Commercial Lease:
Good or Bad?

Investing in a property under a commercial lease can represent an interesting opportunity for stable income. However, this type of investment also comes with its share of specificities and risks. What should you examine before getting started? Here are the key points, supported by legal references to guide you in your decision-making process.

1. Advantages
of a Commercial Lease

Regular income: By purchasing a property under a commercial lease, the owner typically benefits from fixed income, as outlined in the contract signed with an operator. The duration of the commercial lease (usually 11 years fixed) provides financial stability.

Simplified management: In many cases, commercial leases include clauses stipulating that the operator is responsible for routine maintenance of the property. This reduces the management burden for the owner, who delegates these aspects to an experienced tenant. Article L. 145-40-2 of the Commercial Code specifies that certain maintenance tasks are the operator’s responsibility, except for major works covered under Article 606 of the Civil Code.

Tax benefits: In some cases, purchasing a property under a commercial lease allows the owner to benefit from advantageous tax regimes, such as the Non-Professional Furnished Rental (LMNP) scheme or the Censi-Bouvard scheme, if the property is rented as part of a serviced residence. These schemes allow for VAT recovery and tax reductions.

2. Vigilance Before Purchase

Lease duration and conditions:
Before signing, it is crucial to check the remaining lease duration and renewal conditions. According to Article L. 145-9 of the Commercial Code, a standard commercial lease is for a minimum duration of 9 years. However, for commercial leases in tourism residences, a peculiarity applies: the lease cannot be terminated every 3 years by the tenant, unlike other commercial leases. This means the tenant is committed for the entire lease term, unless otherwise stipulated.

At the end of the lease, the tenant can request a renewal, in accordance with Article L. 145-10 of the Commercial Code. However, if the landlord refuses this renewal without a legitimate reason (as defined in Article L. 145-17 of the Commercial Code, for example, due to the tenant’s breach of contractual obligations or a demolition project), the tenant may claim eviction compensation.

What is eviction compensation?
Eviction compensation, as provided under Article L. 145-14 of the Commercial Code, aims to compensate the tenant for the loss of their renewal rights. It includes:

• The value of the business or operation conducted on the premises, assessed based on the tenant’s turnover and profitability.
• Relocation and moving costs to a similar location, as well as potential revenue losses during this period.
• Additional compensation, such as customer loss due to a strategic location.

Therefore, it is essential for the landlord to carefully consider the conditions for refusing a renewal, as they could incur financial liability.

Of course, just because the law provides for eviction compensation does not mean that all developers and operators of tourism residences apply it!

Rental options offered by tourism residence operators:
When signing the commercial lease, tourism residence operators usually offer several options to property owners, allowing them to tailor the use of their property to their needs and expectations. These options include:

• Maximized annual rent: This option guarantees a higher annual rent, but the owner has no access to the apartment during the year. The property is fully dedicated to tourism rentals, optimizing rental income.
• Partial property use: With this option, the owner can use the apartment for personal use for a few weeks a year. In return, the annual rent paid by the operator is proportionally reduced based on the duration of personal use.

These options offer flexibility, allowing owners to balance rental income with personal use of their property, depending on their priorities, whether to maximize profitability or enjoy their investment.

Each lease being unique, it is essential to fully understand the contract specifics to accurately estimate the profitability of an apartment under a commercial lease.

Rents and their revision: Commercial leases may include rent indexation clauses to adjust for inflation. Rent revisions follow the Commercial Rent Index (ILC) or the Tertiary Activities Rent Index (ILAT) and are regulated by Article L. 145-39 of the Commercial Code. However, some leases may cap rent increases, which could impact long-term profitability.

Charges and repairs: Buyers must review the charges and repairs for which the owner is responsible. Article L. 145-40-2 of the Commercial Code states that the owner is responsible for major repairs, but they may also be liable for other charges. Carefully reviewing the property’s condition and diagnostics is crucial to anticipate future costs.

Operator’s commitment: It is essential to verify the financial stability of the operator. An operator in financial difficulty may be unable to pay rent, jeopardizing the investment. Article L. 145-41 of the Commercial Code allows the owner to terminate the lease in case of non-payment, but this process can be lengthy and costly.

3. Risks and Disadvantages

Less flexibility: Unlike traditional rental investments, a property under a commercial lease offers little freedom to the owner during the lease term. The owner cannot reclaim the property for personal use or rent it under different terms, which can be a constraint. Furthermore, reclaiming the property for a "legitimate and serious reason" remains regulated by Article L. 145-17 of the Commercial Code and requires valid justification.

Resale value: Due to contractual commitments, a property under a commercial lease may be less attractive to other investors seeking flexibility. The remaining lease duration and contract clauses can affect the property’s resale value. Buyers must therefore consider that this constraint could reduce the property’s appeal to future purchasers.

Conflicts with the operator: The owner may face conflicts if the operator fails to comply with the lease terms. Disputes can arise over property usage, maintenance, or rent payments. In case of non-compliance, the owner can request lease termination under Article L. 145-41 of the Commercial Code, but proof of violations must be provided, which can be time-consuming and costly.

An Investment
to Consider

Acquiring a property under a commercial lease can be an excellent opportunity for investors seeking a stable source of income. Such properties are often resold at a significant profit once the lease ends. However, this investment requires careful attention and an in-depth analysis of lease clauses, tax obligations, as well as the rights and duties of both the owner and the operator.

Working with an experienced real estate agent helps minimize the risks associated with this type of investment and ensures the commitment aligns with the buyer’s financial goals.