If you’re looking for business premises or have just found them, do you know your rights and obligations with regards to your lessor? myLIFE highlights the key points to consider, preferably before you sign your commercial lease.
Audrey is a florist. She is in the process of setting up her company in Luxembourg. After searching for several months, she has finally found premises that seem to meet her requirements. The shop is in an ideal location, close to home and on a busy street. It’s big enough to have a small display and there’s room for a storage area behind the shop. The rent is standard for the sector and a florist business is permitted under the lease. It all seems perfect! But before signing up, Audrey wants to find out more about a commercial lease and what she is committing to.
A lease is an agreement between the lessor and the lessee or tenant. The lessor undertakes to make premises available to the tenant in exchange for rent. There are several types of lease in Luxembourg: residential, commercial, agricultural, etc.
The type of lease governs how the rented site can be used (e.g. as living accommodation or business premises) and defines the rules to which lessor and tenant are subject.
In Luxembourg, a commercial lease is governed by the Law of 3 February 2018. It is designed for tenants who wish to run a commercial, industrial or artisan business in the rented premises.
→ Useful info: the Law of 2018 does not cover office leases, short-term leases (of one year or less) or premises for freelance professions such as physiotherapists, doctors, architects, lawyers, etc., which are subject to the general provisions of the civil code.
It is therefore a commercial lease agreement that Audrey will sign for her florist business. It is drawn up in writing and signed by both parties to serve as evidence of their respective duties in the event of any dispute.
Reform of commercial leases in 2018
The Law of 3 February 2018 on commercial leases amended some of the provisions of the civil code and introduced some major changes specifically aimed at improving protection for tenants. The amendments mainly relate to lease length, renewal and termination, the practice of key money payments, the rent guarantee, sub-letting, business suspension, compensation for eviction and the tenant’s pre-emptive right. |
A rent guarantee to cover obligations under the lease agreement (…) may not legally exceed six months of rent.
Before signing her commercial lease agreement, Audrey should read the clauses of the agreement carefully and check that they establish the rights and obligations of each party.
→ Useful info: the Law of 2018 puts an end to the practice of key money payments. New agreements cannot include the payment of extra rent or an additional charge payable to the lessor or an intermediary for making the premises available.
A fixed-term lease agreement that is not terminated by the lessor upon expiry is tacitly renewed for an indefinite term.
If Audrey has signed a fixed-term lease, she has the right to renew the lease during nine years. A renewal request must be sent to the lessor by registered letter with acknowledgement of receipt at least six months before the lease expires. The lessor then has three months to respond. A lease renewal means that a new agreement will be drawn up and there is no guarantee that the terms will remain similar to those of the initial agreement.
→ Useful info: a fixed-term lease agreement that is not terminated by the lessor upon expiry (with a six-month notice period) is tacitly renewed for an indefinite term.
The lessor may terminate the commercial lease with immediate effect if Audrey does not meet her obligations under the lease agreement (e.g. if she fails to pay the rent or charges).
In addition, if the premises have been let for less than nine years, the lessor may refuse any request for renewal or may terminate the commercial lease with notice of six months in the following situations:
After nine years of occupation by the tenant, the lessor is within his/her rights to terminate a lease with an indefinite term or to refuse the renewal of a fixed-term lease without justification. In this case, the lessor or a third party (e.g. the future tenant) must pay Audrey an eviction indemnity prior to the end of the lease for the loss of her florist store.
→ Useful info: Audrey and the lessor can define the level of eviction indemnity or the method to be used for its calculation in the lease agreement. Failing this, a magistrate will determine this amount based on the market value of the business assets.
A tenant who has rented premises for over 18 years has a pre-emptive right.
Audrey can also cancel her commercial lease agreement if the lessor fails to respect their contractual obligations: if the lessor imposes a rent increase that does not respect the consumer price index or if the peaceful enjoyment of the rented premises is no longer possible, etc.
Suspension of forced eviction
Since 2018, in the event of a dispute, a tenant subject to an eviction order issued by the courts may request a suspension of this order. This may be granted by the courts for a period of a maximum of nine months solely if the tenant respects the following two conditions: “all rents and anticipated payments for charges that are due have been paid on the day the application for suspension is made” and “the suspension is granted in order to allow the tenant to find another building to continue their activity and fulfil their duties under the employment contracts of any employees.”1 |
→ Useful info: a tenant who has rented premises for over 18 years has a pre-emptive right to purchase the rented premises if the lessor wishes to sell, except in specific circumstances2. However, in order to exercise this right, the tenant must rent the full building where the premises are located or the premises must be part of an owners’ association.
If, after a few years, Audrey wishes to close the business and to sub-let (or assign) her florist shop, she must notify the lessor who has 30 days to accept or reject the request.
If there is a clause in the lease agreement prohibiting a sub-lease or (assignment) this shall be null and void3 if the “assignment or sub-lease is made together with the assignment of the business assets, providing that an identical business remains in operation”1. In other words, Audrey can sub-let (or assign) her lease provided that she also transfers her business assets and the sub-tenant (or new tenant) also runs a florist business.
Remember: the 2018 law specifies that the sub-tenant’s rent may not be higher than the original tenant’s rent, unless the tenant has made specific investments related to the business of the sub-tenant. However, a ruling of the Constitutional Court of 23 December 2022 considers the legal ceiling of sublease rent amounts as a restriction of the freedom of trade. This decision could set a precedent.
In conclusion, a commercial lease is a binding agreement creating rights and obligations for lessor and tenant that must be respected. Its contents should be carefully studied. This is particularly the case since the healthcare crisis, which resulted in numerous disputes between lessors and tenants in connection with the payment of rents during lockdowns. The clauses of a commercial lease do not necessarily cover how to manage this type of exceptional situation!
If there is any doubt, and to protect the interests of each party, it is therefore advisable to consult a legal professional before signing an agreement. Find more information on the law governing professional leases in Luxembourg.
1 Extract of the Law of 3 February 2018 relating to commercial leases and amending certain provisions of the Civil Code.
2 The pre-emptive right does not apply if the premises rented are subject to a public auction, are sold to a third-degree or closer relative of the lessor, or are subject to a transfer for no consideration.
3 The ban on assigning the lease or on sub-letting remains applicable if the lessor has reserved a part of the building for themselves or their family to live.
Sustainable development issues have been a key concern in recent years, and businesses have a…
When it comes to investing, it’s advisable to take the long view and to follow…
Have you ever been to a meeting that seems to drag on with no meaningful…
In a hyperconnected world that constantly demands our attention through messages, notifications and alerts, it’s…
What distinguishes a manager from a leader? What are the rules of leadership, what mistakes…
Just launched a new product or service, or created an online store? Want to stand…