The Commercial Lease in French Franchise Contracts

Franchise and the French commercial lease: two linked but distinct contracts

The relationship between a franchise and the French commercial lease is close to unavoidable, and that is precisely why it is dangerous. A franchisee is rarely the owner of the premises in which it operates its business. Setting aside the few activities that need no fixed outlet, the franchisee will therefore take a commercial lease (bail commercial) whose terms condition, at least in part, the success of the venture. Two contracts sit at the centre of the operation: the franchise contract, which admits the operator to the network and licenses the brand and the know-how, and the lease, which secures the four walls the concept is deployed within. They are economically joined at the hip and yet legally separate instruments, governed by different rules, with different counterparties, different durations and different exits.

That separation is the trap. A foreign brand entering France, and the candidate signing up to it, both tend to treat the site and its lease as a subordinate detail to be sorted out once the franchise is agreed. In law the two contracts do not automatically rise and fall together, they do not share a term, and the disappearance of one does not, as a default rule, carry the other away. The exposure this creates is concrete and it lands almost entirely on the franchisee: a franchise that ends while the lease runs on, a bank loan still being repaid after the sign has come down, an entry fee paid for an entry that never happened. This article sets out where the franchise contract and the commercial lease interact, where French law does and does not join them, and how the franchise term, the loan term and the lease should be aligned at the outset rather than reconciled in a dispute.

The starting point is that the franchise contract is an unnamed contract governed principally by the general law of contract, while the commercial lease is a heavily regulated instrument with its own protective regime. Neither borrows the other's rules. When a lawyer speaks of the "dangerous liaison" between franchise and the French commercial lease, the danger is not metaphorical: it is the accumulation of mismatched terms and unshared risks that only becomes visible at the moment the relationship comes apart.

What the disclosure document must reveal about premises and the commercial lease

The first point at which the franchise and the French commercial lease meet is the disclosure document. Before the candidate commits, the franchisor must hand over a pre-contractual disclosure document (document d'information précontractuelle, or DIP) under Article L 330-3 of the Commercial Code, the obligation introduced by the loi Doubin of 31 December 1989. Article R 330-1 then fixes its content in detail. Among the required items, one bears directly on the premises: the document must state "the nature and amount of the expenditure and investments specific to the sign or trademark that the recipient of the draft contract commits before beginning operations".

This requirement does not, in terms, oblige the franchisor to disclose information about the franchisee's future lease. The cost of a lease is generally not "specific to the sign or trademark" — a shopfront, a deposit, or a right to a lease (droit au bail) are ordinary costs of setting up any retail business, not costs peculiar to the brand. Fit-out to the network's specification, signage, brand equipment and the like are brand-specific and must be disclosed; the lease itself, as such, usually is not. That is the strict reading of Article R 330-1.

Practice runs ahead of the text. A great many disclosure documents do give the candidate an idea of the cost of acquiring a right to a lease, or an estimate of the rent and the entry cost of a site, because a candidate cannot build a business plan without it. Once the franchisor volunteers that information, it takes on the burden of its accuracy. The requirement to disclose brand-specific investment before opening is, in any event, the point at which under-statement most often becomes actionable, because the candidate constructs its entire installation plan on those figures — and the premises are where the largest of them are spent.

When false lease information vitiates consent in a French franchise

The sharpest risk in the franchise and commercial lease relationship arises when the information the franchisor gives about the premises or their cost is wrong. Suppose the franchisor assures the candidate that a suitable site can be found for less than a stated figure, and that figure is entirely disconnected from the local market. Can the franchisee then obtain annulment of the franchise contract it signed? The answer is not in doubt: it can.

The cost of the lease is an essential piece of information on which the franchisee built its installation project. Where that information is false, the candidate has laboured under an error that vitiated its consent (vice du consentement). Article 1130 of the Civil Code provides that error, deception and duress vitiate consent where they are of such a nature that, without them, the party would not have contracted or would have contracted on substantially different terms, their determining character being assessed by reference to the persons and the circumstances. A materially wrong figure for the premises meets that test, and the franchise contract can be annulled for it. It is the general law of defects of consent that here seals the link between the two contracts: a false statement about the lease does not undo the lease, it undoes the franchise.

The instability that follows is essentially a problem for the franchisee, and it turns on money already paid. Can the franchisee recover the entry fee (droit d'entrée) handed over on signature? It can, and for a plain reason. The entry fee is the price of admission to the network. Admission has not occurred — the contract is annulled — so the price must be returned; it is deprived of any consideration. The only qualification is where the franchisee was itself negligent in the search for its site.

Interdependence: how the franchise and commercial lease can carry each other down

Beyond defects of consent, the question is whether the commercial lease and the franchise contract are interdependent contracts — so that the disappearance of one drags down the other. The stakes are not small. Article 1186, second paragraph, of the Civil Code provides that where the performance of several contracts is necessary to carry out one and the same operation, and one of them disappears, those contracts whose performance is rendered impossible by that disappearance become void by lapse (caducité), as do those for which the performance of the vanished contract was a determining condition of a party's consent.

