Sale of leased premises: what happens to the commercial lease?

A persistent belief among shopkeepers and craftspeople who rent their premises is that when they learn their landlord is putting the walls of their shop or workshop up for sale, they must pack up and leave. The opposite is true. Under French law, the sale of leased premises does not bring the commercial lease to an end: it passes automatically to the new owner, who becomes landlord on the same terms. This article explains why the sale does not terminate the lease, how the pre-emption right (droit de préférence) protects the tenant, and in which specific cases, nonetheless, a sale may result in the tenant leaving.

Sale of leased premises and the commercial lease: the principle of continuity

The starting point is Article 1743 of the French Civil Code, the founding text governing the fate of a lease where the leased property is sold.

If the lessor sells the leased property, the purchaser may not evict the farmer, the sharecropper or the tenant who holds a notarised lease or a lease with a certain date.

In practical terms, the sale of the leased premises does not terminate the contract. The commercial lease continues, with the same clauses, the same remaining term, the same rent and the same reciprocal obligations. The purchaser of the premises buys an occupied property and simply steps into the seller's place in the landlord and tenant relationship. The purchaser is said to be subrogated to the rights and obligations of the original landlord.

This rule applies with particular force to the commercial lease because of the protective statute in Articles L145-1 et seq. of the French Commercial Code. The commercial tenant enjoys a right to remain in the premises and a right to renewal of the lease, two prerogatives that make up the substance of commercial property rights (propriété commerciale). These rights attach to the business (fonds de commerce) operated in the premises, not to the person of the owner. A change of owner therefore does not extinguish them.

The received idea "sale = end of the lease" has no basis

The expression "termination of commercial lease on sale" is widely used, but it corresponds to no automatic legal mechanism. Under ordinary law there is no ground for terminating a commercial lease triggered by the sale of the premises alone. The seller cannot terminate the lease in order to sell with vacant possession, except by following the tightly regulated procedures for refusal of renewal, examined below.

Take an example. A restaurateur has operated his restaurant for eight years in premises whose lease still has two years to run. The owner sells the building to an investor. The restaurateur has nothing to fear for his immediate operation: he keeps his lease until its expiry, and will then benefit from the right to renewal on the usual terms. The buyer knew he was buying let property: he cannot invoke the sale to take back the premises.

Why does the lease pass automatically to the purchaser?

The transfer of the lease to the purchaser rests on two conditions derived from Article 1743 of the French Civil Code: a notarised lease or a lease with a certain date. In commercial matters this requirement is almost always met, but it deserves explanation because it determines whether the lease can be enforced against the buyer.

The question of the certain date

A lease acquires a certain date in particular where it is drawn up by notarial deed, where it is registered with the tax authorities, or where one of the signatory parties dies (the date of death then making the earlier existence of the deed certain). In practice, the sale of a let building takes place before a notary, and the rent roll is systematically annexed to the sale deed. The purchaser therefore knows of the existence and content of the lease before signing.

What happens if the lease has no certain date, for example an unregistered private agreement? Case law holds that the lease remains enforceable against the purchaser provided the purchaser knew of it at the time of the sale, which is almost always the case since occupation of the premises is visible and the sale deed mentions the existence of the letting. A purchaser cannot pretend not to know that a business is being operated in the premises he is buying.

The fate of the security deposit and sums paid

The transfer of the lease carries with it the accessories of the contract. The purchaser becomes creditor of the rent falling due and, at the end of the lease, debtor of the obligation to return the security deposit. This question must be settled in the sale deed between the former and the new owner, because the tenant may claim return of the deposit from the landlord in place at the end of the lease, that is the purchaser, even if the purchaser never physically received the sum from the seller. A prudent tenant therefore keeps proof of the initial payment of the security deposit. The allocation of lease-related risks between seller and purchaser, and the asset and liability warranties that go with it, are dealt with in our article on the sale of an occupied building.

What changes and what does not change for the tenant after the sale

After the sale, the essentials of the landlord and tenant relationship remain the same. The lease continues to take effect as signed: term, amount of rent, indexation clause, allocation of charges and works, permitted use of the premises, forfeiture clause. The tenant does not have to renegotiate the lease and the purchaser cannot impose new terms.

What changes is the identity of the landlord. From the sale onwards, rent must be paid to the new owner. To avoid any payment to the former landlord, the sale must be brought to the tenant's attention. In practice, the tenant receives a notification, often by registered letter or by a commissaire de justice (bailiff) deed, informing the tenant of the identity of the new owner and of the details to which rent should be paid. Until the tenant has been informed, a tenant who pays in good faith to the former landlord is validly discharged of the debt.

One point deserves the tenant's attention: the sale does not reset the clock on length of occupation. The years of occupation accrued under the former owner continue to run. For calculating the term of the lease, the right to renewal or any eviction indemnity, total length of occupation is taken into account, regardless of owner.

