Operation of a fonds de commerce (business undertaking) on the public domain: are we moving towards a form of near-commercial property?

France

The Pinel Act admits that a fonds de commerce (business undertaking) may be operated on the public domain. What are the private law rules applicable to such a fonds de commerce? In particular, how is it possible to determine whether such a business undertaking exists? What indemnity is due to its owner in case of withdrawal of the authorisation to occupy the public domain? Jean-Luc Tixier and Sophie Weill provide their insights concerning this issue.

Act 2014-626 of 18 June 2014 concerning crafts, trade and micro-businesses – better known as the “Pinel Act” – introduced new provisions into the Public Person’s General Property Code (Code Général de la Propriété des Personnes Publiques or CGPPP). The main new provision is contained in Article L 2124-32-1, according to which “a business undertaking may be operated on the public domain, provided that such business undertaking has a specific customer base.”

This reversal of the principles that were prevailing theretofore deserves particular attention from public law specialists. Indeed, these provisions mark the end of a settled administrative case law rejecting the creation of any business undertaking on the public domain (CE 31-7-2009 No. 316534: Lebon T p. 739; CE 19-1-2011 No. 323924: Lebon T p. 923), subject to specific provisions, as is the case within the boundaries of national-interest markets (French Commercial Code Art. L 761-9; CAA Paris 7-3-2013 No. 10PA0599). However, by doing so, these provisions validate the solution adopted long ago by the Cour de Cassation (Cass. Com. 7-3-1978: Bull. Civ. IV No. 84; Cass. Com. 28-5-2013 No. 12-14.049: Bull. Civ. IV No. 90).

The origin of these provisions, which were introduced into the Pinel Act by way of an amendment, has been broadly commented upon by legal authors (C. Chamard-Heim and P. Yolka, La reconnaissance du fonds de commerce sur le domaine public (The recognition of the business undertaking on the public domain): AJDA 2014 p. 1641). However, it is necessary to recall the material influence of two factors on these provisions’ adoption process: the constraints resulting from the Convention for the Protection of Human Rights and Fundamental Freedoms and the search for a greater appreciation of public domain occupancies.

Regarding the first aspect, the parliamentary history clearly highlights the pressure exercised by the European Court of Human Rights (ECHR 26-4-2011 No. 32521/05), which considered that the failure to recognise the existence of a business undertaking in favour of an occupant of the public domain (CGPPP Art. L 2124-35) constitutes a violation of the property right.

We must recall that Article 1 of Protocol No. 1 to the European Convention is not violated in case of destruction of dwellings irregularly maintained on the natural public domain (ECHR 29-3-2010 No. 34078/02). This exclusion from the natural public domain is also provided for in Article L 2124-35 of the CGPPP.

The second issue covered by this provision’s parliamentary history originates from the trend towards the appreciation of the public domain, as evidenced by recent court decisions and legislative developments. This trend offers to occupants new financing opportunities (finance leases and pledge of business undertakings).

It is also necessary to mention that the legislature acted faster than administrative courts. Indeed, these provisions were adopted while the Conseil d’Etat’s litigation division was about to give legal consideration to a related dispute.

In this context, doubts arise, and administrative courts will have to address them, pursuant to Article L 2331-1 of the CGPPP. The main uncertainty is related to the solutions that a private-law specialist who is well versed in commercial law might apply to a business undertaking created on the public domain. Indeed, there is no doubt that the principles governing the public domain (including mainly the occupancy-at-will rule provided for by the CGPPP and validated by the ECHR (ECHR 29-3-2010 No. 34044/02)) shall bar any systematic analogy with a business undertaking operated on private property or on the private domain of public persons. The fact that administrative courts have jurisdiction in these matters and do not hesitate to deviate from the concepts defined by judicial courts should further increase this trend.

Most importantly, the public domain system and the principles governing it seem already to define specific features that deserve to be studied.

I. Transposition of the rules related to the creation of a business undertaking on the public domain

Can the criteria defining the existence of a business undertaking be purely and simply transposed as regards the public domain?

A first question is bound to arise in the context of the application of Article L 2124-32-1 of the CGPPP: will administrative courts apply the precedents defined for a long time by judicial courts as regards the criteria related to the existence of a business undertaking?

The legislature took pains to specify that the existence of a business undertaking on the public domain shall be reflected in the existence of a specific customer base. Such an indication may seem superfluous, taking into account the definition of the concept of fonds de commerce (business undertaking), unless we consider that, by doing so, the legislature intended to recommend that administrative courts refer to the tests applied in these matters by judicial courts and to discourage them from applying any conditions that are more restrictive.

