Commercial Lease-Finance: Can the Lessee Grant a Commercial Lease?

Imagine a trader in Capbreton who runs a dry cleaner's in premises he does not own. He pays rent each month, but to whom? To the owner of the walls? Not necessarily. Sometimes, the premises are held by a bank under a real property lease-finance agreement (a lease with an option to purchase). And if that 'principal' tenant (the credit-preneur) sub-lets the premises to a trader, does that trader benefit from the protection of the commercial leases regime? That is the question the Court of Cassation decided in 2002.

For a landlord who leases his property to a credit-preneur, or for a trader who sub-lets, this decision is fundamental. It says yes, a credit-preneur can grant a commercial lease to a sub-tenant. In other words, the sub-tenant benefits from the right to renewal of the lease and all the protections attached to the commercial leases regime (Decree of 30 September 1953).

But this solution was not self-evident. For a long time, some considered that the credit-preneur, not being the owner, could not grant more rights than he himself had. The Court of Cassation put an end to this uncertainty. Let us decipher this decision together, with concrete examples in Dax and Capbreton.

The facts: a story like many that happen every day

In March 1985, a company called Altis (the credit-preneur) entered into a real property lease-finance agreement with a landlord for commercial premises. Altis therefore did not own the property but leased it with a promise of sale at a later date. Then, Altis signed a lease agreement with the company 'Pressing Françoise' to operate a dry cleaner's in those same premises. Pressing Françoise paid rent to Altis, believing it had a standard commercial lease.

But the landlord of the premises (the lessor under the lease-finance agreement) challenged this. He argued that the agreement between Altis and Pressing Françoise was not a commercial lease but a mere precarious sub-lease, because Altis was only a credit-preneur and not the owner. According to him, Pressing Françoise could not claim the protective status of commercial leases, which gives the right to renewal and to an eviction indemnity in case of non-renewal.

Pressing Françoise therefore sued Altis to obtain recognition of a commercial lease and the fixing of an appropriate rent. The case went to the Court of Cassation, which had to decide: can a credit-preneur grant a commercial lease? In 2002, the Court answered yes, thus confirming the decision of the lower courts. For the Court, the agreement between Altis and Pressing Françoise did constitute a commercial lease, subject to the Decree of 30 September 1953.

The reasoning of the court — analysed

The Court of Cassation relied on Article 1134 of the Civil Code (now 1103), which sets out the principle of the binding force of contracts: agreements lawfully formed take the place of law for those who have made them. But above all, it interpreted the specific rules of real property lease-finance and the commercial leases regime.

The reasoning is as follows: the credit-preneur is a tenant of the property under the lease-finance agreement. He therefore has the right to sub-let, unless there is a contrary clause in the lease-finance agreement. And this sub-lease may be subject to the commercial leases regime, because nothing in the law prohibits the credit-preneur from granting a commercial lease. However, note that the credit-preneur cannot confer more rights than he himself has. But the commercial leases regime applies to any lease agreement concerning commercial premises, regardless of the status of the lessor (owner or mere tenant).

In clear terms, the Court considered that the status of credit-preneur does not prevent granting a lease for commercial use. What matters is the intended use of the premises (commercial) and the reality of the operation. This decision is a confirmation of earlier case law, which already tended to protect the trading sub-tenant. What few people know is that this solution also protects the landlord under the lease-finance agreement: if the sub-tenant has a commercial lease, the credit-preneur remains liable to the landlord, but the sub-tenant can be evicted in case of non-payment by the credit-preneur, which secures the landlord.

What this changes for you — concretely

If you are a trader who is a tenant (sub-tenant): You can benefit from the commercial leases regime even if your lessor is not the owner but only a credit-preneur. Concrete example: in Dax, you rent premises for your clothing shop from a company that itself has a lease-finance agreement on the walls. You are entitled to renewal of your lease every 9 years, and if the lessor (credit-preneur) refuses renewal, they must pay you an eviction indemnity (often several years' rent).

If you are a credit-preneur (lessor sub-letting): You can grant a commercial lease to your sub-tenant. But be careful: you remain liable to the owner under the lease-finance agreement. If you do not pay your lease-finance rents, the owner can terminate the lease-finance agreement, which leads to the lapse (cancellation) of your sub-tenant's commercial lease. The sub-tenant can then claim damages from you.

If you are the owner of premises let under a lease-finance agreement: You must be vigilant: your credit-preneur can sub-let to a trader who will benefit from the protection of the regime. If the credit-preneur goes bankrupt, you will not be able to recover the premises easily if the sub-tenant has an ongoing commercial lease. undefined, I have come across cases where the owner had to negotiate an amicable departure with the sub-tenant, with compensation.

Four tips to avoid this type of dispute

• Check the lease-finance agreement: Before sub-letting, the credit-preneur must ensure that the lease-finance agreement authorises sub-letting. In the absence of a clause, it is possible, but it is better to have written authorisation from the owner.
• Draft a proper commercial lease: The sub-tenant should insist on a written lease, stating the duration (minimum 9 years), the rent, and essential clauses (use, triennial review, etc.). This avoids disputes.
• Inform the owner: The owner under the lease-finance agreement must be informed of the sub-lease. He may even be made a party to the agreement to secure the whole arrangement. In Capbreton, I advised an owner to sign a deed of consent to the sub-lease to avoid any later dispute.
• Include an automatic termination clause: The commercial lease granted by the credit-preneur should provide that if the lease-finance agreement is terminated, the commercial lease ends automatically. This protects both the owner and the sub-tenant (who knows where he stands).

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Further information: related case law and developments

Before 2002, the Court of Cassation had already accepted that a principal tenant (lessee under a commercial lease) could sub-let to a trader by granting him a commercial lease (Cass. 3e civ., 17 July 1997, n° 95-17.492). But the question of lease-finance remained unclear. The decision of 10 December 2002 therefore extended this principle to the credit-preneur, considering that his situation is similar to that of a standard tenant.

Since then, case law has confirmed this solution on several occasions (Cass. 3e civ., 4 February 2009, n° 07-21.200). The trend is therefore clear: the trading sub-tenant is protected, regardless of the status of the intermediate lessor. For the future, one can expect the courts to continue to favour the stability of businesses, in the name of protecting the business goodwill.

In practice: what to do

FAQ: 4 frequent questions

1. As a sub-tenant, can I request renewal of my lease if my lessor (credit-preneur) loses his lease-finance agreement?
No, because the commercial lease is linked to the lease-finance agreement. If the lease-finance agreement ends, the commercial lease is extinguished. However, you may claim damages from your lessor if he did not inform you of this risk.

2. What should I do if my landlord (credit-preneur) refuses to grant me a written commercial lease?
You can apply to the judicial court to have the existence of a commercial lease recognised. Proof can be provided by any means: rent receipts, peaceful operation, etc.

3. Can the owner under the lease-finance agreement evict me directly?
No, because you are the tenant of the credit-preneur, not of the owner. But if the credit-preneur stops paying his rents, the owner can terminate the lease-finance agreement and seek eviction of all occupants, including you.

4. Should I pay rent to the owner or to the credit-preneur?
To the credit-preneur, unless the owner has notified you of an assignment of rent. In that case, you pay directly to the owner.

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