The tenant's pre-emption right on a sale

The question of the sale of leased premises under a commercial lease is not limited to continuation of the contract. Since Law No. 2014-626 of 18 June 2014, known as the Pinel Law, the commercial tenant has a pre-emption right where the owner plans to sell the premises. This mechanism, codified in Article L145-46-1 of the French Commercial Code, gives the tenant the opportunity to buy in priority the walls it occupies.

How the pre-emption right works

Where the owner decides to sell the commercial premises, the owner must inform the tenant by registered letter with acknowledgement of receipt or by commissaire de justice deed. This notification constitutes an offer of sale: it states the price and the conditions of the proposed sale. The tenant then has one month to give notice of acceptance.

If the tenant accepts, the tenant then has two months to complete the sale from the date the reply is sent to the landlord. This period is extended to four months where the tenant states that a loan will be used to finance the acquisition. If the owner finally decides to sell on terms or at a price more favourable to the purchaser, the owner must notify these new terms to the tenant, who again benefits from the pre-emption right.

This mechanism protects the trader by giving a chance to become the owner of the tools of the trade before a third party steps in. A craftsman established for a long time can thus secure his location definitively by buying the walls rather than remaining a tenant.

The numerous exceptions to the pre-emption right

The pre-emption right has significant limits, provided for by Article L145-46-1 itself. It does not apply in particular in the following cases:

• the single sale of several premises forming part of a commercial complex
• the sale of a whole building containing commercial premises
• the sale of premises to a co-owner of a commercial complex
• the sale to the landlord's spouse, or to an ascendant or descendant of the landlord or of the landlord's spouse

These exceptions explain a large proportion of sales of let premises made without the tenant being consulted. This is the very common case of the sale of an entire building containing flats and a shop on the ground floor. The purchaser buys the building as a whole, and the commercial tenant cannot claim a pre-emption right over the single unit it occupies. The lease nevertheless remains fully enforceable against the purchaser: the tenant keeps the right to remain in the premises, even though deprived of the right to buy in priority.

A useful clarification: the pre-emption right concerns the sale of the walls. It does not apply where the transfer results from a gift, an inheritance, a contribution to a company or a judicial auction sale. It targets the voluntary sale of a single commercial unit.

The cases where a sale may nonetheless lead to the end of the lease

The thrust of this article is to dispel the received idea that sale means eviction. But nuance is needed: the sale may, indirectly, be accompanied by the end of the lease in certain situations. It is never the sale itself that terminates the lease; it is a separate event that the new owner may trigger, in compliance with the procedures of the statute.

Refusal of renewal at the end of the lease

The most frequent scenario is that of the landlord, former or new, who refuses to renew the lease at its expiry. The commercial lease reaches its term every nine years, unless a different term is agreed. At that point, the owner may serve notice (congé) with refusal of renewal. But this refusal has a cost: except for a serious and legitimate ground attributable to the tenant, or an unfit building destined for demolition, the landlord must pay an eviction indemnity intended to compensate for the loss resulting from the loss of the business (fonds de commerce).

This indemnity, often high, generally corresponds to the value of the business where the move leads to its disappearance, plus reinvestment costs, removal costs and ancillary indemnities. A purchaser who wishes to recover vacant premises in order to redevelop them must therefore anticipate payment of this indemnity. It is not the sale that ends the lease, it is the refusal of renewal, with compensation, decided on expiry. The grounds for refusal and the regime of the indemnity due to the tenant are detailed in our article on non-renewal of the commercial lease.

Take a concrete example. An investor buys a building occupied by a local shop whose lease expires in eighteen months. The investor cannot evict the tenant immediately. The investor will have to wait for expiry, serve notice with refusal of renewal in the form required by law, and pay the eviction indemnity. Until the indemnity has been paid, the tenant keeps the right to remain in the premises.

Notice and its forms

Notice is served at least six months before the lease expires, by commissaire de justice deed or by registered letter with acknowledgement of receipt. It must state the grounds on which it is given and reproduce, on pain of nullity, the statutory provisions on the tenant's right to challenge the notice or to claim an eviction indemnity. The formalities are strict, and an irregular notice has no effect.

Recovery for occupation or demolition

Certain grounds for recovery allow the landlord to refuse renewal without an indemnity, or with a reduced indemnity. This is the case in particular of a building declared unfit by the administrative authority and destined for demolition, or of recovery in order to build or rebuild the existing building, subject to offering the tenant replacement premises or an eviction indemnity as the case may be. Here again, these options form part of the renewal regime, independently of the sale.

