On 23 December 2022, the Luxembourg Constitutional Court (the “Court”) delivered Judgment No. 176 (the "Judgment") to clarify its position on the issues on the right to engage in commercial real estate speculation through subletting.
What happened in facts?
On 1 June 2002, a company (the "Lessee") leased commercial premises for a monthly rent of EUR 7,950, which was reduced to EUR 5,000 as from 1 April 2018.
On 1 September 2014, the Lessee sublet the said commercial premises to another company (the "Sub-Lessee") for a monthly rent of EUR 16,000, reduced to EUR 14,500 as from 1 September 2017.
Consequently, the sublease of the commercial premises earned the Lessee a profit of approximately EUR 6,350, at its lowest (i.e., for the period from 1 September 2017 to 1 April 2018) and up to EUR 9,500 at its highest (i.e., as from 1 April 2018).
What does the Law say?
In order to avoid commercial real estate speculation, the law of 3 February 2018 on commercial leases and amending certain provisions of the Civil Code introduced an Article 1762-6 (4) in the Civil Code. This article provides that "Except in the case of a sublease where investments specific to the sub-lessee's activity have been made by the lessee, the rents paid to the lessee by the sub-lessee may not exceed the rents paid by the lessee to the lessor".
Therefore, except in specific investment cases, the rent for a sublease cannot exceed the rent paid by the Lessee.
What is the Court being asked?
The court magistrate (juge de paix) of Esch-sur-Alzette referred to the Court for prejudicial questions ruling on whether Article 1762-6 (4) of the Civil Code is in conformity with:
- the freedom of trade and industry guaranteed by Article 11(6) of the Constitution, which covers the freedom to set the price of goods and services subject to economic transaction by agreement, and
- the general principle of legal security, which implies that any legal rule must not only be sufficiently clear and accessible, but also foreseeable.
What does the Court say?
The Judgment clarifies that Article 1762-6(4) of the Civil Code, insofar as it does not allow an economic operator who has leased commercial premises, to sublease them for a price that covers his operating costs relating to the sublease and to receive a reasonable profit from the sublease, is contrary to the freedom of trade and industry.
In doing so, a lessee should at least be able - through subletting - to recover their operating costs, including in particular overheads and administrative costs, and expect a "reasonable profit". However, it will remain for the trial judges (juges du fond) to assess the notion of "reasonable profit" on a case by case basis.
Furthermore, according to the Judgment, "it results from a reasonable application of the law under consideration that the notion of "investments specific to the activity of the sub-lessee" refers to investments made by the lessee in the direct interest of the activity carried out by the sub-lessee, and that the proof by the lessee of having made such investments gives rise to the possibility of an increase in the rent, over and above that paid under the main lease, which is proportionate to the scale of the investment thus proved and allows for appropriate amortisation". So, according to the Court, Article 1762-6(4) of the Civil Code does not infringe the general principle of legal security.
What do we learn from the Court's ruling?
The rent paid by a sub-lessee to a lessee should reasonably be allowed to be increased by:
- the investment’s amortisation made in the direct interest of the activity carried out by the sub-lessee (the increase must be proportionate to the scale of the investment);
- the operating costs incurred by the lessee, including overheads and administrative costs; and
- possibly, a "reasonable profit" which in any event must be adequate and proportionate to the economic transaction in question.
What should the reaction of the legislator be?
The Luxembourg legislator should react to the Court's ruling which decided that Article 1762-6 (4) of the Civil Code is not in conformity with the Constitution. Following the indications given by this judgment, it should amend the law and, in particular, define the evasive notion of "reasonable profit" to be derived from a subletting operation.
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