

The Court thus distinguishes the penalty clause (which sanctions non-performance of an obligation) from the termination indemnity (which compensates for the exercise of a right). Articles L. 341-1 and L. 341-6 of the Consumer Code, in their old wording, referred to penalties, i.e., sums due in case of default by the debtor. Here, however, the debtor (the lessee) exercises a legal right: early termination. It is not a fault, therefore no penalty.

This decision is consistent with previous case law: the Court had already held that the termination indemnity of a finance lease is not a penalty clause (Cass. com., 8 July 2008, No. 07-16.534). But it goes further by applying it in favour of the professional creditor against a guarantor. Indeed, Article L. 341-1 protects the guarantor against excessive penalties, but here the Court sets it aside. This is a victory for banks and lessors.

Attention: since the Ordinance of 14 March 2016, the Consumer Code has been rewritten. Articles L. 341-1 et seq. were repealed and replaced by Articles L. 343-1 et seq., which extend the protection of guarantors. But for contracts prior to this, this case law remains relevant.

What this changes for you — concretely

For lessor owners (finance lessors): you can now claim the full termination indemnity provided for in the contract, without fear that a judge will reduce it for excess. Example: in Orthez, you have granted a finance lease for a commercial property. The lessee goes bankrupt after 3 years. The indemnity is €50,000. The guarantor (the manager) can hardly challenge it as a penalty clause. You recover what is owed.

For guarantors: you can no longer invoke protection against excessive penalties for this type of indemnity. But you can still challenge the indemnity if it is manifestly disproportionate to the lessor's actual loss, on the basis of Article 1231-5 of the Civil Code (new) or the old Article 1152. However, the burden of proof is on you. Be vigilant when signing the guarantee agreement: negotiate a cap.

For real estate professionals: this decision secures finance lease contracts. It confirms that the termination indemnity is due even in the event of insolvency proceedings. However, you must check the date of the contract: if the contract was signed after 1 July 2016, the new rules of the Consumer Code apply, and the protection of guarantors is strengthened.

For judicial liquidators: you can terminate the finance lease without fear that the indemnity will be reduced, which facilitates the management of the liquidation. But be careful to comply with the formalities of Article L. 641-11-1 of the Commercial Code.

Four tips to avoid this type of dispute

• Draft a clear and proportionate indemnity clause: in your finance lease contract, specify the method of calculating the termination indemnity. Avoid vague formulas that could be reclassified as a penalty clause. For example: "In the event of early termination, the lessee must pay an indemnity equal to the sum of unpaid rents and 50% of the rents still to run, capped at 12 months' rent."
• Inform the guarantor of their obligations: since the judgment, the guarantor is less protected, but they must be informed annually of the amount of the indemnity. Comply with Article L. 313-22 of the Monetary and Financial Code (annual information). Failing this, the guarantor could request forfeiture of interest.
• Check the date of your contract: if your contract is after 1 July 2016, the new provisions of the Consumer Code (Articles L. 343-1 et seq.) apply. The termination indemnity could be considered a penalty if disproportionate. Consult a lawyer to adapt your clause.
• In case of dispute, challenge the qualification of penalty clause: if a guarantor argues that the indemnity is excessive, invoke the judgment of 11 April 2018. Show that the indemnity compensates a real loss (costs of reinstatement, loss of rents). Document your loss with quotes or expert reports.

Further reading: related case law and developments

This decision is part of a line favourable to the creditor. Already in 2008, the Court of Cassation had held that the termination indemnity of a finance lease is not a penalty clause (Cass. com., 8 July 2008, No. 07-16.534). More recently, in 2020, the Court extended this reasoning to financial leasing contracts (Cass. com., 11 March 2020, No. 18-19.841). The trend is clear: the early termination indemnity escapes the penalty regime.

However, the legislature reacted. The Ordinance of 14 March 2016 strengthened the protection of guarantors by broadening the concept of penalty. Now, Article L. 343-1 of the Consumer Code prohibits a professional creditor from claiming excessive penalties from the guarantor, even if they are not linked to a default. But this reform only applies to contracts concluded after 1 July 2016. For earlier contracts, the 2018 case law continues to apply.

Beware: some courts of appeal resist. For example, the Court of Appeal of Pau, in a judgment of 12 September 2019, reclassified a termination indemnity as a penalty clause on the grounds that it was disproportionate. But this judgment was quashed by the Court of Cassation. The national trend is therefore favourable to the creditor.

Checklist before acting

• Q: Can I challenge the termination indemnity of my finance lease if it is excessive?
  A: Yes, but only if you prove it is disproportionate to the lessor's actual loss. The 2018 judgment does not prohibit it, but it requires you to demonstrate the excess. Gather evidence: expert reports, relocation quotes, etc.
• Q: What should I do if my finance lease contract was signed after 1 July 2016?
  A: The new rules of the Consumer Code apply. The termination indemnity may be considered a penalty and therefore reduced. Check your contract with a lawyer.
• Q: Can the guarantor refuse to pay the indemnity on the grounds of failure to provide annual information?
  A: Yes, if the creditor has not complied with the annual information obligation under Article L. 313-22 of the CMF, the guarantor can request forfeiture of interest, but not cancellation of the indemnity itself.
• Q: What is the time limit for taking legal action against the termination indemnity?
  A: The limitation period is 5 years from the termination of the contract (Article 2224 of the Civil Code). After this period, you are time-barred.
• Q: Can I negotiate the termination indemnity before signing the contract?
  A: Absolutely. As a guarantor, you can request a cap on the indemnity (e.g., 6 months' rent). Banks sometimes agree if you are a long-standing customer.

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