Transfer of a commercial lease to a third party (Art. 263 SCO): refusal for good cause

Nathalie Adank (as Guest contributor)

In this case, the Federal Supreme Court confirmed the mandatory nature of Art. 263 SCO: parties to a lease agreement cannot agree on more stringent conditions for a commercial lease transfer than those provided by the law.

Judgment of the Federal Supreme Court of 29 August 2023

Case Reference: 4A_453/2022

Facts

Since July 1, 1986, B. and C. (the “Lessees”) have been renting commercial premises of approximately 55 m2 (hereinafter referred to as the “Premises”) located in Geneva. The lessees fully equipped and maintained the premises as a hair salon.

Article 6 of the rental agreement provides that ‘[…] [t]he transfer of the lease shall only be authorized for good cause and only if the transferee exercises the same business activity as the lessee and possesses the moral, professional and financial capacity to ensure that the business continues to operate normally. The tenant may request documentation of the assignment terms.[1] The lease expires on March 31, 2013, with tacit renewal every five years. The annual rent amounts to CHF 13,220, excluding ancillary fees.

On September 27, 2019, the Lessees requested from A. (the “Tenant”) the authorization to transfer their lease to D. (the “Transferee”) with effect as of November 1, 2019. The request included the business transfer agreement signed that same day between lessee B. and the Transferee. This agreement specified a purchase price of CHF 40,000. The Lessees submitted additional documentation regarding the Transferee. These documents showed that the Transferee was a Swiss national with a net monthly income exceeding CHF 7,500 and assets of more than CHF 60,000. The documents also confirmed that no legal proceedings or deeds of default had been instituted against him. The Lessees further confirmed to the property management company that they had intentionally reduced their business operations due to their age, which should be taken into account when calculating their turnover.

The Tenant refused the transfer of the lease, arguing that the amounts quoted did not correspond to the bookkeeping records of the business and claiming that the amount of CHF 40,000 should be understood as key money (‘pas-de-porte’), rather than compensation for the residual value of the business and goodwill. The Lessees then had an inventory drawn up by E., detailing the market value of each piece of furniture in the hair salon, totalling CHF 56,530. They shared it with the Tenant and set him a deadline to accept the transfer of the lease. The Tenant reiterated her refusal, adding that the Transferee had never worked as a hairdresser and was forecasting an excessive turnover in comparison to the results achieved by the Lessees. She argued that the price at which the business was sold was directly related to the very low rent for the premises.

The Lessees filed a petition before the Geneva Tribunal des baux et loyers,[2] seeking a court ruling confirming the reasons given by the Tenant to refuse the transfer of the lease were not justified and authorizing the transfer of the lease. They submitted a new estimate of the value of the furniture in the hair salon, drawn up by another third party. The Geneva Tribunal des baux et loyers authorized the transfer of the lease. The Geneva Court of Justice dismissed the Tenant’s appeal. In essence, it ruled that the Tenant had not demonstrated the existence of good cause for refusing to consent to the transfer of the lease.

The Tenant appealed the judgment before the Federal Supreme Court, which also upheld the decision to dismiss the appeal.

Issue

The Federal Supreme Court had to determine whether the Tenant could claim the existence of good cause to withhold her consent to the transfer of the commercial lease within the meaning of Art. 263 SCO.

Decision

The Federal Supreme Court started by addressing the question of the right to evidence (Art. 8 SCC), confirming that the previous instance could (i) refuse the Tenant’s request for a judicial expertise to set the fair market value of the business and (ii) make an anticipated assessment of the facts on the basis of the two inventories drawn up by third parties without this being constitutive of arbitrary. Moreover, the Federal Supreme Court confirmed that it was not unusual for the inventory to be drawn up after the Tenant refused the transfer of the lease.

On the merits, the Federal Supreme Court reviewed the conditions for the transfer of the lease within the meaning of Art. 263 SCO, pointing out in particular that these rules are absolutely mandatory.

When the conditions set forth by Art. 263 SCO are met, the original lessee has a subjective right to transfer their commercial lease to the transferee. The tenant may object to the transfer only on good cause. Some circumstances in particular are considered to constitute good cause, such as the insolvency of a transferee or an agreement on a key money payment between a former lessee and a  transferee, i.e. a payment compensating the mere transfer of the right to use the premises. The tenant’s freedom of contract is thus limited, based on the interest of the lessee to impose a specific transferee in cases where the lessee has an opportunity to transfer assets it created itself on the leased property (e.g. a customer base) or stocks of goods on terms which are favorable because the sale happens under the transfer of the lease. As a counterpart for the tenant’s inability to freely chose its new contractual partner, the former lessee is jointly and severally liable with the lessee taking over for a specified period (Art. 263 para. 4 SCO).