Indeed, a customer base is the indispensable element, absent which no business undertaking exists (Cass. 3rd Civ. 18-5-1978 No. 76-13.943: Bull. Civ. III No. 205; Cass. 3rd Civ. 19-9-2006 No. 05-18.365: RJDA 12/06 No. 1201). In addition, a business undertaking also includes tangible items (equipment and merchandise) and intangible items (trade sign, trade name, patents, licences, trademarks and intellectual and industrial property rights).

In order to determine whether or not a business undertaking exists, administrative courts should therefore rely on the solutions found in judicial precedents. The concept of business undertaking on the public domain should not be totally autonomous as compared with its private-law definition.

Judicial courts find that, in order to reflect the existence of a business undertaking, a customer base must be personally attached to the merchant (Cass. Plenum, 24-4-1970 No. 68-10.914: Bull. Civ. No. 3). Such personal customer base need not be preponderant when compared with that of the host establishment (Cass. 3rd Civ. 19-3-2003 No. 01-17.679: RJDA 6/03 No. 572). Such a solution should prevail on the public domain, which frequently induces its own specific traffic, and in particular the traffic of users of the public service or public domain, who are not principally attracted by the merchant’s business itself.

The application of this solution has given rise to numerous decisions, in which courts concretely assess the characteristics of each case at bar.

Thus, numerous disputes concern commercial premises located nearby supermarkets. In such cases, courts must determine whether or not the relevant business has a specific customer base, taking into account the configuration of the area and the retail store concerned.

The Cour de Cassation held that a specific customer base existed (Cass. 3rd Civ. 1-12-1976 No. 75-14.592: Bull. Civ. III No. 436) in a case involving the sale of foodstuffs outside a supermarket, taking into account the location and the specialties sold; in another case (CA Paris 21-6-1994 No. 93-5675, 16th ch. A, Sté alimentaire Boulets Montreuil vs. Sté SPBM), the tenant had, since the outset, a permanent and well-delineated space, that could be separated from the supermarket by iron curtains; the tenant had a store front and a direct access to the street, separate from that of the supermarket whose opening hours were also different; the products sold in both stores were not identical; the tenant’s stalls were located outside the supermarket, on the public sidewalk (CA Paris 14-3-2005 No. 03-352: AJDI 2005 p. 579, with a note by S. Porcheron).

In other cases, courts found that no specific customer base existed: in one case (Cass. 3rd civ. 28-9-1982 No. 1243, R. vs. SARL Marché du Puits), trial courts, by using their unfettered discretion, had held that it was not proved that a business had a customer base independent from that of the supermarket. In another case, the same solution prevailed as regards photo booths (CA Nîmes 12-1-2012: AJDI 2013 p. 203).

In general, we note that courts are rather prone to consider that a business has a specific customer base, unless it is demonstrated that the customers of the commercial area are not making purchases therein spontaneously, but only because such area is located within a broader complex, e.g. a golf course (CA Pau 2-7-1959, Ville de Biarritz), a racetrack(Cass., Plenum 24-4-1970 No. 68-10.914: Bull. Civ. No. 3) or a vacation resort (Cass. 3rd Civ. 8-1-1997 No. 95-14.124: Gaz. Pal. 1997 p. 549).

In cases involving the public domain, the same reasoning should quite logically apply and lead to the conclusion that no specific customer base exists in the case of captive businesses, such as businesses located in train stations or airports, in the sterile area after tickets have been controlled.

However, the situation should be more open in the case of properties having a certain autonomy as compared with the public domain. The method used by administrative courts might then draw from the principles applied in order to determine whether certain plots belong to a public person’s private or public domain (see in this respect, CE 25-5-2005 No. 274683 and CE 28-12-2009 No. 290937: Lebon p. 528).

Finally, these developments should not affect the judicial case law, according to which the operations conducted by a person holding a public service concession may not result in the creation of a customer base specific to the said person (Cass. Com. 29-1-1952: D. 1952 p. 737 note F. Derrida).

It remains however that the issue of the existence of a specific customer base should arise more frequently as regards premises located on the public domain, because retail stores are intertwined with the public domain, and the public domain exercises a great power of attraction. Also, administrative courts are bound to clarify, or even adapt, the concept of specific customer base, taking into account the particular requirements related to the public domain.

