Real Estate in the covid era, is there any need for an alternative legal framework ?

Real Estate in the covid era, is there any need for an alternative legal framework ?

Written by Hélène Cloëz, Sidonie Fraîche-Dupeyrat and Géraldine Piedelièvre,  partners at LPA-CGR avocats Paris office

The sharing economy has developed in recent years with concepts such as Airbnb in the real estate sector and Blablacar in the transport sector. The use of these services has become a reflex for many individuals, but not only, because owners and occupiers alike are now looking to optimise use of space.

This type of practice has been largely encouraged by the development of the digital economy and new ways of organising work (co-working, freelance, teleworking), but also responds to a real need for retailers, as shown by the emergence of pop-up stores, trying to compete with e-commerce and to adapt to the ever-accelerating requirement of consumers for novelty.

In the residential sector, the concept of co-living has taken over from that of serviced apartments and reflects a threefold objective: optimising space in tense areas, ensuring flexibility of use and ensuring community of life or a sense of belonging. This offering is no longer aimed solely at senior citizens and students, but now specifically targets the entire population: young professionals, families, mobile workers, etc.

The purpose of these new uses such as co-working, co-living, pop-up stores, third places, fractional rentals is to enhance the value of the building in a common interest and reveals common characteristics:

• sharing of resources,
• more property-related services,
• more flexibility of use over time and in space,
• a search for a more community based way of life or working, sometimes even extending to a search for meaning.

In actual fact, the health crisis has accelerated the development of these new uses, which appeared already several years ago.

From a legal standpoint, fundamental legal institutions of real estate law are in question, which reflect arduously procured and frail balances between opposing interests:

• the statutory regime governing commercial leases which attempts to establish a balance between the interests of owners and those of retailers, with the wide variety of situations that this covers,
• residential leases governed by the law of 6 July 1989 which attempts to establish a balance between the diverging interests of the owner and of the individual occupying the premises,
• the rules of use and intended use, as a synthesis between the right of ownership, protected constitutionally and the powers of public authority as tools for city planning and organisation policies.

Should these new uses modify these legal balances? Does our legal system know how to support these changes without profound reform?

Most often these new real estate uses, whether in the tertiary or the residential fields, adopt the same operating scheme, that of a commercial lease entrusted by an investor to an operator, who will make available to the end user the premises with services. The same triptych can be organised around a management agreement.

Three different economic operators are therefore concerned by the question: investors, operators and users; and the response to this question must include a search for balance between the interests, sometimes contradictory, of these operators.

A legal framework tailored to investors?

In the residential sector, new modes of living and the structuring of the operation thereof through the use of a commercial lease granted to an operator can be of real interest to investors seeking to diversify their assets. The benefit of a commercial lease frees the investor from the risks of vacancy, non-payment and the cumbersome management of residential assets; these constraints are borne by the operator. The rent flow thus comes from a single and secured source.

Investors may, however, be sensitive to the risk of taking over the residential leases at the end of the operation, a risk that substantive law does not address clearly enough. And they will have to agree to share with the operator the value of the activity developed in the building.

If investors wish to capture this value, they will have to choose to develop an operating structure or to resort to an operating mandate, while however being mindful of the constraints of the Hoguet law and the tax constraints of the SIIC or OPPCI regime to which they may be subject. The logic is more or less the same in the tertiary sector.

But is the commercial lease requested by operators secure/satisfactory enough for investors ?

The commercial lease seems suitable, but investors will have to perform prior verifications to ensure the feasibility of their projects with regard to required standards and co-ownership rules, for example. They will have to exercise care when drafting sub-rental clauses, tax clauses, and the contractually intended use (destination) and the activity of the end user will have to conform to the intended use within the meaning of planning rules and to assigned use (affectation) within the meaning of Article L.631-7 of the CCH (editor’s note, the French Code de la construction et de l’habitation).

The difficulties come, from an administrative standpoint, from a lack of flexibility in the time scales and use of space under urban planning rules.

For the record, occupancy of buildings is governed both by the rules relating to “use” (usage) under the French Code de la construction et de l’habitation and those relating to “intended use” (destination), governed by the French Code de l’urbanisme, which correspond to different purposes.

The legislation concerning changes of use of premises has a social purpose: it tends to control the conditions of use and occupancy of premises and to preserve the dwelling. Such must therefore be complied with independently of the granting of any other authorisation, in particular planning permission.

The concept of intended use tends to protect, for its part, the main function of the building that its design and physical characteristics of the construction purport to ensure.

Planning rules do not permit a single and same set of premises to come under several intended uses.

These rules require, indeed, a planning authorisation to be issued each time the premises transition from one intended use to another and vice versa. Which is not feasible in practice.

Thus, the assumption according to which furnished premises can be, for part of the year, offered for rental for lengthier periods, and for another part of the year, for shorter periods is not possible having regard to planning rules.

The reform on intended use resulting from order no. 2015-1783 of 28 December 2015 does not include any significant progress on this issue.

