Rent review under a commercial lease: Article L.145-38

The commercial lease, which governs the relationship between a landlord and a tenant in the context of a commercial activity, is subject to strict legal provisions in France, notably those of the French Commercial Code. These provisions aim to balance the interests of the parties while offering a degree of flexibility to adapt to market realities.

The commercial lease is governed by specific provisions of the French Commercial Code, in particular Article L.145-38, which allows the rent to be reviewed every three years. This review is based on changes in reference indices, such as the Commercial Rents Index (ILC) or the Tertiary Activities Rents Index (ILAT).

By way of illustration, in the second quarter of 2023 the ILC stood at 118.45, an increase of 3.95% over one year according to INSEE.

The regulation of commercial rent levels in France is governed mainly by Articles L.145-33 and L.145-38 of the French Commercial Code, together with related articles specifying how rent reviews are to be implemented.

On the amount of the commercial rent: Article L.145-33 provides that the rent under renewed or reviewed commercial leases must correspond to the rental value, which is determined according to various criteria such as the characteristics of the premises, the permitted use, the obligations of the parties, local commercial factors, and the prices charged in the vicinity.

On the three-yearly rent review: the three-yearly review, as governed by Article L.145-38 as amended by the Pinel Act, allows the rent to be reviewed every three years from the date on which the tenant takes possession or from the start of the renewed lease. This review is normally capped at the change in certain economic indices, unless a material change in local commercial factors leads to a change of more than 10% in the rental value. In that case, and since the Pinel Act, any increase resulting from uncapping is limited to 10% of the previous year’s rent.

Procedure for the three-yearly review: the procedure for requesting a review is strictly regulated, requiring in particular service by bailiff or a registered letter with acknowledgement of receipt. Failing agreement, a statement of case must be served, followed by a summons after a period of one month. Compliance with these procedures and time limits is essential for the request to be admissible.

Conditions for a review to rental value: a review to rental value requires three conditions to be met: a material change in local commercial factors, an effect of that change on the rental value of more than 10%, and an impact on the commercial activity concerned.

To assess changes in local commercial factors, various avenues can be explored, such as statistics for the retail area, analysis of the competition, developments carried out, or changes in the local population.

In addition to the statutory review, the parties may include specific clauses such as an indexation clause, allowing an annual review based on an agreed index, or a turnover clause, adjusting the rent according to the tenant’s turnover.

Rent capping aims to protect the tenant against disproportionate increases by limiting the review to the change in the chosen index. However, in certain situations the rent may be uncapped, in particular where there is a significant change in commercial conditions or in the activity carried on in the premises, allowing a fairer adjustment to the current market rental value.

When the lease is renewed, the rent may be renegotiated. While the capping principle remains, exceptions allow uncapping, in particular for long-term leases or those relating to premises for specific use, such as offices or bare land.

On renewal, the rent review can lead to complex discussions. Case law plays a crucial role in this area, as illustrated by the Court of Cassation (French Supreme Court) judgment of 14 June 2019, which confirmed the principle of uncapping the rent where there is a significant change in the characteristics of the premises or in the business sector.

The involvement of a property valuer can prove essential for both parties, particularly when the rent is reviewed on lease renewal. The valuer provides an objective analysis of the rental value, taking into account local commercial factors, market comparisons and the specific features of the property. The valuation can help to justify a request for a rent review or to challenge a proposal considered inappropriate.

Rent review under a commercial lease must be approached with a thorough understanding of the legal and economic mechanisms and of the specific features of the local market. Figures and indices, such as changes in the ILC and ILAT, together with property valuers’ assessments, are essential tools for ensuring balanced and fair negotiations.

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Further reading: our rental value practice (market and Commercial Code, Paris, Lyon, South-East) and, where renewal is refused, the calculation of eviction compensation.