Specific issues related to the application of the new provisions

As we emphasised above, administrative courts should not hesitate to find specific solutions to questions that were already debated and adjudicated by judicial courts. The lack of extensive parliamentary history and the drafting of the adopted provisions will also make it necessary for administrative courts to address specific issues.

The Conseil d’Etat has already had the opportunity to clarify the mode of implementation over time of the new provisions: Article L 2124-32-1 of the CGPPP only applies to agreements made after its coming into effect (CE 24-11-2014 No. 352402: Lebon p. 350 which refers to business undertakings whose operators occupy the public domain on the basis of titles issued starting from the coming into effect of the Act), i.e. 20 June 2014. Such a clarification is welcome and addresses the concerns related to this provision’s consequences on current contracts, and in particular as regards the determination of the royalties.

The application of the new provisions of the Pinel Act will require additional clarifications to be provided by courts.

The first such clarification is related to the public policy character of the said provision. Indeed, it is necessary to determine whether the parties are free to disregard such public policy character, as Article L 2124-32-1 of the CGPPP does not contain any indication in this respect. Does the fact that the law sets forth that a business undertaking “may” be created on the public domain imply that this solution prevails systematically in cases where a specific customer base exists, or does this rule apply only absent any contrary provision? Indeed, if it is found that Article L 2124-32-1 of the CGPPP is a public policy provision, then may the agreement or title amend the terms governing the indemnification of the loss in case of early termination of the relationship?

In this respect, as the parliamentary history refers to the ECHR’s case law, we might have tended to consider that Article L 2124-32-1 of the CGPPP would be a public policy provision, with the parties remaining free however to adapt contractually the indemnification of all or part of the loss.

However, Benoît Bohnert, in his opinion preceding the Conseil d’Etat’s decision of 24 November 2014 referred to above, seems to have incidentally held the contrary view. Indeed, when analysing the application over time of the new provisions, the public reporter recalled that the public policy provisions applied to the current contract, but that such was not the case for Articles L 2124-33 et seq. of the CGPPP. However, such a solution would need to be confirmed.

A second question concerns the scope of these provisions, which cover only commercial undertakings and agricultural undertakings, but do not mention craft undertakings. In this respect, administrative courts might apply an extensive definition of the concept of business undertaking, in order to include therein craft undertakings.

Most importantly, the transferability of a business undertaking established on the public domain is bound to raise questions. Indeed, in order to reconcile the existence of a commercial undertaking with the privileges of the owner of the public domain, Article L 2124-33 of the CGPPP sets forth that “any person wishing to acquire a commercial undertaking or agricultural undertaking may beforehand seek from the relevant authority an authorisation to occupy temporarily the public domain as regards the operation of the said undertaking. The authorisation is effective from receipt by the relevant authority of proof of completion of the sale of the undertaking.”

Thus, these provisions exclude the application of the mechanism governing commercial lease agreements according to which the transfer of the business undertaking must give a right to transfer the leasehold right (in accordance with Article L 145-16 of the French Commercial Code, which deems null and void any provisions prohibiting lessees from transferring their lease or their rights derived from their commercial status to the buyer of their business undertaking or enterprise. As regards business undertakings located on the public domain, the transferee will be responsible for obtaining from the relevant public person an occupancy authorisation specific to such transferee.

This solution is explained by the non-transferability of simple occupancy agreements, which do not create any right in rem (CE 10-5-1989 No. 73146: Lebon T p. 675; CE 31-7-2009 No. 316534: Lebon T p. 739). However, this rule seems more surprising in the case of agreements creating rights in rem, which may be freely transferred.

It is indisputable that the implementing terms of this mechanism must be clarified, in particular as regards the duration of the title that may be claimed in such event by the transferee of the business undertaking. Even though the legislature decided that the operator of the business undertaking would in principle have the right to propose a transferee, in order to protect the principle according to which public domain authorisations are personal in nature, it seems surprising that the duration of the occupancy title that may be claimed by the transferee might exceed the residual duration of the current title.

This will certainly have a consequence on the drafting of deeds for the transfer of business undertakings that are to remain located on the public domain, i.e. the introduction of conditions precedent to which practitioners will pay particular attention and that will be related to the grant to the transferee of an occupancy title commensurate with the applied valuation.

Also, the possible execution of a business lease agreement covering a business undertaking is not mentioned in the new provisions. As the execution of such a business lease agreement is not to be analysed as a transfer of the agreement, the procedure detailed in Article L 2124-33 of the CGPPP should not be applicable. However, it is likely that such an agreement may not be signed unless with the relevant public person’s prior authorisation.