The rules on “use” are even more stringent and require that any premises that had a residential use on 1 January 1970 maintain such use (Article L. 631-7 of the French Code de la construction et de l’habitation), unless an authorisation is requested to change this use, in return for a compensation in the form of conversion of equivalent areas (sometimes double the area) with a use other than a residential use into residential areas.

It is clear that these new modes of living and working require the planning rules to be adapted to allow for mixed uses in the same premises or for the possibility of changing this use over time without having to apply for a new planning permit.

Such flexibility already exists in embryonic form in the certain statutes. Thus, Article 81 of Law No. 2015-990 of 6 August 2015, known as the “Loi Macron”, introduced a temporary use mechanism codified under Article L 631-7-1B of the French Code de la construction et de l’habitation. This mechanism allows, under certain conditions, premises intended for a use other than residential use, to be temporarily assigned to a residential use for a period not exceeding fifteen years.

Similarly, a certain flexibility exists since the Elan law no. 2018-1021 of 23 November 2018 for private individuals who can freely rent out their main place of residence to a visiting clientele for short-term rentals, up to a limit of 120 days per year.

This possibility for temporary use could thus be extended to other uses or other assets, such as university halls of residence, for example, which need to occupy the three months of the summer left vacant by students. This flexibility would at the same time address the concerns of students who are often forced to rent out their rooms unnecessarily for those three months because operators are unable to rent them out on a temporary basis.

In the same vein, the Elan law created the “mid-rise building” (IMH) in order to harmonise construction standards between housing and office buildings so as to facilitate their conversion.

Lastly, attention should be paid to the mechanism of the “dual-status permit” created in the JO law of 26 March 2018 which allows, within a single planning permit, to provide for a current and a future intended use. The legal obstacles to its generalisation exist, but the mechanism exists in principle and is worth looking into.

A legal framework tailored to operators?

Although rigid in appearance, the conclusion of a commercial lease has the benefit of conferring security of tenure on operators who thus benefit from the protective status of commercial leases. The wording of the lease clauses could be further developed to confer a certain flexibility over its term, for example by granting the tenant the option to break the lease outside the triennial periods, without the need for legislative amendments.

It should be emphasised that the conclusion of a commercial lease does not confer a commercial character on the intended use or on the use of the premises, which will be assessed with regard to effective use of the premises by their occupiers.

Operators may sometimes wish to benefit from a flexible use and intended use, over time or in space, which is not permitted by planning law and which investors will therefore refuse to grant.

In the residential sector, the restrictive regime of residential leases and the strict regulation and capping of rents in tense areas can be viewed as an obstacle to the development of a profitable and flexible activity for operators.

There are, however, more liberal legal frameworks that allow these constraints to be adapted, such as the regime of serviced apartments, residential accommodation or even furnished rentals and mobility leases (mobilité). From experience, they can be sufficient to respond to the main expectations of operators. If a little simplification and flexibility would not go amiss, the best is likely to be the enemy of the good in this sensitive area.

A legal framework tailored to users?

In residential matters, residential leases governed by the law of 6 July 1989 (bare rentals or furnished rentals or mobility leases) will most often be applicable and will guarantee the protection of the occupier’s rights. More occasionally, if occupiers do not establish their main place of residence within the premises made available, the lease may be subject to the rules of the French Code civil, which are more flexible for operators, but less protective of occupiers. But in the absence of a main residence issue, is more protection legitimately required?

As regards services provided to occupiers, consumer law will in principle support the occupier’s rights. While the lack of a global approach to the occupiers’ rights (occupancy and services) is to be regretted, all of these provisions, even if they have not been designed for these specific situations, protect occupiers from the most obvious possible abuses.

In tertiary matters, as concerns co-working, the contract implemented between operators and end users is a services agreement, in which the supply of premises is secondary in relation to the services offered.

The services agreement is not a rental agreement so that the activity does not come directly or indirectly under the ambit of an activity regulated by the Hoguet law and the agreement is not liable to come under or to breach a mandatory statutory regime.

The more the co-working contract is marked by the scope of the services provided to occupiers and presents particularities, the more it will be legitimate to deviate from a classic lease contract and to thus avoid any risk of requalification.

This type of contract is very flexible for end users and has its place in the context of these new uses.

Conclusion

New modes of living and working are developing rapidly, reflecting the desire of students, single workers, couples and families to live in a more collaborative way.

In terms of rental and, more broadly, in terms of the operation of these new activities, legal stability will, in our opinion, be more conducive to such growth than a legal reform that could rekindle heated debates and call into question balances that have at last been incorporated by economic operators, with a high risk of failure.

The upheavals are more operational and economic in nature, than legal. The current legal rules and a little creativity will go a long way in accompanying these changes in a fair manner, subject to a few adaptations that could be facilitative and, undoubtedly, to the issue of urban planning.

On the other hand, urban planning rules do not follow this societal evolution with the same pace. The design and purpose of these rules are the result of decades of spatial planning designed to organise and control use of ground. In order to embrace this fundamental movement, while respecting the general principles of urban planning law, a few adjustments would be welcome, without it being necessary to profoundly change the nature and principles thereof.

In conclusion, the law is not a hurdle to the development of these new uses, but a few well-targeted adjustments, especially in urban planning law, could be useful catalysts…