Leasehold right (droit au bail)

The droit au bail (leasehold right) is one of the elements of the fonds de commerce (the business as a going concern), and often the most important for a well-placed shop. It represents the advantage the tenant derives from occupying premises on the terms of its lease: a sought-after location, a rent sometimes below the market, a remaining term, the protection of the statute. That advantage has a price, the one a trader would agree to pay the outgoing tenant to succeed it in the lease.

It differs from the pas-de-porte (premium paid to the landlord on entry) and from the fonds de commerce, of which it is only one component alongside the clientele, the equipment and the trading name.

Where the rule comes from

The Charte de l’expertise en évaluation immobilière (French property valuation charter, Title III § 1.18) defines the leasehold right as the average price a tenant is likely to obtain from assigning its lease to a successor, the economic counterpart of the advantages of taking over an existing lease. It lists the criteria: quality of the location, nature of the trades permitted, term of the lease and remaining term, right to sublet, ratio between market rental value and rent paid, charges and conditions of the lease.

The assignment of the lease together with the business is guaranteed by article L. 145-16 of the French Commercial Code, which treats clauses prohibiting it as unwritten.

In a valuation report

I most often use the differential method: I calculate the annual gap between the market rental value and the rent actually paid, then capitalise that gap with a multiplier that depends on the location and the remaining term. I check the result against prices of leasehold assignments observed in the area, where they exist. In an eviction compensation claim, the leasehold right forms the principal compensation where the business can be relocated, and the floor of the replacement compensation, since the value of the business cannot be lower than it.

The report states the valuation date and the rent adopted, indexed to that date.

Example

A shop of 60 m² weighted area is let at €15,000 per year while the market rental value is €24,000. The annual gap is €9,000. For a good-quality location in the centre of VANNES, with six years remaining, I adopt a multiplier of 5, giving a leasehold right of €45,000. A recent assignment in the same street, at €50,000 for comparable premises, supports the estimate.

Not to be confused with

The pas-de-porte, a sum paid to the landlord when the lease is signed and kept by him; the indemnité de déspécialisation, paid to the landlord for a change of trade.