Covid-19 and the triennial revision of commercial rents: the time for requests for a downward revision of the rents to match the rental value?

11/05/20
Covid-19 and the triennial revision of commercial rents: the time for requests for a downward revision of the rents to match the rental value?
According to Article L. 145-38 of the French Commercial Code, the amount of a revised rent can only be set at a lower figure with respect to the current rent in the event of ‘production of an evidence of a material change in the local commercial factors which has of itself given rise to a variation of more than 10% in the rental value ‘Can the closure of many shops and the lockdown of their customers be at the origin of such a change, which could ‘of itself’ result in a variation of more than 10% in the rental value of the premises in question? This issue relating to the legitimacy of the request for a downward revision of the rent to match the rental value in these times of pandemic cannot be dissociated from the question of the appropriateness of such an approach. Since the revised rent is due effective from the date of the request, should commercial tenants be in a hurry to request a downward rent revision? After force majeure, the exception of non-performance or the revision of the contract for unforeseen circumstances, would the triennial revision be the new hope of tenants, the new fear of landlords? As a preliminary observation, it should be noted that a request for revision does not exempt the tenant from paying the current rent until an amicable agreement or a court decision on the reviewed rent has settled the matter. However, its appeal is not to be underestimated, considering the lasting nature of the revised rent that is in question. If the date of the request for revision is strategic, it seems that any generalization concerning both the legitimacy of such request and the assessment of its appropriateness must be rejected.  

1- On the legitimacy of the request

The legitimacy of a request for a downward revision of the rent to match the rental value shall be assessed on the basis of the conditions set out in the aforementioned text.

1-1 Firstly, with regard to the material change of the local commercial factors, it is provided under the terms of Article R. 145-6 of the Commercial Code that:

"Local commercial factors depend mainly on the attractiveness of the town, district or street in which the business is located, the location of the premises, the availability of various activities in the neighborhood, the means of transport, the special attraction or constraints that the location may present for the activity in question and the changes that these elements may undergo on a permanent or temporary basis.’ As a result,
  • on the one hand, the said factors are of interest in a neutral sense of the term, concerning the geographical, demographic and commercial environment of the rented premises, as well as their accessibility, and this with respect to the activity in question, i.e. the one actually carried out among those agreed. In this way, the local commercial factors are at the crossroads between the activity in question and its environment
  • on the other hand, their modification can be of either a permanent or a temporary nature provided that it is ‘material’, i.e. concrete.
  A change in local commercial factors cannot therefore be confused with a change in rents applied in the neighborhood or with a change in the turnover of the activity in question. However, it has been ruled that the closure of nearby shops constitutes a material change in local commercial factors (Paris, 16e ch. A, 27 November 2002 - Paris, 16e ch. B, 29 January 1999 - Montpellier, 5 November 1997)   This being specified, it could be considered that these factors are currently undergoing changes.  

a. On the one hand, local commercial factors and their evolution have become irrelevant for the activities that had to temporarily cease to operate pursuant to the decree of 14 March 2020.

In this respect, a change in a commercial environment which, since the aforementioned decree, has deteriorated, due in particular to the closure of surrounding businesses could prove to be indifferent. Could the loss of influence of local commercial factors in such cases, due to a lack of activity, be considered as a modification of the latter? This is doubtful, as the triennial revision seems to imply that the ‘activity in question’ is being operated.  

b. On the other hand, among the activities that have been able to be maintained, it would be conceivable that a degradation of their commercial environment could occur due to the closure of nearby businesses.

The question would then arise as to whether these could be considered as ‘local’ factors with regard to their probable generalization beyond the environment of the activity in question, being specified that market factors relating to an urban area have been discarded on the grounds that they were not sufficiently ‘local’ (CA Paris, 16th ch. B, 2 February 2001).  

1-2 While it cannot be excluded that a material change in local commercial factors may have an impact on certain activities, it remains to be determined whether, in such cases, it is likely that it would ‘of itself ‘ result in a variation of at least 10% in the rental value occurred since the last agreed or court-ordered rent was set.

a. To this end, the evidence of a causal link between a material change in local commercial factors and the variation of more than 10% in the rental value must be provided by the applicant to the revision.

More specifically, the applicant must establish that the change in local commercial factors is ‘of itself ‘ at the origin of such a variation. In this respect, the trend in case law is to look for an ‘exclusive’ causal link between the alleged change and the variation in the rental value (CA Paris, 6 May 1998, No. 96/07049: JurisData No. 1998-022585). Accordingly, it is the material change in local commercial factors - and not another factor, such as a conjunctural change - which alone must have led to a variation of more than 10% in the rental value of the premises in question (Paris Court of First Instance, 18 June 1998, No. 7946-1996).  

b. Furthermore, there is not one but several ‘rental values’ falling within the scope of the triennial revision.