Sale by auction and collective proceedings

Where the premises are sold at auction in the context of a property seizure or collective proceedings (procédure collective), the lease remains in principle enforceable against the successful bidder provided it has a certain date and was validly entered into before the relevant registrations of creditors' charges. The situations are nevertheless more complex, because the fate of the lease depends on the date it was entered into, its enforceability against registered creditors and the possible existence of fraud. A tenant whose landlord is the subject of collective proceedings has an interest in having its position checked before the auction. On the enforceability of the lease against the successful bidder and the effect of the certain date, see our analysis of the fate of existing leases on a seized building.

Practical precautions for the tenant and for the purchaser

The sale of let premises brings three interests into play: those of the seller, the purchaser and the tenant. Each has checks to carry out.

For the tenant, vigilance concerns notification of the sale and the pre-emption right. The tenant must keep the lease, its amendments and proof of payment of the security deposit. If the premises are sold on their own, the tenant checks that the offer of sale provided for by Article L145-46-1 has been received and complies scrupulously with the acceptance periods. Silence during the one-month period amounts to a waiver of the right to buy.

For the purchaser, buying let premises calls for careful examination of the existing lease. Before signing, the purchaser analyses the permitted use of the premises, the remaining term, the amount of rent and the method of revising it, the allocation of charges and works, the state of payments and the existence of any disputes. Above all, the purchaser checks the tenant's length of occupation and the expiry date, because these determine the timetable on which the purchaser may, if so wished, consider a refusal of renewal and the cost of any eviction indemnity. Buying premises let to a long-established trader means buying a property that will be expensive to recover.

For the seller, the duty to inform under the pre-emption right must be observed to the letter. A sale concluded in disregard of the tenant's pre-emption right exposes the seller to having the sale annulled or to having to compensate the tenant deprived of its right. Prior notification to the tenant, where required, is not an optional formality.

Conclusion

The sale of the premises does not mark the end of the commercial lease: it transfers it. This principle, anchored in Article 1743 of the French Civil Code and reinforced by the protective statute for commercial leases, protects the tenant's business against changes of owner. The expression "termination of commercial lease on sale" describes a mechanism that does not exist: no sale automatically terminates the lease. The end of the landlord and tenant relationship, when it occurs, always results from a separate event, essentially refusal of renewal on expiry, heavily compensated by the eviction indemnity.

The advice is twofold. For the tenant who learns that the premises are being put up for sale, the first check is to make sure the tenant has received the offer of sale under the pre-emption right where the premises are sold on their own, because this right may allow the tenant to become the owner of the walls. For the purchaser, before any signature, have the existing lease analysed by a lawyer: it is the tenant's length of occupation and the lease expiry date, far more than the asking price, that determine the real value of the property and the cost of any future recovery.

Frequently asked questions

Does the sale of commercial premises end the commercial lease? No. Under Article 1743 of the French Civil Code, the sale of the leased premises transfers the lease to the purchaser, who becomes landlord on the same terms. The lease continues with its remaining term, rent and clauses unchanged. There is no automatic termination of the commercial lease as a result of the sale.

Can the new owner increase the rent or change the lease after the purchase? No, not unilaterally. The purchaser must respect the existing lease as signed. The purchaser may revise the rent only under the mechanisms provided for by the lease and the statute, in particular the three-yearly revision or contractual indexation, and may set a new rent only on renewal, according to the applicable capping rules.

What is the commercial tenant's pre-emption right? Since the Pinel Law of 18 June 2014, Article L145-46-1 of the French Commercial Code requires an owner who sells commercial premises to offer them first to the tenant. The tenant has one month to accept the offer, then two months to complete the sale, or four months if a loan is used. This right does not apply, in particular, to the sale of an entire building as a whole or to a sale to the landlord's spouse, or to an ascendant or descendant of the landlord.

Can a purchaser evict the tenant in order to occupy the premises? Not immediately. The purchaser must wait for the lease to expire and serve notice with refusal of renewal in the form required by law, at least six months before the end of the term. Except for a serious and legitimate ground or an unfit building destined for demolition, this refusal gives rise to payment of an eviction indemnity intended to compensate for the loss of the business. Until the indemnity is paid, the tenant remains in the premises.

Is the security deposit transferred to the new owner? Yes. The transfer of the lease carries with it its accessories, including the security deposit, which the purchaser will have to return at the end of the lease. The transfer of the sum between former and new owner must be settled in the sale deed. The tenant has an interest in keeping proof of the initial payment in order to claim its return from the landlord in place.

To whom must the tenant pay rent after the sale? To the new owner, from the time the sale has been notified to the tenant. Until the tenant has been informed of the change of landlord, a tenant who pays the former owner in good faith is validly discharged. Clear notification of the sale, with the new payment details, avoids any dispute on this point.

Can the tenant object to the sale of the premises? No, the tenant cannot prevent the sale. The owner remains free to sell the property. The tenant has only, where the premises are sold on their own, a pre-emption right allowing it to buy in priority, and the guarantee that its lease continues with the purchaser. The right to remain in the premises and the right to renewal are preserved whoever the new owner is.