The default answer, for franchise and the French commercial lease, is that they are not interdependent in this sense. In principle the lease and the franchise contract stand on their own, unless there is a contrary clause or indicia establishing such an interdependence. So the general rule does not join them; the joining, where it happens, is the product of how the parties actually structured the deal. That makes the drafting decisive.

Two directions of dependence are worth distinguishing, because they allocate risk very differently.

Where the franchise contract depends on the lease

The conclusion of the franchise contract may depend on the lease. Some franchisors attach particular importance to the operating premises. Coverage of the territory is a common preoccupation, but certain networks are far more demanding than others about the characteristics of the site — its location, its floor area, its frontage. Those characteristics then become, if not a condition precedent, at least a determining condition of the franchisor's consent. If the franchisee fails to secure suitable premises, the franchise is inevitably compromised: absence of the lease means disappearance of the franchise. The parties can make this explicit, concluding the franchise contract subject to a condition precedent (condition suspensive) of obtaining a bank loan or a commercial lease, or subject to a condition subsequent (condition résolutoire) of the failure to obtain them. Where a condition of that kind is written in, a franchisor cannot keep sums paid by the franchisee unless a specific clause allows it, save where the failure of the condition is attributable to the franchisee's own fault.

Where the lease depends on the franchise contract

The reverse dependence is rarer. A franchisee usually needs a lease, but a landlord does not need a franchisee. Not every business is operated under a franchise, and a landlord — unless it is also the franchisor — has no reason to care which contractual technique its tenant uses to distribute goods or services; what matters to it is that the premises are worked. It can nonetheless happen. Shopping centres, whose relentless uniformity reflects a reliance on the pull and synergy of the same large brands, may make the tenant's affiliation to a given network a term of the lease they grant. The lease can then be concluded subject to a condition precedent that the tenant conclude a franchise contract with a particular sign or type of sign. That the fulfilment of the condition depends on the tenant's own will does not make it purely potestative and void, because it depends also on the will of a third party — the franchisor — and is therefore a mixed condition and valid. If no franchise contract is concluded, the lease is deemed never to have been made. The franchisee's risk here is modest: apart from any immobilisation indemnity paid to the landlord, it loses, one might say, only an opportunity.

Why the common-expiry rule (L 341-1) does not align the lease with the franchise

A foreign operator familiar with the idea that a network's contracts can be forced onto a single term needs to understand exactly where that idea stops, because it stops at the commercial lease. Article L 341-1 of the Commercial Code subjects to a common expiry all the contracts aimed at the operation of a retail store and concluded with a head of network within the meaning of Article L 330-1 — franchise, exclusivity, non-affiliation and the rest are drawn to one aligned term. The commercial lease is expressly excluded from the scope of that text.

The consequence is structural and it is easy to miss. The lease is not aligned to the franchise term by operation of law. Where a network reaches its common expiry, the various brand contracts fall in together; the lease does not. It has a natural vocation to survive the tenant's departure from the network, precisely because the legislator carved it out of the common-expiry mechanism. So the tenant who leaves a network keeps a lease that keeps running, and the landlord who granted it keeps a tenant whose brand may now change. The alignment a franchisee might assume the law provides between franchise and the French commercial lease simply is not there.

This is not an accident of drafting. The commercial lease carries its own protective regime and its own economic logic — the goodwill attached to the premises belongs to the tenant, and the security of tenure the lease confers is not something the network's term should be able to extinguish. Article L 341-1 respects that by leaving the lease outside its reach. For the franchisee, the practical effect is that the two most important dates in its business life — when the franchise ends and when it can exit the lease — are set by two different instruments that the law makes no attempt to synchronise.

The term-mismatch trap: franchise, bank loan and triennial lease

The gap left by Article L 341-1 becomes a financial trap at the end of the franchise, because the three instruments that govern the franchisee's business run to three different clocks. The franchise contract is classically concluded for five years. The bank loan taken to launch the business is classically concluded for seven. The commercial lease runs for the usual nine years but can be broken by the tenant only at each three-year period — the triennial break. None of these terms is set to match the others, and the franchisee sits at the intersection.

Project forward to the end of the contract, after five years of operation. The franchisee, which most often suffers a non-renewal rather than a renewal, still has to pay two more years of loan and, depending on where the triennial breaks fall, up to a further year of rent — the loans being concluded for seven years and the commercial leases being terminable only at each three-year period. It must, of course, also continue to pay its staff. The picture is a squaring of the circle: the operator has to bear the charges of the activity and at the same time stop carrying on the activity, because the sign has come down and turnover has fallen with it.

