Commercial lease with minimum guaranteed rent: can the floor be set by the judge?

Imagine: you own a commercial property in La Ciotat, let to a café-restaurant. The lease provides for a minimum guaranteed rent of €1,200 per month, plus a variable component equal to 8% of turnover. Upon renewal, you consider that the minimum guaranteed rent should increase to €1,500. The tenant refuses. What can you do? Does the lease clause provide that the commercial rent judge can set this minimum? This is precisely the question decided by the Court of Cassation in its judgment of 3 November 2016 (appeal no. 15-16.827).

This decision is of interest to all commercial leases known as 'variable rent with minimum guarantee', very common in town centre shops, shopping centres or neighbourhood boutiques. It answers a practical question: when the parties have agreed on a rent consisting of a minimum and a percentage of turnover, can they, from the initial lease, provide that the rent judge will set the amount of the minimum guaranteed rent upon renewal? The answer is yes, subject to certain conditions.

But be careful: the judge cannot set any amount. He must refer to the market rental value, i.e. the rent that the property could achieve on the market, taking into account the criteria of Article L. 145-33 of the Commercial Code. And above all, he must include in his calculation the variable component already paid by the tenant. In short, if the tenant already pays a percentage of his turnover, this justifies a reduction in the minimum guaranteed rent. Analysis.

The facts: a story that happens every day

The case concerns a commercial lease signed in 1994 between the société civile immobilière (SCI) du 13… (landlord) and the company Le… (tenant), for premises located in Marseille. The lease provided for a rent consisting of a minimum guaranteed rent (a 'basic rent') and an additional rent equal to 8% of turnover excluding tax. At the time, the parties included a clause stipulating that, upon renewal, the minimum guaranteed rent would be fixed by the commercial rent judge 'at the market rental value, all other terms and conditions of the lease including the additional variable rent being maintained'.

In 2007, the lease expired. The tenant requested renewal. The landlord refused to sign a new lease on the same terms and applied to the rent judge to set the new minimum guaranteed rent. The tenant contested: according to him, the rent judge had no jurisdiction to set a variable rent or a minimum guaranteed rent; only the amount of the fixed rent could be judicially revised. He relied on Article L. 145-34 of the Commercial Code, which prohibits the judge from modifying the structure of the rent (for example, converting a fixed rent into a variable rent).

The landlord retorted that the lease clause, freely agreed, authorised the judge to set the minimum guaranteed rent. After an initial judgment in favour of the tenant, the Aix-en-Provence Court of Appeal ruled in favour of the landlord in 2015, leading the tenant to appeal to the Court of Cassation. The Court of Cassation, by two twin judgments (appeals nos. 15-16.826 and 15-16.827), confirmed the solution of the Court of Appeal.

The reasoning of the court — dissected

The central question was whether the parties may, by mutual agreement, provide that the commercial rent judge will set the minimum guaranteed rent upon renewal. The Court of Cassation answers yes, relying on Article L. 145-33 of the Commercial Code, which defines the criteria of market rental value: characteristics of the premises, use, respective obligations of the parties, local commercial factors, etc. But it specifies an essential condition: this fixing must respect the will of the parties expressed in the lease, in particular the maintenance of the variable component.

In other words, the judge cannot remove the variable component to fix only a fixed rent. He must fix the minimum guaranteed rent taking into account that the tenant will pay, in addition, a percentage of his turnover. Concretely, if the market rental value of the premises is estimated at €2,000 per month, but the tenant already pays 8% of his turnover (say €500 per month on average), the judge can set the minimum guaranteed rent at €1,500, i.e. a total of €2,000. Thus, the tenant does not pay the same rent twice.

What few people know is that this solution is an application of the principle of freedom of contract: the parties may organise the fixing of the renewed rent as they wish, provided they do not violate mandatory rules. The Court of Cassation had already admitted, in a judgment of 9 July 2008, that the parties may provide for a rent revision clause based on the construction cost index (ICC). Here, it goes further by allowing recourse to the judge to fix an element of the variable rent.

In practice, the judge must therefore calculate the minimum guaranteed rent by applying a reduction corresponding to the variable component. The Court of Appeal had estimated that the reduction should be 15% to take account of the uncertainty of turnover. The Court of Cassation validates this method, without imposing a precise percentage.

