In the last few years, indexation clauses have been thoroughly analyzed by judges and often challenged when law practitioners tried to be a bit creative. What kind of clause can a landlord provide for in a commercial lease so that the indexation of the rent is not invalidated?
Some answers below.
The upward-only indexation clause known as the "ratchet clause" (Clause à "effet-cliquet")
The ratchet indexation clause provides that the indexation cannot have the effect of reducing the revised rent to an amount lower than the current rent.
French case law seems now to have reached a position on these indexation clauses. These clauses are prohibited and rendered null and void. Pursuant to article L.112-1 of the French monetary and financial code, judges consider that an indexation clause that prevents the reciprocal variation and which generates a distortion shall be unenforceable1.
The indexation clause with a minimum rent ("loyer plancher")
The indexation clause with a minimum rent prevents the decrease of the rent but only below the initial rent (and not the current rent).
The French Supreme Court has not yet ruled on this type of clause, but the trend seems to be that this type of clause will also be invalid, on the same basis as the "ratchet clause" 2.
The "tunnel" indexation clause
The "tunnel" indexation clauses provide for a collar for the index's variation, both upwards and downwards. Such clauses stipulate, for example, that the indexed rent cannot vary by more than 3% each year (upwards or downwards).
The French Supreme Court has not yet ruled on this type of clause and French legal commentators remain divided on whether judges should invalidate or not such clauses pursuant to article L.112-1 of the French monetary and financial code.
Recently, the Lyon Court of Appeal validated an indexation clause that provided for an indexation limit of 3% (upwards or downwards) 3. The Court considered, pursuant to the aforementioned article, that the clause did not create any distortion and therefore remained valid.
Thus, the "tunneling" of the indexation clauses, as long as it is reciprocal and proportional, could be allowed. In practice, in the expectation of a tangible court decision, it would be preferable not to include this type of clause in commercial leases 4.
The indexation clause with a fixed base
Indexation clauses with a fixed base index have been validated by judges as long as their mechanism is properly implemented, i.e. when the indexation of the rent is applied each year on the basis of the initial rent agreed between the parties, by comparing the fixed base index and the reference index, only the latter changing each year according to the year in question.
However, indexation clauses with a fixed base index which result in a distortion of the indexation due to a modification of the rent during the lease are often deemed invalid by judges because the indexation is no longer applied on the same initial rent.
Indexation on the 1 January
French court decisions invalidate indexation clauses on the 1 January when they create a distortion the first year5.
Indeed, the indexation clause providing for a one year variation of the index (regardless of whether there is a fixed base index or not), when the period over which the first review is made is lower (period corresponding to the commencement date of the lease until the 1st January of the first indexation) must be deemed invalid because the clause leads, for the first rent review, to take into account, a period of variation of the index greater than the period elapsed between the commencement date of the lease and the first rent review6.
Conclusion
A review of French court case law reveals that the trend is to invalidate indexation clauses which do not strictly respect the natural variation of the indexation. Consequently, in order to prevent unpleasant surprises, it is recommended to allow upwards and downwards indexations and ensure that the period of variation of the index is equal to the time elapsing between each revision.
Otherwise, the sanctions listed below may apply.
Invalid indexation clauses: what are the consequences in practice?
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the clause is partially deemed invalid (although we cannot exclude a clause entirely deemed invalid, recent caselaw tends to only partially deem invalid indexation provisions in breach of French law)7,
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the landlord shall have to refund to the tenant the faultily applied rents adjustment,
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there is no time limit to the right of the tenant to challenge the validity of the indexation,
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however, there is a 5 year time limit for the tenant to request for the refund of any overpaid rents to the landlord8.
Authored by Michaël Lévy
[1] Cass. 3ème civ. 14 Jan. 2016, n°14-24.681, CA Paris, chambre 3, 13 Apr. 2016, n°14/06301 & CA Paris, Pôle 5, 7 Feb. 2018, n°16/07034.
[2] CA Paris, Pôle 5, ch.3, 31 May 2017, n°15/04336, CA Lyon, 3ème chambre A, 18 Jan. 2018 - n°14/10142 & CA Paris, Pôle 5, ch3, 24 Jan. 2018 n°16/09460.
[3] CA Lyon, 8ème chambre, 28 Feb. 2017, n°16/01794.
[4] Cass. Civ. 3ème 7 May 2014, n° 12-22.637, Cour d'appel de Versailles, 20 Oct. 2015 RG n° 15/00545 Cass. 3ème civ., 25 Feb. 2016, n°14-28.165, Cass. Civ. 3ème 9 Feb. 2017 n°15-28.691.
[5] CA, Paris, Pôle 5, chambre 3, 20 May 2016 – n°14/09332 & Cour d'appel Versailles, chambre 12, 7 Feb. 2017 n°15/08820.
[6] Cass. 3ème civ., 9 Feb. 2017, n°15-28.691.
[7] CA Lyon, 3ème chambre A, 18 Jan. 2018 - n°14/10142 & CA Versailles, 12 Jun. 2017- n°15/03929 : two recent decisions cast some doubt on this consequence. The Courts of Appeal of Lyon and Versailles considered that the disputed clauses were null and void but only for the part that contravened the provisions of Article L.112-1 of the French Monetary and Financial Code.
[8] CA Paris, chambre 3, 13 Apr. 2016, n°14/06301: an isolated judgment has condemned the lessor to restitution of the overpayment since the beginning of the lease.