Finally, certain difficulties might also exist as regards the combination of these provisions with a possible tender procedure organised in relation to the grant of the authorisation to occupy the public domain, whether such public tendering is voluntary or mandatory.

II. Limits applicable to the creation of a business undertaking on the public domain

The legislature moved forward by recognising the possible existence of a business undertaking on the public domain. However, the incompatibility existing as a matter of principle between a commercial lease agreement and the public domain remains and leads to a refusal to grant to the occupant the benefit of any “commercial ownership rights” within the meaning of Article L 145-14 of the French Commercial Code, and necessarily influences the valuation of the business undertaking so created.

A business undertaking deprived of any “commercial ownership rights”

The specific nature of any business undertaking created on the public domain stems obviously from the precarious and at-will nature of the title held by the operator.

However, this is not an unprecedented legal situation, taking into account the constantly reaffirmed judicial case law according to which a leasehold right is not a necessary prerequisite of the existence of a business undertaking (Cass. Com. 27-4-1993 No. 91-10.819: RJDA 11/93 No. 896; Cass. Com. 4-2-2014 No. 12-25.528). Thus, the lessee under a long-term lease agreement occupies the premises pursuant to an enjoyment right in rem that does not give him, despite the fact that he operates a business undertaking, any commercial ownership rights (CA Aix-en-Provence 20-10-1987, 4th Ch.). The same is true in case of construction leases and derogatory leases.

Therefore, the situation of a person operating a business undertaking on the public domain shall thus be similar to that of a person party to a bail superficiaire (lease agreement covering the surface of the property) in that such person’s business undertaking shall be deprived of one of its main components: the benefit of a statutory commercial lease agreement capable of conferring “commercial ownership rights”.

There is however, as regards the situation of these various occupants, a difference related to the rights available to their subcontractors: while an occupant of the public domain may not execute commercial leases with third parties, lessees under a long-term lease agreement (bail emphytéotique) or a construction lease agreement are authorised to do so, as only their title (and not the occupied property) excludes the application of the rules governing commercial lease agreements. It is necessary to note that the term of the renewal granted to the “sub-lessee” may not result in an extension of the occupancy beyond the lease agreement’s expiration date, as such commercial lease agreements are made within the limit of the lessor’s title (Cass. 3rd Civ. 14-11-2007 No. 06-18.133: RJDA 4/08 No. 383).

Incidentally, for two reasons, this case law bears testimony to the historical origin of the prohibition of business undertakings on the public domain.

The first reason is related to the opposition between the rules applicable to commercial leases and the rules governing the occupancy of the public domain: as regards commercial leases, the paramount principle relies on a right to the renewal of the title, provided that the conditions imposed by the status are satisfied, unless the evicted lessee is indemnified (French Commercial Code, Art. L 145-14). On the contrary, as regards the occupancy of the public domain, the holder never has any renewal right, even where the title otherwise provides, it being specified however that any refusal to renew the title must rely on legal grounds, and may in particular not correspond to a misuse of the applicable procedures (CAA Lyon 30-10-2014 No. 13LY20754).

The second reason is related to the resulting financial consequences: if there exists no business undertaking or commercial lease on the public domain, the indemnification due to the occupant in respect of his title is therefore limited, and thus makes it possible to protect the financial interests of the owner of the public domain.

At law, it is impossible for the occupant to rely, if his title is not renewed, on the provisions of Article L 145-14 of the French Commercial Code under which an eviction indemnity is due in principal in case of refusal to renew a statutory lease agreement. In principle, the occupant, who does not have any renewal right, should continue to be deprived of any right to an indemnification, unless otherwise provided. Indeed, the authority owning the public domain may, depending on the circumstances, grant an indemnification right in case of non-renewal of the title (CE 20-7-1990 No. 77781).

Accordingly, the operator of a business undertaking on the public domain may not claim any “commercial ownership rights” within the meaning of Article L 145-14 of the French Commercial Code. However, the right to create a business undertaking on the public domain should improve the occupant’s indemnification terms in the event of an early expiration of his title, once the valuation of the components of such atypical business undertaking has been clearly explained.

III. Specific valuation of a business undertaking created on the public domain

The concept of business undertaking is primarily asset-related, and its main interest is to be found in the valuation induced by it. However, where a business undertaking does not include any commercial ownership rights within the meaning of Article L 145-14 of the French Commercial Code, its other components, and in particular its intangible components, represent for the owner an asset whose loss must be indemnified.

