Rental law and principle of contractuel loyalty

A Decision of 29 November 2024 by the Swiss Federal Court reiterates that in rental law the principle of contractual loyalty nevertheless prevails in certain situations.

An unusual case in tenancy law, which the Federal Court had to decide (ATF 4A_555/2023), is an opportunity to recall that, in this area, contractual freedom and contractual fidelity must still prevail in certain cases, even if the result is unfavourable to the tenant.

Tenancy law, as we know, has the particularity of containing protective provisions for tenants, even if there has been an agreement between the parties, i.e. a written and signed agreement. This is particularly the case – to cite the most telling and frequent example – of the tenant disputing the initial rent. Even if the tenant has accepted the rent and signed a lease agreement mentioning this rent, the tenant can still challenge it. This possibility goes against the principle of Swiss contract law of ‘pacta sunt servanda’, i.e. the principle that agreements must be respected (with a few exceptions such as contracts that are contrary to morality or that relate to an unlawful act, etc.).

The Swiss Federal Court decision of 29 November 2024 reiterates that, in certain situations, in tenancy law, the agreement between the parties always prevails.

This unusual case, due to the amounts involved for an apartment, was the following: 

I had entered into a lease, on a friendly and fiduciary basis, for an eight-room apartment in Geneva. The lease was entered into by I on behalf of A, who did not want to appear on the lease but was to occupy the apartment. The judgement does not say why A did not want to appear. The monthly rent was CHF 16,000.

The contract included special provisions. According to these clauses, ‘the apartment was rented as is’ (art. 5 of the special clauses of the contract). The tenant was authorised to carry out work in the apartment, according to a list annexed to the contract, and could, in the event of departure, negotiate with the new tenant a possible takeover of this work (art. 7 of the special clauses of the contract). However, according to art. 8 of the supplementary clauses forming an integral part of the lease, all works or contributions of fixed elements financed by the tenant formed an integral part of the apartment and the building and the outgoing tenant could not demand financial compensation or indemnity for the added value contributed, neither from the new tenant succeeding him, nor from the lessor. Finally, according to Art. 37 of the general conditions and rental rules and practices to which the contract refers, as an exception to Art. 260a para. 3 CO, the tenant could not claim any compensation at the end of the lease for the value-adding work carried out at his expense and with the prior written consent of the landlord in the rented premises’.

A carried out works in the flat, the total amount of which amounted to CHF 994,430.81.

In October 2015, the landlord terminated the lease. A contested this termination and raised the fact that it prevented him/her from negotiating with a future tenant to take over the work. A requested CHF 600,000 in compensation for the work carried out.

To keep the peace, the landlord offered CHF 150,000.

A refused this amount, and the case was brought before the conciliation commission, then before the Tenancies Tribunal, then the Cantonal Court, and finally the Federal Court.

In addition to the question of compensation, there was the question of the default of the rented flat and a reduction in rent due to water damage, but this will not be developed here.

The Swiss Federal Court recalls the content of Article 260a CO.

According to this article, the tenant has the right to renovate or modify the item only with the written consent of the landlord. Once the lessor has given his consent, he may only demand that the item be restored if this has been agreed in writing. If, at the end of the lease, the item has increased considerably in value as a result of the renovation or alteration agreed to by the lessor, the lessee may demand compensation for this increase in value; this is subject to written agreements providing for higher compensation.

The Swiss Federal Court points out that this provision is dispositive, which means that the parties may derogate from it.

The Federal Court held that the cantonal court had ‘found that the parties had the real and common intention of excluding compensation for the value-adding work undertaken by the tenant, which they mentioned in the various contractual documents. The cantonal court based its decision first and foremost on the letter of the contract, from which it emerged, in art. 8 of the supplementary clauses of the lease, that the outgoing tenant could not demand financial compensation or indemnity for the added value contributed, either from the new tenant succeeding him, or from the lessor. Art. 37 of the general terms and conditions also stipulated that any compensation for value-adding work was excluded in derogation of art. 260a para. 3 CO. At the stage of establishing the facts and assessing the evidence, the cantonal court noted that there was no evidence to suggest that the tenant had not understood the aforementioned contractual clauses or that she had objected to them. Indeed, I had initialled all the pages of the contract. Furthermore, the cantonal court considered that the fact that the lessor had offered compensation of 150,000 francs for peace of mind at the end of the lease did not change anything: this element did not demonstrate that the lessor would have been willing to commit to compensating for value-added work at the time of signing the contract”.

For the Swiss Federal Court, the cantonal court had clearly set out the reasons that led it to conclude that the parties had the real and common intention to derogate from art. 260a para. 3 CO and thus to exclude any compensation for the tenant for his work.

The Federal Court therefore dismissed the appeal of tenant A and confirmed that no compensation for the work carried out by the tenant, for a total amount of CHF 994,430.81, was due to the landlord, even though the latter had offered CHF 150,000 as a peace offering.

The principle of contractual fidelity, or the principle of ‘pacta sunt servanda’, therefore prevailed in this case!