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The new law on commercial lease agreements: Takes effect on 1 November 2017?
Posted on 10 October 2017 in News > Real Estate, Zoning & Environment

Bill n°6864 on commercial lease agreements modifying some dispositions of the Luxembourg Civil Code (the “Bill”) is expected to be voted by the Chamber of Deputies this Thursday (12 October). Then, provisions of the Bill – which will become the new law on commercial lease agreements (the “Law on Commercial Lease Agreements”) – will apply from the 1st day of the month following the publication of the Law on Commercial Lease Agreements in the Luxembourg Official Journal (Mémorial A), i.e. in all likelihood from 1 November 2017. The Law on Commercial Lease Agreements will apply to any lease agreements, including existing contracts. Here is information on the scope of the Bill as well as its key changes.

 

SCOPE OF THE BILL

The Bill modifies and replaces Articles 1762-3 to 1762-8 of the Luxembourg Civil Code and adds Articles 1762-9 to 1762-13.

It applies to commercial lease agreements. These are defined by the Bill as “any leases with regard to a building intended for commercial, industrial or artisanal activities” (“Commercial Lease Agreements”). At present, a commercial lease agreement is only defined by Luxembourg case law.

Provisions of the Bill do not apply to office lease agreements, lease agreements in relation to a liberal activity (unless expressly stated in the contract) and Commercial Lease Agreements with a duration of less than or equal to 1 year.

 

DURATION OF THE LEASE

At present, a Commercial Lease Agreement can be concluded for a limited or an unlimited period of time.

The Bill states that a written Commercial Lease Agreement can be concluded for a limited or an unlimited period of time.

If there is no specific provision in the contract, the Commercial Lease Agreement is deemed to be concluded for an unlimited period of time.  

 

GUARANTEE

Whereas at present there is no limit regarding the amount of the guarantee to be provided by the lessee, the Bill provides that any guarantee issued by a third-party or set up by the lessee in relation to a Commercial Lease Agreement is capped to 6 months of rent.

 

PROHIBITION OF LEASING RIGHTS

Additional rent paid to the lessor or the intermediary due to the signature of a Commercial Lease Agreement is null and void.

This provision aims to eradicate the phenomenon of leasing rights (pas-de-porte) which has grown in the Grand-Duchy since the ‘90s similar to the French model.

Prohibition of leasing rights is not applicable to Commercial Lease Agreement by which the entry into possession of the premises by the lessee has taken place before the Law on Commercial Lease Agreements comes into effect.

 

SUB-LEASE

The Bill states that the lessor must be provided with a copy of any sub-lease contracts.

Moreover, except when specific investments linked to the sub-lessee's activities have been made by the lessee, the Bill provides that the rent paid by the sub-lessee to the lessee cannot be higher that the rent paid by the lessee to the lessor.

 

ASSIGNMENT

As for sub-leases, the lessor must be provided with a copy of any assignment contract of a Commercial Lease Agreement he is part of.

 

TERMINATION OF THE LEASE CONTRACT 

Whereas at present, a Commercial Lease Agreement can be terminated with a notice period of 6 months (except otherwise provided for in the contract), the Bill states that a notice period of a Commercial Lease Agreement cannot be less than 6 months.

The termination letter must be issued by registered mail with acknowledgment of receipt.

In the case of termination of the Commercial Lease Agreement for any reason other than a termination letter (e.g. the lease has reached its expiration date), the contract is tacitly extended for an unlimited duration. The Bill also provides that the lessee is no longer an occupant with neither right nor title.

 

LESSOR’S RIGHT OF TERMINATION 

The Bill allows the lessor to terminate the contract as follow:

  • With immediate effect, in the case of breach by the lessee of his contractual obligations;
  • Anytime with a notice period of 6 months, if (i) the lessor or his child(ren) intend(s) to live in the premises, (ii) the lessor decides not to lease the premises anymore for activities described in the lease contract or (iii) a rebuilding or a transformation of the premises is about to take place; or
  • After 9 years and with a notice period of 6 months, if the lessor (or a third-party) pays an eviction compensation to the lessee. The amount of this compensation should be included in the contract. If not, the judge fixes it on the basis of the market value of the business capital.

 

PRE-EMPTIVE RIGHT IN THE CASE OF SALE OF THE PREMISES

In the case of sale of the rented premises, the Bill grants to the lessee leasing the real estate for at least 18 years a pre-emptive right, under the condition that the lessee leases the whole building or that the rented premises are governed by the co-ownership rules.

This pre-emptive right does not apply in the case of a sale by public auction or if the real estate is sold to a family member of the lessor (parent or relative up to third removed included) or free of any cost.

 

PREFERENTIAL RENEWAL

The Bill substantially modifies the current clauses on preferential renewal of commercial leases.

At present, a lessee is allowed to ask for the preferential renewal of his lease under the condition that he has operated a business capital for more than 3 years. This right is also granted until the 15th year of rental and the lessor.

The Bill states that any lessee (or sub-lessee) is allowed to use the right of preferential renewal of his Commercial Lease Agreement regardless of the time during which his business capital is operated and/or the duration of his contract.  Any clause to the contrary in a Commercial Lease Agreement is null and void.

The request of preferential renewal must be issued to the lessee by registered letter with acknowledgment of receipt at least 6 months before the termination date of the Commercial Lease Agreement.

Following the Bill, the lessor can still refuse the renewal regardless of the duration of the lease if:

  • He or his child(ren) intend(s) to live in the premises (N.B.: at present, the law refers to descendants);
  • He decides not to lease the premises anymore for activities described in the lease contract; or
  • a rebuilding or a transformation of the premises is about to take place,

but the right of refusal of the lessor based on legitimate grievances toward the lessee that is granting at present has disappeared.

In the case of a contract with a duration of more than 9 years, the Bill also provides that the lessor can refuse the renewal of the Commercial Lease Agreement if he or a third-party pays an eviction compensation to the lessee.

Finally, the Bill specifies that any lessees for whom the residual duration of the Commercial Lease Agreement is less than 6 months at the date of the entry into force of the Law on Commercial Lease Agreements are also allowed to ask for the preferential renewal of their contract.

 

SUSPENDED EVICTION

The Bill abolishes Article 1762-8 of the Luxembourg Civil Code (sursis commercial of two periods of 6 months each) and replaces it with a single judicial suspension of 9 months at the request of the lessee or sub-lessee with regard to an eviction decision.

The suspended eviction can be granted under the two cumulative following conditions:

  • The payment by the lessee/sub-lessee of all the due rents and common charges at the date of the request; and
  • The suspended eviction will allow the lessee/sub-lessee to find other premises for continuing his activity as well as for complying with his obligations included in the employment contracts with his workers.  

 

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