What this changes for you — concretely

If you are a landlord (in Marseille, La Ciotat or elsewhere): You can now secure your leases by including a clause providing that the rent judge will set the minimum guaranteed rent upon renewal. Be careful, however: this clause must be carefully drafted. It must specify that the judge rules according to Article L. 145-33 and that he takes into account the variable component. Without this clause, the judge cannot intervene, and you will have to negotiate with the tenant. Example: in Marseille, a 50 m² premises in the Panier district may see its minimum guaranteed rent increase from €1,000 to €1,300 after renewal, if the clause allows it.

If you are a tenant: You must be vigilant when signing the lease. If a clause provides for recourse to the judge, know that you can challenge the amount proposed by the landlord before the judge, but that the judge may increase the minimum guaranteed rent if the market rental value has increased. On the other hand, if the variable component is significant, you will obtain a reduction. For example, if your turnover is €200,000 per year and you pay 8% (i.e. €16,000 per year), the judge will reduce the minimum guaranteed rent accordingly.

If you are a purchaser of a business: Check the rent clause in the lease. If it provides for a minimum guaranteed rent and a variable component, and gives the judge jurisdiction to fix the minimum upon renewal, you know where you stand. This can be an asset or a risk, depending on the evolution of the market rental value.

undefined, I have come across cases where the landlord, for lack of a clause, could not obtain an increase in the minimum guaranteed rent, even though the neighbourhood had become gentrified. A well-drafted clause would have avoided this dispute.

Four tips to avoid this type of dispute

• Draft a clear clause for fixing the renewed rent. Expressly provide that the commercial rent judge may fix the minimum guaranteed rent at the market rental value, taking into account the variable component, upon renewal. Avoid vague formulas such as 'the rent will be fixed in accordance with the law'.
• Have the market rental value estimated by an expert before starting proceedings. The judge will rely on objective criteria. A friendly expert appraisal (cost: €1,000 to €2,000) can avoid a more costly judicial expert appraisal.
• Negotiate the reduction from the initial lease. If the tenant agrees that the variable component will be taken into account, define a percentage of reduction (e.g. 10% to 20%) to avoid later debate.
• In case of disagreement, prefer mediation before going to court. Legal costs (lawyer, expert, court fees) can quickly exceed €5,000. A mediation (€500 to €1,500) can lead to a faster agreement.

Further reading: related case law and developments

This decision is part of a line of judgments favourable to freedom of contract in matters of rent fixing. In a judgment of 9 July 2008 (appeal no. 07-13.596), the Court of Cassation had already admitted that the parties could provide for an annual revision clause based on the construction cost index, thereby derogating from the legal cap. Here, it extends this principle to the judicial fixing of the minimum guaranteed rent.

Conversely, the Court had censured, in a judgment of 10 December 2013 (appeal no. 12-24.544), a clause that attempted to circumvent the prohibition of revising the rent during the lease by a flat-rate increase. The difference lies in the nature of the variable rent: it is an agreed method of calculation, not a disguised revision.

The current trend is therefore towards recognition of the parties' freedom, provided that mandatory rules (such as the protection of the tenant in case of excessive rent) are not infringed. For the future, we can expect judges to accept other original clauses, as long as they are clear and not abusive.

Frequently asked questions

• Can I ask the judge to set the variable rent itself, without a minimum guarantee? No, the judge cannot create a variable component if the lease does not provide for one. He only sets the amount of the minimum guaranteed rent, the structure (fixed + variable) remaining unchanged.
• What if my lease does not contain a clause about the judge? You will have to negotiate with the tenant. In the absence of an agreement, you cannot apply to the judge to fix the minimum guaranteed rent; you can only request a revision of the fixed rent if the legal conditions are met (for example, index variation).
• What is the time limit for applying to the rent judge? In matters of renewal, the landlord must notify his rent offer at least 6 months before the expiry of the lease. The tenant has 3 months to accept or contest. In case of contestation, the judge must be seized within 2 years of the refusal.
• Can the judge lower the minimum guaranteed rent? Yes, if the market rental value has decreased (for example, a decline in commercial attractiveness). But he must take into account the variable component: if it is high, the minimum guaranteed rent may be reduced.
• Does this rule apply to leases of less than 10 years? Yes, the regime of commercial rents applies to all leases subject to the commercial lease status (duration of at least 9 years). For short-term leases of less than 2 years, the rent judge is not competent.

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