The danger sharpens if the contract also carries a post-term non-compete or non-affiliation clause, because the operator is then forbidden to run a competing or affiliated business in the very premises whose lease it is still paying. Charges continue, activity is prohibited, and the fruit of the franchisee's work risks passing to the network. That is one reason such clauses are so heavily contested; but even without them, the raw mismatch of the three terms is enough to leave a non-renewed franchisee carrying cost with no matching income. The mismatch is not a drafting nicety. It is the single most predictable way a French franchise ruins the operator who signed it without aligning the instruments.

Aligning the franchise, the loan and the commercial lease at the outset

Because the law will not synchronise them, the franchisee must. The franchisee should be conscious of the interest in making the term of the franchise contract — usually five years — coincide with the term of the loan — classically seven — and must also keep the lease in view. The alignment is a matter of drafting done before signature, not of argument raised after a non-renewal. The following steps set out how the three instruments should be brought into line.

The comparison below sets the three instruments side by side so the mismatch, and the point of intervention, are visible at a glance.

Frequently asked questions about franchise and the French commercial lease

Are the franchise contract and the commercial lease legally the same agreement?

No. They are closely linked in economic terms but legally distinct. The franchise contract is an unnamed contract governed principally by the general law of contract; the commercial lease is a separately regulated instrument with its own protective regime. They have different counterparties — the franchisor and the landlord — and different rules, terms and exits.

Does the disclosure document have to give information about the lease?

Not as such. Article R 330-1 of the Commercial Code requires the disclosure document to state the nature and amount of the brand-specific expenditure and investments the candidate commits before opening. Lease costs are generally not specific to the sign or trademark and so fall outside that requirement. In practice many disclosure documents nonetheless give an idea of the cost of a right to a lease, and once the franchisor volunteers that information it answers for its accuracy.

Can I annul the franchise contract if the lease cost I was told was false?

Yes. The cost of the lease is an essential piece of information on which the franchisee builds its installation project. If that figure is false, the franchisee has suffered an error vitiating its consent under Article 1130 of the Civil Code, and the franchise contract can be annulled. On annulment the entry fee should be returned, because the entry it paid for has not occurred, unless the franchisee was negligent in searching for its site.

If my franchise ends, does my commercial lease end too?

Not automatically. As a default rule the two are not interdependent, so the disappearance of the franchise does not carry the lease with it. Article L 341-1 of the Commercial Code, which aligns a network's contracts to a common term, expressly excludes the commercial lease, and the lease has a natural vocation to survive the tenant's departure from the network. The lease can be linked to the franchise only by an express clause or clear indicia of interdependence.

What is the term-mismatch trap between franchise, loan and lease?

The franchise is usually five years, the launch loan seven years, and the commercial lease nine years with a tenant break only every three years. At the end of a five-year franchise that is not renewed, the franchisee can still owe around two years of loan and up to a further year of rent, while the loss of the brand has already reduced its turnover. The three instruments run to different clocks and the law does not synchronise them.

Can I make the franchise conditional on getting the lease or the loan?

Yes. The parties can conclude the franchise contract subject to a condition precedent of obtaining a loan or a commercial lease, or subject to a condition subsequent if they are not obtained. Where such a condition is written in, the franchisor cannot retain sums paid by the franchisee unless a specific clause allows it, and even then not where the failure of the condition is attributable to the franchisor rather than to the franchisee's fault.

Can a landlord require me to belong to a particular franchise network?

It can, though this is rarer. A landlord — typically a shopping centre relying on the pull of established brands — may make the tenant's affiliation to a given network a term of the lease, concluding it subject to a condition precedent that the tenant sign a franchise contract with a particular sign. The condition is valid because it depends partly on a third party, the franchisor, and is therefore mixed rather than purely potestative.

How should the three instruments be aligned before I sign?

Set a franchise term long enough to amortise the investment and adjusted so far as possible to the loan; provide for automatic renewal on compliance and payment of royalties; place a triennial lease break at or near the end of the franchise term; and make the loan and the lease express conditions of the franchise, stating what happens to the entry fee if they fail. If you operate two outlets, align the two franchise terms as well.

Key takeaways on franchise and the French commercial lease

How our French lawyers can help with franchise and the French commercial lease

The interaction between a franchise and the French commercial lease is decided at the drafting stage, long before any dispute. We advise foreign franchisors structuring their entry into France and franchisees and candidates about to sign, on how the franchise contract, the launch financing and the lease should be brought into line so that the operator is not left carrying cost after the brand has gone.

Our work runs from reviewing the disclosure document and the figures given about premises and investment, through negotiating the term, renewal, condition-precedent and break clauses that align the three instruments, to acting where a false statement about the lease or its cost supports annulment of the franchise and recovery of the entry fee. Where a network has already come apart and the loan and lease outlive the franchise, we advise on the exposure and on the remedies available.

This article is for general information only. It does not constitute legal advice. The interaction between a franchise contract and a commercial lease depends on the exact wording of both instruments, the financing arrangements and the circumstances of each site. Contact our French lawyers for qualified advice before signing a franchise contract or a commercial lease, or before acting on any term of an existing one.