In this case, the Tenant unsuccessfully argued that the consideration for the takeover should be considered key money and that contractual obligations relating to the personal operation of the business were breached.

First, the Federal Supreme Court confirmed – relying on third parties inventories and valuations – that the amount paid by the Transferee was commensurate with the property on offer: the hair salon did in fact have a customer base and other valuable intangible assets, such as a ‘brand’ and a telephone number, which were the subject of the business takeover, and the lower turnover from the past years could be explained by the Lessees’ intentional decision to reduce their workload in light of their age and health conditions. The Tenant had failed to demonstrate the contrary.

Second, the Federal Supreme Court dismissed the Tenant’s argument pertaining to the fact that the Transferee, who had no experience as a hairdresser, would not be operating the business himself, as foreseen in the lease’s provision about any transfer and that this would constitute good cause to refuse the transfer. The court relied on the fact that the profession did not require official authorization and on the fact that the Transferee had shown his intention to surround himself with qualified people, since he had the entrepreneurial skills required to manage the salon. Importantly, the Federal Supreme Court ruled that the requirements of the lease agreement could not be more stringent than the legislation in force, which is mandatory in nature.

Based on the above, the Federal Supreme Court excluded the existence of good cause to refuse the transfer of the lease and dismissed the Tenant’s appeal.

Key takeaway

Parties to a commercial lease agreement may not agree validly on conditions for a transfer of the lease which would be more stringent than those set forth in Art. 263 SCO.

Comments

The question of the transfer of a commercial lease often comes up in practice, particularly when a tenant is handing over their business, and a transfer of leases is, as a matter of principle, commonly used. In this context, a distinction must be made between the application of Art. 263 SCO, which allows the tenant to impose a transferee, and that of Art. 264 SCO, which only aims to release tenants from their contractual obligations in advance, without however obliging the tenant to take on the proposed candidate. The choice between these two options will depend primarily on whether the outgoing tenant transfers their lease in the broader context of a business transfer (in which case they will opt for Art. 263 SCO).

This decision by the Federal Supreme Court reiterates an important point in this regard, namely that Art. 263 SCO is mandatory and that the parties are therefore not at liberty to agree that the tenant may object to the transfer outside of the conditions set out in this provision. It points out that this is the result of a deliberate choice by the legislator, who deliberately limited tenants’ contractual freedom (they may be forced to take on a lessee they had not chosen) in favor of the lessee’s interest in being able to transfer their lease to a specific third party, with whom they may agree on special conditions such as a takeover price for equipment or goodwill.

The classification of the takeover price often raises questions, insofar as it is sometimes difficult to distinguish between a real consideration and a key money payment. In this case, the Federal Supreme Court did not need to specifically examine this issue, as it was able to dismiss the appeal due to insufficient arguments against the lower court’s decision and based on the rules of evidence. f. In any event, the transferring tenant should be cautious, as the Federal Supreme Court confirmed the prohibition on key money, such type of payments being constitutive of good cause to refuse the transfer.

In the view of the Federal Supreme Court, Art. 263 SCO is absolutely mandatory (with the exception of para. 4, which is not relevant here, cf. 4A_30/2020). Consequently, no derogation to the detriment of the tenant is possible. The nature of this provision has long been a matter of discussion among scholars and the absolute mandatory nature could also be questioned as a matter of policy, keeping in mind that the legislator wanted to facilitate business transfers. It also appears debatable in circumstances where lease agreements would provide for more flexible conditions for intra-group transfers, which are provisions frequently requested by commercial tenants of a certain size when group reorganisations are required.

This decision by the Federal Supreme Court confirms established case law on the mandatory nature of Art. 263 SCO. In practice, tenants also address the issue of lease assignments by other means, in particular by provisions cancelling tenants’ renewal options when the lease has been transferred to a third party, which – without allowing them to oppose a transfer even if they consider that the interest in taking over the lease is based primarily on favorable rent conditions (as the tenant argued in the case at hand) – opens up the possibility of renegotiating a new lease upon expiry as the transferee does not have an option to extend the lease.