In this respect, the direct consideration of local commercial factors in the context of a court setting of a rental value concerns - among other criteria - only the one referred to in Article L. 145-33 of the French Commercial Code. Consequently, while the latter may be directly influenced by a material change in local commercial factors, such influence is necessarily indirect in the case of other ‘rental values’.   Indeed, as far as they are concerned, the influence of a material change in local commercial factors must be exerted on the criteria on which their determination depends. For example, in the case of premises for the exclusive use of offices, it will have to be evidenced that the material change in local commercial factors was the cause of the variation in the rents charged for equivalent premises in the neighborhood, any corrections made in the light of the concerned premises (see art. R. 145-11 C. com).   In the case of single-use premises, the change in local factors must have influenced the variation in the criteria used to determine their ‘rental value’, which are likely to be based on the uses observed in the activity in question (see art. R. 145-10 of the Commercial Code) and are mandatorily based on such uses in the case of authorized movie theaters (art. L. 145-36 of the Commercial Code).   Applicants will in all cases have to demonstrate that the change in rental value was caused by changes in local commercial factors, exclusive of any other factor. To illustrate the difficulty of the evidence to be provided, the case of movie theatres is enlightening. For the latter, it is customary for approaches to determine their ‘rental value’ to take into account:
  • either a percentage of their actual revenue (CA Toulouse, 2nd ch., 23 February 1993: JurisData No. 1993-040990),
  • or an average of the ‘rental values’ resulting from their actual and theoretical revenues, the latter generally being estimated on the basis of the number of authorized seats subject to application of an occupancy rate (CA Rennes, 7th ch., 8 October 1997: JurisData No. 1997-048936).
  At a time of temporary shutdown of movie theatres, it is possible to be left wondering about the number of seats remaining authorized and to fear a drop in their actual revenues ... so many factors that are likely to influence the ‘rental value’ of their premises. But, even on the assumption, in this case, of a variation of more than 10% of the rental value since the last amicable or judicial setting of the rent , could it be considered that this variation would result from the mere neutralization of local commercial factors which has occurred since 14 March this year - provided, of course, that it could be considered as a ‘modification’ (see 1.1.a above)?   Even in this case, it seems that such a variation would result from the sole law that forced the movie theatres to cease their activity and lock down their customers. The neutralization of the local commercial factors would then only be a consequence of the same causes, with no influence on the variation in the rental value under consideration.   Anyways, a brief reminder of the conditions of the triennial revision of the rents encourages an approach that takes into account the specificity of each rental situation. The evidence to be provided by the applicant seems in all cases to be more difficult to establish than it appears.      

2. On the appropriateness of the request

It is possible that many tenants who are considering submitting a request to their landlord for a downward revision of their rent to match the rental value may perceive it, regardless of how well-founded it may be, as an instrument for renegotiating - if possible, quickly - a rent that has become too difficult to bear. This approach is not necessarily to be discouraged, provided that the tenant has also been able to take into account the consequences of the agreement he is hoping for. For those who plan to go to court in the absence of an agreement, they cannot neglect the procedural aspects involved in assessing the appropriateness of their approach.

2-1 On the appropriateness with regard to the lease renewal in case of agreement

Some tenants should bear in mind that a landlord who has agreed to an amicable rent revision would not be entirely devoid of any argument to circumvent the rent threshold that would be applicable at the time of the lease renewal. In fact, it has been ruled, in the case of a lease with a contractual term of nine years for premises which rental value fell within the scope of Article L. 145-33 of the French Commercial Code, that ‘the signature of an amendment following the filing of a request for rent revision on the basis of Article L. 145-39 of the French Commercial Code constituted a significant change in the mutual obligations of the parties during the tenure of the lease under conditions that were extraneous to the law and that alone justified to discard the threshold’ (Cass., 3ème civ. 15 February 2018, No. 17-11.866). There is nothing to prevent such a solution from being adopted in the case of an amendment concluded pursuant the introduction of a claim based on Article L. 145-38 of the Commercial Code (in favor of such a position: Cass. 3rd civ., 4 April 2001, No. 99-18.899). Consequently, the assessment of the appropriateness of a request for revision in such cases should also be made in contemplation of the renewal to occur.  

2-2 On the appropriateness with regard to the legal procedure failing an agreement

The judge in charge of commercial rents have sole jurisdiction to set the amount of the revised rent, as the First Instance Court cannot rule on the matter as a main issue.   As a result, the judge in charge of summary proceedings is not competent to order an expertise to research for a variation in the rental value, even on the basis of article 145 of the Code of Civil Procedure (CA Paris, 14th ch. A, 13 February 1991: JurisData No. 1991-022876). Moreover, while his request for rent revision does not exempt the tenant from the payment of the current rent, the provisional fixings of the reviewed rent remain marginal. As a consequence, failing an agreement as to the amount of the reviewed rent, the plaintiff who wishes to have it judicially set shall refer the matter to the competent court within two years of his request, and then arm with patience and cash flow. He will indeed be exposed to the length and cost of a legal procedure which requires, in most cases where a significant change in local commercial factors is ascertained, the appointment of a legal expert whose fees generally provisionally weigh on the applicant. For this reason, it cannot be excluded that owners of first-class premises who have little to fear from rent shortfalls or the depression of the rental market will be content to wait.   In the end, it seems neither possible nor desirable to give in to the appeal of generalization when it comes to assessing both the soundness and the appropriateness of a request for a triennial downward revision of the rent to match the rental value, otherwise such an approach may miss its purpose. It is likely that the opinion of an expert in estimating rental values will be particularly sought in order to estimate the rental value of the premises on the day of the request. However, the experts will have to proceed in the absence, since the occurrence of the pandemic in France, of reference elements regarding the legal fixings of rents for renewed leases at the closest of the date of the request. Furthermore, with regard to the reference elements corresponding to the market rents of leases concluded on the date of the request or to the amicable fixings of rents for leases renewed on the date of the request, the scarcity of references, which is particularly to be feared in areas with low commercial density, may render the mission of the expert consulted extremely difficult.   [interne id="67056"]      
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