The new Law on commercial lease (Part 1: scope of the Law and new restrictions)

The Law is the result of the willingness of our legislator to define a new legal framework which is supposed to avoid dysfunctions resulting from speculative practices in the commercial real estate market. In fact, the few existing provisions dating from 1936, which already aimed at preserving the business assets of the retailers (fonds de commerce), turned out to be too liberal for an economic activity in need of more stability.

Undoubtedly, this Law constitutes a revolution in the Luxembourg real estate landscape. We will therefore address this substantive change in three newsletters. In the present newsletter, we will focus on the scope of application of the Law as well as on the new prohibitions and restrictions 1.

The application scope of the Law

The substantial application scope of the Law
In accordance with the new article 1762-3 of the Civil Code, a commercial lease is defined as a lease intended for the exercise of a commercial, industrial or craft activity. The Law will apply uniformly to all those leases.

It is to be noted that if the Law does not specify the meaning of “commercial, industrial or craft activity”, some clarifications can however be found in the Law’s preparatory works such as the exclusion of banks or office premises from the scope of application.

However, the legislator has specifically excluded from the scope of the law, commercial leases with a term of up to one year to prevent the Law from becoming an obstacle to ephemeral marketing activities such as "pop-up" and "concept" stores.

The temporal scope of the Law
Almost all provisions of the Law are immediately applicable to future and ongoing contractual relationships. This is uncommon and contrary to the principle of non-retroactivity of the law. We therefore anticipate that this provision will give rise to practical difficulties.

The prohibitions and restrictions introduced by the Law

On the rental guarantee
The amount of the rental guarantee is now capped to 6 months’ rent and the lessor cannot refuse a rental guarantee taking the form of a first demand bank guarantee, an insurance or any other equivalent guarantee.

On rent supplements paid at the conclusion of the lease
(“pas de porte”)
The “key money” practice consisting in the payment of a sum of money to the lessor or to an intermediary by the lessee as an entry fee at the beginning of the lease is now prohibited by Article 1762-5 (1) of the Civil Code. Any payment made in this respect shall be refundable.

According to the legislator, this restriction is justified by the need to reduce the investment effort of the retailers, to improve the economic viability of their businesses, reduce the number of early bankruptcies and facilitate the access to the rental market and the creation of new businesses.

Logically, the Law provides that this restriction shall not apply to ongoing lease.

On sublease and lease assignment 
The sublease or the assignment of the lease agreement is admitted, either if it has not been prohibited by the lessor in the lease agreement, or, in any case, if it is made together with the transfer of the business activity and if the lessor has no good reason to refuse.

The Law also requires the lessee to notify to the lessor a copy of the transfer or sublease agreement and above all provides that the sub-rent shall not exceed the rent of the principal lease, except in case specific investments have been made by the lessee for the purpose of its activity. The idea here was again to break the speculative practices consisting in taking premises to sublease them at a higher rent. This sub-rent limitation will be applicable to future and ongoing contractual relationships only from 1 March 2019.

Finally, the Law prohibits any stipulation forcing the lessee to use a specific intermediary for sublease or assignment of his lease.

These new legal restrictions represent some paradigm shift in the Luxembourg retail real estate market and lessors and tenants are advised to be vigilant particularly with respect to the changes that will apply to their current contractual relationships.