Other comments on this judgment

Eron Gjukaj / Dario Galli/Markus Vischer, Übertragung des Mietverhältnisses im Rahmen eines Betriebskaufs, in: digitaler Rechtsprechungs-Kommentar (dRSK), published on August 27, 2024

[1] The original provision in French reads as follows: “[…] [l]a cession du bail ne sera autorisée que pour de justes motifs et seulement si le cessionnaire exerce la même activité que le locataire, et s’il possède les capacités morales, professionnelles et financières pour assurer la marche normale de l’entreprise. Le bailleur peut exiger la production des conditions de la cession.” 

[2] A specialized court that deals specifically with disputes concerning lease contracts.

Reproduction authorized with the following reference: Nathalie Adank , "Transfer of a commercial lease to a third party (Art. 263 SCO): refusal for good cause", published on: Swiss Contract Law, January 16, 2025, https://scl.cultureweb.ch/36/



Bona fides in negotiating: how disingenuous can one be?

Swiss law provides for a special basis of liability for conduct contrary to the rules of good faith in the context of pre-contractual negotiations. The more unreasonable the position adopted by a negotiating party, the more difficult it is for that party to successfully claim that the other party who broke off the negotiation is liable.

Judgment of the Federal Supreme Court of 19 March 2020

Case Reference : 4A_313/2019

Facts

The case concerned a hairdresser, tenant of a commercial lease, who had decided to hand over his business. Various merchants were interested, among them a chocolatier who wanted to open a new shop.

The hairdresser and the chocolatier had started negotiating the handover of the business. During the negotiations, the chocolatier had agreed to offer the hairdresser the sum of CHF 50,000, subject to the landlord’s acceptance of the change of tenant.

The hairdresser had two choices: 1) to transfer the commercial lease directly to the chocolatier, by remaining jointly and severally liable for the rent for two years (Art. 263 of the Swiss Code of Obligations [SCO]); or 2) to terminate his lease contract and have the chocolatier conclude a new lease contract with the landlord. Given that the hairdresser was not satisfied with the first option, the parties decided they would meet with the landlord to sign, in writing, both the business sale (between the hairdresser and the chocolatier) and the new commercial lease (between the chocolatier and the landlord). Shortly thereafter, however, the hairdresser asked the chocolatier to sign the business sale agreement the day before the tripartite meeting was scheduled to take place.

Without any news from the chocolatier – who suddenly disappeared – the hairdresser opted to break off negotiations with him. Later on, he discovered that the chocolatier had come to an agreement directly with the landlord to conclude a lease agreement and rent the premises previously held by the hairdresser, thereby avoiding to pay the sum of CHF 50,000.

The hairdresser put the chocolatier on notice to pay the price of the business sale discussed among them, i.e. the expected CHF 50,000.

Issue

The Federal Supreme Court had to clarify the scope of the duty to negotiate in good faith: was the chocolatier entitled, after negotiating the business handover agreement with the hairdresser, to enter into a lease agreement directly with the landlord and to get the premises without paying the agreed fee to the hairdresser?

Decision

1. The Federal Supreme Court explained the legal framework for contractual negotiations. The main principle is contractual freedom: everyone is free to enter into, or interrupt a negotiation whenever they want, even without justification.

However, the possibility to interrupt negotiations is subject to good faith (cf. Art. 2 para. 1 of the Swiss Civil Code [SCC]), generally known, in this context, as the culpa in contrahendo.

The culpa in contrahendo is a basis for liability for persons negotiating a contract. It is based on the idea that talks by their very nature create a form of legal relationship between the negotiating parties and impose on them reciprocal duties, in particular the obligation of negotiating seriously and in accordance with their true intentions. The purpose is to make a party liable for having, through behavior which does not align with its true intentions, given rise to the illusory hope that a deal would be concluded and thus leading the other party to make arrangements or incur expenses in view of this deal. It is contrary to the rules of good faith to agree in principle to the conclusion of a formal contract and to refuse in extremis, without reason, to translate it into the required form.

In practice, culpa in contrahendo for breach of contract is only accepted in exceptional situations, especially when the type of contact is subject by law to a written form. Neither long negotiations nor the knowledge that the other party has made investments are sufficient. Indeed, incurring costs before the conclusion of the contract has, in principle, to be carried out at one’s own risk. The conduct contrary to the rules of good faith does not consist so much in having broken off the negotiations as in having kept the other party in the belief that the contract would certainly be concluded or in not having dispelled this belief in time. In practical terms, failed negotiations will not, in principle, give rise to liability, unless specific elements such as an oral or written commitment give rise to a legitimate expectation that the contract will certainly be concluded.

