Transformation of Civil Company into Commercial Company: No Assignment of Agricultural Lease

You are the owner of agricultural land in Nice or in the Alpes-Maritimes, and your tenant, a civil company, announces that it is transforming into a commercial company. Panic on board: does this mean that the lease is assigned without your consent? That you will have to put up with a new tenant you did not choose? This is precisely the question that the Court of Cassation decided in a judgment of 31 October 2012 (no. 11-23.194). And the answer is clear: the transformation of a civil company into a commercial company does not entail the creation of a new legal entity and therefore does not effect an assignment of the agricultural lease. In other words, the lease continues with the same company, simply under a new legal form. A reassuring decision for operators, but one that deserves to be understood in its finest details to avoid any dispute.

The facts: a story like many that happen every day

Imagine: Mr. Martin, owner of a beautiful agricultural plot in Cannes, granted an agricultural lease of his land to "Ferme du Soleil", a civil agricultural company (SCA). Years pass, the farm thrives. The partners decide to change the form of their company to a commercial company, a SARL (limited liability company), in order to benefit from a more suitable tax regime and facilitate the entry of new investors. They therefore transform the SCA into a SARL, without changing the corporate object or the partners. But Mr. Martin wonders: does this transformation not amount to an assignment of the agricultural lease? After all, the company is no longer the same legally, and the agricultural lease is a contract intuitu personae, that is, concluded in consideration of the person of the tenant. He seises the court to have the unlawful assignment declared and to demand the termination of the lease. The court rules in his favour: according to it, the transformation creates a new legal entity, and therefore an assignment of lease prohibited by the agricultural tenancy statute (Article L. 411-38 of the Rural Code). The operating company appeals. The Court of Appeal reverses the judgment, and the case comes before the Court of Cassation.

The reasoning of the court — dissected

The Court of Cassation had to answer a specific question: does the transformation of a civil company into a commercial company constitute an assignment of an agricultural lease? To answer this, it relies on a fundamental principle of company law: the transformation of a company, whatever its form, does not entail the creation of a new legal entity. This means that the company remains the same legal entity, with the same rights and obligations, including current contracts. In this case, the civil company "Ferme du Soleil" was transformed into a SARL, but it retains its legal personality. Consequently, the agricultural lease contributed to the civil company upon its incorporation is not assigned within the meaning of Article L. 411-38 of the Rural Code, which prohibits the tenant from assigning his lease without the landlord's authorisation. The judges specify that the contribution of an agricultural lease to a civil company is permitted by Article L. 411-38, paragraph 2, subject to certain conditions (landlord's consent, etc.). But once the lease has been validly contributed, the company becomes the tenant. Its subsequent transformation into a commercial company does not call this state of affairs into question. The Court of Cassation therefore dismisses the landlord's appeal and confirms that the lease continues with the company in its new form. Caution, however: this solution applies to a "simple" transformation, without any change of partners or substantial modification of the corporate object. If the transformation is accompanied by the admission of new partners or a modification of the legal entity, the situation could be different. What few people know is that the case law has been consistent on this point since a 2004 decision (Civ. 3e, 19 May 2004, no. 02-17.077).

What this changes for you — concretely

For the landlord: You cannot oppose the transformation of your tenant civil company into a commercial company, provided that this transformation does not modify the conditions of operation and that the lease was validly contributed to the initial civil company. If you are the owner of land in Cannes, you must verify that the contribution of the lease to the civil company was made with your consent. Otherwise, you could challenge the validity of the contribution, but not the transformation itself. undefined that you cannot demand the termination of the lease on this ground alone. For the tenant operator: You can freely transform your civil company into a commercial company, without fear that the landlord will reproach you with an unlawful assignment. This is an important legal security for farmers who wish to evolve towards a structure more suited to their development. For the purchaser of leased property: If you buy land already leased to a company, check the legal form of that company. A transformation in progress does not affect the lease, but you must be informed of the situation. undefined, I have come across cases where landlords tried to take advantage of a transformation to recover their property, without success.

Four tips to avoid this type of dispute

• When contributing the lease to a civil company: Obtain the landlord's written consent and have the contribution recorded in a notarised or private deed. This will avoid any later challenge to the regularity of the contribution.
• In case of transformation of the company: Inform the landlord by registered letter with acknowledgement of receipt of the transformation, specifying that it does not affect the lease. Even if not mandatory, it is a mark of transparency that can defuse conflicts.
• Check the company's articles of association: Ensure that the articles allow for the transformation of the company and that the corporate object remains agricultural (or related to the operation). A change of corporate object could be considered a substantial modification.
• Consult a specialised lawyer: Before any transformation, have your situation analysed by a professional. Rural law is complex and each case is particular. A preventive consultation will save you years of litigation.

In-depth: related case law and developments

The Court of Cassation has already had occasion to rule on related issues. In a judgment of 19 May 2004 (no. 02-17.077), it held that the merger of civil agricultural companies did not entail an assignment of lease, insofar as the absorbing company took over the leases without creating a new legal entity. The commented decision follows this line. More recently, the Court specified that the transfer of shares in a tenant civil company does not amount to an assignment of lease (Civ. 3e, 12 September 2019, no. 18-18.764). The trend is therefore towards securing restructuring operations of agricultural companies, as long as legal personality is maintained. However, caution: if the transformation is accompanied by a change of control or a substantial modification of the corporate object, the judges could recharacterise the operation as a disguised assignment. So vigilance is required.

What you absolutely must remember

FAQ:

• Can I oppose the transformation of my tenant civil company into a commercial company? No, if the transformation is regular and the lease was contributed to the civil company with your consent. You cannot invoke an assignment of lease.
• What if I am the landlord and I did not consent to the initial contribution of the lease? You can challenge the contribution before the agricultural tenancy court, within 5 years of the contribution. But the transformation itself remains valid.
• Must I sign a new lease after the transformation? No, the initial lease continues, with the company in its new form. No addendum is necessary, but it may be prudent to establish one to clarify the situation.
• What are the risks if the landlord brings legal proceedings? If the landlord acts without grounds, he may be ordered to pay damages for abusive proceedings. Conversely, if the initial contribution was irregular, the lease could be terminated.

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