Nevertheless, in the case of a business undertaking created on the basis of a title of occupancy of the public domain, which is by its very nature precarious and at-will, the occurrence of the title’s normal expiration date should not in principle give rise to any indemnification; as the business undertaking’s owner has made, with full knowledge of the facts, a contract (or has benefited from a unilateral occupancy authorisation) clearly providing for the lack of any renewal right, he should not be able to complain about any loss suffered because of the expiration of the initially provided term.

However, it is necessary that the title clearly provides for the duration of the occupancy, which, according to administrative case law, is not a condition of the lawfulness of those titles that do not create rights in rem (CE 5-2-2009 No. 305021: Lebon p. 20).

However, such solution might – on different legal grounds – be found not to apply when the authority owning the public domain has misled the occupant as regards his occupancy right, by giving him the impression that he is a party to a commercial lease agreement. Indeed, a public person may be held liable for such a tortious conduct and may be obliged to indemnify the occupant for all of the expenses that he has incurred with a view to the operation of the business under a commercial lease and for any commercial and where applicable financial losses resulting directly from the fault that misled him as to the scope of his rights (CE 24-11-2014 No. 352402: Lebon p. 350).

Save in the above case – and save as regards the sale price of such a business undertaking between private-law persons, which is beyond the control of the authority owning the public domain – the issue of the valuation of the business undertaking should focus on the termination or early withdrawal of the title by the authority managing the domain.

It is necessary to note from the outset that it is no longer possible in this case to reason by analogy with surface area leases, as the rights in rem granted to the lessee by the said agreements are incompatible with any stipulation related to a condition subsequent. The situation of a long-term lessee, like the situation of the other surface area lessees, is thus totally different from that of the occupant of the public domain: while tenancy at will is excluded in one case, it is the rule in the other case.

In other words, the solutions in this area remained to be defined… by administrative courts or by judicial courts, depending on the case at hand (i.e. before judicial courts in cases involving the sale of a business undertaking and its valuation in this context and before administrative courts as regards the valuation of the indemnity due to an occupant in case of early termination of his occupancy title).

In such cases of termination or early withdrawal, the CGPPP specifies the terms applicable to the indemnification of the occupant holding rights in rem, by providing that losses are covered when they are direct, physical and certain (CGPPP, Art. R 2122-17).

As regards simple authorisations, the applicable solution, defined by case law, is identical absent any contrary provision: the occupant is indemnified in the amount of his direct and certain loss (it is not required here that losses be tangible) including lost profits and expenses incurred in respect of the normal occupancy of the domain, that should have been covered at the end of such occupancy (CE 31-7-2009 No. 316534: Lebon T p. 739; CE 24-11-2014 No. 352402: Lebon p. 350).

In this context, any early termination of the agreement for the occupancy of the public domain is very likely to oblige the authority owning the public domain to indemnify the occupant for the loss of his business undertaking, if it is demonstrated that the occupant may not move his business undertaking to any other location, or for the costs and losses related to the transfer of the operations when such a transfer is possible.

If the occupant loses his customer base because of the termination or withdrawal of his title, the loss shall be similar to that referred to in Article L 145-14 of the French Commercial Code, i.e. the loss of his business undertaking. The main difference will then be found in the valuation of the said business undertaking, which is assumed not to be lasting. Indeed, such business undertaking will not include any leasehold right, and this will affect the business undertaking’s market value, taking into account the fact that the title is by its very nature precarious and at-will.

The valuation of the other components of the business undertaking (including primarily the customer base) shall also be influenced by the nature of the title if it appears that the title is not transferable. In such case, the occupant may only assert a right limited in time, and the valuation should depend on the residual term of the title upon the termination. Such value should be reduced to nil in case of termination occurring soon before the expiration of the title, but such an event is rather unlikely.

However, if it is demonstrated that the business undertaking can be transferred to another location, then the occupant should not be entitled to claim any indemnification, because his title, which is precarious by nature, does not include any leasehold right and his operations may be continued at another place.

The other loss items that might be claimed by the occupant in addition to the items related to the early disappearance of his business undertaking should remain unchanged (no depreciation of capital expenditures, etc.).

In other words, while the new provisions of the Pinel Act reflect the intention to ensure legal certainty as regards the ownership rights of a person occupying the public domain, the concrete transcription of such provisions, as regards the valuation of the assets whose existence is so recognised, is unprecedented and leaves room for rich exchanges between the parties concerned.

Article published in Bulletin rapide droit des affaires No. 12 dated 30 June 2015