2. In this case, the Federal Supreme Court clarified that legitimate expectations (that the contract would be concluded) were excluded from the outset – and therefore the pre-contractual liability of the other party would not come into play – when the allegedly injured party knew or should have known that the negotiations would not be successful.

3. In the case at hand, the Federal Supreme Court found that there was no evidence of any agreement that would have been entered into between the chocolatier and the landlord before the hairdresser broke off the negotiations with the chocolatier. Besides, it is rather the attitude of the hairdresser that was at the origin of the misunderstanding that affected the last phase of the negotiations: after having fixed a meeting to sign the business sale and the lease agreement simultaneously, the hairdresser demanded that prior to that meeting the chocolatier sign the business sale contract. This conflicting behavior created an unclear situation for the chocolatier, who was legitimately reluctant to enter into the business transfer agreement without the guarantee of obtaining the commercial lease. The chocolatier’s silence obviously did not help the parties find a solution, but he simply refused to sign the business sale since the initial plan was to sign the new lease agreement at the same time.

4. The pre-contractual liability of the chocolatier could not be triggered.

Key takeaway

When the tenant of a commercial lease wants to sell his business, there is a risk that the would-be transferee will come to an agreement directly with the landlord of the premises without the transferor being involved. In order to avoid direct negotiations between the would-be transferee and the landlord, it is in the business interest of the seller to obtain the landlord’s consent in advance or, alternatively, to proceed with a transfer of the lease in accordance with Art. 263 SCO, even if it means remaining jointly and severally liable for two years. Last option: draft a letter of intention preventing the buyer from negotiating directly with the landlord.

Comments

Unlike other laws (specifically French law), Swiss law does not, strictly speaking, recognize the concept of “fonds de commerce” (sale of a business) nor does it provide for a specific legal framework. Under these conditions, the transfer of a business must be carried out according to several legal rules, specific to each of the components of the business (lease, furniture, clientele, etc.). In the same way, Swiss law does not recognize the French concept of “droit au bail” (right to the lease), which authorizes a business owner to transfer his lease to another business owner without the landlord being able to oppose it.

Art. 263 SCO does limit the landlord’s right to oppose the transfer of the lease under justified reasons; but, in exchange, the first tenant remains liable, jointly with the new tenant, for a period of up to two years. When the tenant has not obtained the prior agreement of the landlord to transfer his lease to any other merchant, he is in an unfavorable position if he wants to sell his business. Indeed, the lease contract is an essential element of the transfer of a business and it is unlikely (as the case commented here shows) that anyone will buy a business without the relevant lease agreement for the premises where the business will be carried out. Case law shows that the absence of a specific legal regime for the transfer of business gives significant power to commercial lessors to the detriment of lessees (cf. recently 4A_30/2020).

In this case, the hairdresser, being in an unfavorable position, acted improperly. He sought to transfer his business at all costs without considering that the chocolatier would not be satisfied with a transfer of the business without assurance that he will take over the lease. Although the attitude of the chocolatier may seem to lack transparency and be unfair since he stopped the negotiation with the hairdresser and began negotiations directly and separately with the landlord, the Federal Supreme Court did not sanction this behavior.

Good faith is the underlying principle of the liability for culpa in contrahendo. Since such liability is based on the protection of the legitimate expectations that one negotiating party holds over the other, it is subject to a fairly subjective assessment by the courts, who put themselves in the shoes of both negotiating parties and rule according to the behavior they find most appropriate.

In short, since pre-contractual liability is only rarely admitted, there is a requirement for the party claiming fault on his counterparty to show irreproachable conduct. If his behavior was not impeccable, it would have been difficult for him to accuse the other party of violating the rules of good faith by refusing to enter into the contract. However, in this case, the hairdresser changed his strategy and pushed for an unrealistic agreement since it cannot usually be expected that the other party would accept this in good faith.

Other sources presenting the case

Blaise Carron, in Droit du bail, 2020 p. 15.

Reproduction authorized with the following reference : , "Transfer of a commercial lease to a third party (Art. 263 SCO): refusal for good cause", published on: Swiss Contract Law, January 16, 2025, https://scl.cultureweb.ch/36/