What are the effects of insolvency proceedings on a commercial lease?
Unfortunately, it is not rare for a company to be subject to insolvency proceedings.
These procedures apply to a company in financial difficulties and organize the payment of the company’s debts and may include:
– a safeguard procedure, at the initiative of the company’s director, if the company is not insolvent;
– in administration or compulsory liquidation, if the company is insolvent.
What are the consequences to the lease in the event the company is put in administration or compulsory liquidation?
A court decision ruling on a safeguard procedure, in administration or compulsory liquidation does not have any direct impact upon the lease: which continues (Articles L.622-13 of the French Commercial Code and Articles L.641-11-1 of the French Commercial Code). The lessee remains in the premises and is subject to the terms of the lease and then required to pay the rent.
The lessee no longer has any control over the commercial lease: it is the role of the administrator or liquidator to assume the lessee’s rights and obligations on behalf of the insolvent company, such as the payment of the rent and charges.
The administrator or liquidator shall decide whether to continue, terminate or transfer the commercial lease.
Accordingly, the administrator or liquidator may terminate the lease if there are insufficient funds to pay the rent.
What formalities are required for terminating the lease?
A premature termination of the lease does not require any specific formality.
The French Commercial Code only provides that the lease shall end “on the date on which the lessor is informed of the liquidator’s decision to terminate the lease” (Articles L 622-14 of the French Commercial Code and L 641-12 of the French Commercial Code). In practice, the administrator or liquidator shall send a registered letter to the lessor to give an effective date of termination of the lease.
What is the effective date for the termination of the lease?
More precisely and in other words, can the administrator or liquidator send a letter to the lessor informing him of his intention to terminate the lease later and thereby defer the effects of the termination?
This would give the administrator or liquidator the opportunity to enable the company’s activity to continue for a few months to terminate any contracts pending or organize the sale of business assets, whilst enabling the lessor to assess his situation following this premature termination, and, for example, enable him to seek a new lessee.
The French Civil Supreme Court responded unequivocally to the contrary in a decision dated January 24 2018 (French Civil Supreme Court, commercial chamber, January 24, 2018, no.16-13333):
“Yet, whereas, on the one hand, after having set forth in accordance with Article L. 622-14, 1° of the French Commercial Code, in its drafting resulting from the order dated December 18 2008, that the termination of the lease of premises under lease to the debtor and used for the company’s activity shall be effective on the date on which the lessor is informed of the official receiver’s decision to terminate the lease; the decision uses the same rationae materiae as Article L. 622-13, II of said Code which obliges the official receiver to terminate a successive performance agreement if the funds were insufficient to settle the following instalment, yet such obligation shall not prohibit him from terminating the lease agreements at any time, even if there are sufficient funds to pay the rental instalments;
Whereas, on the other hand, as the law stipulates that the termination shall be effective on the date on which the lessor is informed, the fact that the administrator has mentioned that the termination shall occur at a subsequent date, shall not invalidate the termination nor defer the effective date thereof”.
In this matter, the administrator intended to defer the lease termination upon the expiry of a six-month period.
The lessor contested the option for the administrator to terminate the current lease at any time without having to provide any justification, and the effective date of this termination contrary to the statutory provisions.
The French Civil Supreme Court dismissed his appeal whilst recalling that the administrator could terminate the lease agreement at any time, but confirming that the termination date was defined by Article L. 622-14 of the French Commercial Code which automatically stipulates to the parties an effective date for the premature lease termination on the date on which the lessor is informed of the administrator’s decision.
It ruled that the termination with a deferred effective date did not render the termination invalid per se but that the deferment provided in the letter was inapplicable.
Accordingly, the administrator or liquidator may not give any notice to the lessor and must send the letter to inform the lessor of his intention to terminate the commercial lease only a few days prior to the vacation of the premises.
Once the lessor has been informed of the termination, the commercial lessee shall be considered as an illegal occupant without any rights, which exposes him to risk of eviction.
The administrator or liquidator should then be vigilant concerning the date of sending this letter.
Finally, the Lessor should weigh the advantages and disadvantages prior to sending a formal request to the administrator or liquidator concerning the continuation of the commercial lease.