Property Tax and Calculation of Commercial Rent: What the Court of Cassation Says

Imagine for a moment: you own a commercial premises in Saint-Berthevin, let to a restaurateur. The lease provides that the tenant reimburses you for the property tax. When revising the rent, you wonder: should this reimbursement be included in the calculation of the variation of more than one quarter? A seemingly technical question, but one that can make your rental income rise – or fall.

This question was considered by the company Construction et Gestion Hôtelière (CGH), owner of a hotel in Château-Gontier. Faced with its tenant, the company Hôtel Ker Moor, a dispute arose over the amount of the revised rent. The Court of Cassation, in its judgment of 3 May 2012, ruled clearly: the property tax reimbursed by the tenant is not included in the basis for calculating the variation of more than one quarter provided for in Article L. 145-39 of the Commercial Code.

Whether you are a landlord or a tenant, this decision has concrete consequences on your rights and obligations. Let us decipher it together, as if we were having a coffee in Laval.

The facts: a story like many others

The company Construction et Gestion Hôtelière (CGH) owns commercial premises used as a hotel, located in Rennes. It lets them to the company Hôtel Ker Moor under a commercial lease with a sliding scale clause. The contract also provides that the tenant reimburses the landlord for the amount of property tax, in accordance with a contractual transfer of charges.

At the time of the triennial rent revision (a mechanism allowing the rent to be adjusted to the rental value every three years), a conflict arose. The landlord considered that the revised rent should include the property tax in its calculation basis, which would increase the rent by more than one quarter (i.e., more than 25% increase). The tenant contested this interpretation.

The case came before the Rennes Court of Appeal, which ruled in favour of the tenant: the reimbursed property tax is not an element of the rent, but a reimbursement of a charge. The company CGH appealed to the Court of Cassation. The Court of Cassation, in a clear judgment, dismissed the appeal and confirmed the appellate decision. For the Court, the property tax reimbursed by the tenant is not included in the basis for calculating the variation of more than one quarter of the rent referred to in Article L. 145-39 of the Commercial Code.

The reasoning of the court — dissected

To understand the decision, one must first grasp what Article L. 145-39 of the Commercial Code says. This text allows the landlord or tenant to request a rent revision every three years if the rental value (the actual market rent) has varied by more than one quarter compared to the initial rent. In other words, if the rent you could obtain for the premises has increased by more than 25%, you can request an upward revision (or downward, if the value has fallen).

The central question was therefore: to calculate this variation, should one take into account, in addition to the rent, the reimbursement of property tax by the tenant? The Court of Cassation answered no, for a simple reason: the reimbursed property tax is not a supplement to the rent, but a recoverable charge. The landlord pays it to the tax authorities, and the tenant reimburses it. This does not change the nature of the rent itself.

The judges rely on a strict interpretation of the text: the basis for calculating the variation of more than one quarter is the annual rent fixed in the lease, and nothing else. Charges, even if passed on to the tenant, do not enter into this basis. This solution is logical: the reimbursement of property tax fluctuates each year with tax rates, which would make the calculation of the variation unstable and unpredictable.

The Court of Cassation thus confirms its previous case law, which clearly distinguishes rent from recoverable charges. It rejects the landlord's argument that the charge transfer clause made the property tax an element of the rent. No: the will of the parties, even expressed in the lease, cannot circumvent the legal rule.

What this changes for you — concretely

If you own a commercial premises in Saint-Berthevin or elsewhere, this decision concerns you directly. When you calculate the variation of more than one quarter to revise the rent, you must isolate the bare rent (the amount fixed in the lease) and not add reimbursements of charges, particularly property tax. Example: your annual rent is €12,000, and the tenant reimburses you €2,000 of property tax. To know whether the rent has varied by more than one quarter, you compare €12,000 to the current rental value, not €14,000. This may reduce the possible increase margin.

For the tenant, this is protection: they are not at risk of seeing their rent artificially increase because property tax has risen. However, they must still reimburse the property tax, which remains a separate charge.

If you are in the midst of lease negotiations, know that the charge transfer clause is valid, but it does not affect the calculation of the triennial revision. Do not be misled by a landlord who wants to include the tax in the basis to obtain a larger increase.

Finally, for purchasers of commercial premises, check the existing leases: if the rent has been revised by including the property tax, the tenant could contest the revision and claim a refund. An expert assessment is essential.

Four tips to avoid this type of dispute

• Draft the revision clause clearly: in the lease, specify that the basis for calculating the variation of more than one quarter is the bare rent excluding taxes and charges. Avoid ambiguities.
• Distinguish rent and charges in your documents: on rent receipts, show the rent and charge reimbursements separately. This will facilitate later calculations.
• Calculate the variation with a professional: before notifying a revision, have your calculations checked by a lawyer or accountant specialising in commercial leases. An error can be costly.
• Anticipate property tax increases: if you are a landlord, do not try to compensate for the tax increase by integrating it into the rent. You can negotiate a specific revision clause for charges, but separate from the rent.

Further information: related case law and developments

The Court of Cassation had already ruled on similar issues. For example, in a judgment of 20 February 2008 (No. 06-20.267), it held that recoverable charges could not be included in the calculation of the rent for fixing the security deposit. This new decision confirms the trend of strictly separating what relates to rent and what relates to charges.

More recently, the Court of Cassation clarified that compliance works imposed by the authorities are not recoverable charges, unless there is an express contrary clause. This shows that the courts protect tenants against disguised increases.

In the future, case law is likely to continue to distinguish between rent and charges, especially with the rise in local taxes. If you are a landlord, do not hope to circumvent this rule with clever clauses: the Court of Cassation is vigilant.

Checklist before acting

• Check your lease: does the revision clause explicitly mention the calculation basis? If so, comply with it. If not, apply the legal rule: bare rent only.
• Calculate the variation: take the annual principal rent (excluding charges) and compare it to the current rental value (estimation by expert or indices). If the difference exceeds 25%, you can revise.
• Notify by registered letter: the request for revision must be made in the legal form (Article R. 145-23 of the Commercial Code). Attach your detailed calculations.
• Consult a lawyer: if in doubt, especially if the lease contains specific clauses, seek advice before sending a notification. A 30-minute appointment can avoid a two-year lawsuit.

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 →