Termination of a Commercial Lease in the Context of Judicial Liquidation Proceedings

The Court of Cassation distinguishes between procedures for termination by operation of law and those for the enforcement of a termination clause in commercial lease agreements.

Commentary on the ruling issued by the Commercial Chamber of the Court of Cassation on October 9, 2019 (Case No. 18-17563)

When the lessor has chosen to petition the bankruptcy judge pursuant to Article L 641-12(3) of the Commercial Code to seek a declaration that the commercial lease has been terminated as of law without invoking a termination clause, then the landlord is not required to issue the payment order regarding the termination clause required by Article L 145-41 of the Commercial Code.

This is the lesson to be drawn from a recent decision handed down by the Commercial Chamber of the Court of Cassation on October 9, 2019 (Case No. 18-17563).

In this case, by private agreement dated May 11, 2005, SCI des Bains granted SARL CARLA a commercial lease.

By judgment dated November 17, 2016, the Paris Commercial Court initiated judicial liquidation proceedings against SARL CARLA.

By order dated March 8, 2017, the bankruptcy judge authorized the sale of SARL CARLA’s business to Company Y.

The lessor, SCI des Bains, filed an appeal against this order on March 21, 2017, and on the same day filed a motion with the bankruptcy judge requesting a declaration that the commercial lease had been terminated due to nonpayment of rent owed after the commencement of the judicial liquidation proceedings.

By private agreement dated April 25, 2017, the court-appointed liquidator and Company Y signed the deed of assignment of the business, including the right to the lease, subject to the condition that the order of March 8, 2017, not be overturned.

By order dated June 16, 2017, the bankruptcy judge dismissed the motion to declare the termination of the commercial lease.

By judgment dated October 10, 2017, the Paris Commercial Court, ruling on an objection, dismissed the motion to declare the termination of the lease.

The lessor filed an appeal on October 19, 2017.

The lessor argues that, following the expiration of a three-month period after the judgment ordering judicial liquidation, no subsequent rent was paid. It argues that, since it chose to bring the matter before the bankruptcy judge pursuant to Article L 641-12(3) of the Commercial Code to have the lease terminated, it was not required to issue a payment order, as it would have been required to do had it brought the matter before the judge in summary proceedings.

The Paris Court of Appeals, in its April 4, 2018, decision (Division 5 – Chamber 8, Case No. 17/19289), dismissed the plaintiff’s claim and affirmed the judgment rendered at the trial court level.

The trial court judges held that the provisions of Article L622-14 of the Commercial Code do not derogate from the provisions of Article L 145-41 of the Commercial Code, which require, in the event of a termination clause, the prior issuance of a demand for payment.

They therefore concluded that the automatic termination of the commercial lease for failure to pay rent and charges for more than three months following the judgment opening bankruptcy proceedings is not effective until, pursuant to Article L 145-41 of the Commercial Code, a demand for payment has been served on the tenant by a bailiff. Consequently, the fact that the landlord chose to bring the matter before the bankruptcy judge, rather than the judge presiding over summary proceedings, did not exempt him from the prior service of the demand for payment pursuant to the termination clause.

The Court of Cassation rejected this reasoning. It noted, with reference to Articles L 641-12(3) and R 641-21, paragraph 2, of the Commercial Code, that: “when the bankruptcy judge is seized, on the basis of the first of these provisions, of a request to declare the automatic termination of the lease of a building used for the company’s business, due to nonpayment of rent and charges related to occupancy occurring after the judgment of judicial liquidation of the lessee, this procedure—which is subject to specific conditions—is distinct from the procedure aimed, pursuant to Article L. 145-41 of the Commercial Code, to have the termination clause stipulated in the lease agreement declared effective.”

Consequently, the landlord, who appeared before the bankruptcy judge to seek a declaration of the automatic termination of the commercial lease, without claiming the benefit of a termination clause, was not required to issue a demand for payment regarding the termination clause as provided for in Article L.145-41 of the Commercial Code.

There is, in fact, a distinction between a request for a declaration of the automatic termination of the commercial lease and a judicial request for a declaration that the termination clause has been triggered.

Upon reading the reasoning of the Court of Cassation, one might perceive a reversal of case law; however, this is not the case.

In fact, the trial court judges referred to established case law of the Court of Cassation (notably Court of Cassation, Commercial Chamber, June 28, 2011, No. 10/19331; Court of Cassation, Commercial Chamber, December 6, 2011, 10-25.689), which clarified that the provisions of Article L. 622-14 of the Commercial Code did not derogate from the provisions of Article L. 145-41 of the same code, which stipulate, in the case of a termination clause, the prior issuance of a demand for payment. The issuance of a demand for payment was therefore mandatory before a court could be petitioned to declare the termination clause included in the lease agreement effective.

However, the Court of Cassation did not reverse its position with respect to the aforementioned decisions; in fact, it merely provided an important clarification regarding the obligation to issue a demand for payment pertaining to the termination clause.

There is, in fact, a distinction between a request for a court to declare the automatic termination of a commercial lease and a judicial request for a declaration that the termination clause has been triggered. In the first scenario, there is no need to issue a demand for payment beforehand. This obligation applies only in the case of a request for a court ruling confirming the triggering of the termination clause.

To elaborate further, under Article L 622-14 of the Commercial Code, when the tenant is subject to insolvency proceedings, the lease of business premises is governed by a regime that deviates significantly from general law and protects the tenant’s rights. Termination of the lease is therefore subject to restrictive rules for the landlord.

It is exclusively in the event of the lessee’s judicial liquidation that the law permits the lessor to have the bankruptcy judge confirm the termination of the lease for nonpayment of rent and charges incurred after the judgment of judicial liquidation, without having to apply to the judge in summary proceedings to have the termination clause enforced.