Eviction compensation (indemnité d'éviction)

The landlord of commercial premises in France may refuse to renew the lease without having to give a reason. But that refusal has a price: the landlord must compensate the tenant for the loss caused by losing its premises. This is the indemnité d’éviction (statutory eviction compensation under a French commercial lease), the cornerstone of what French law calls “commercial property” (propriété commerciale). It is due unless the landlord relies on a serious and legitimate ground or takes back the building in the cases provided by statute.

Its amount depends on a question of fact: does the tenant lose its business, or can it move the business elsewhere? In the first case, the compensation is called replacement compensation and covers the value of the business. In the second, it is called relocation compensation and covers the leasehold right and the costs of moving. In both cases, ancillary heads are added.

Where the rule comes from

Article L. 145-14 of the French Commercial Code provides that eviction compensation is equal to the loss caused by the non-renewal, and that it includes in particular the market value of the business, determined according to the custom of the trade, increased where appropriate by the normal costs of removal and reinstallation, and by the costs and transfer duties payable for a business of the same value, unless the owner proves that the loss is smaller.

The Charte de l’expertise en évaluation immobilière (French property valuation charter, Title III § 1.19) details the principal compensation for replacement or relocation, lists the ancillary heads and specifies that the compensation is assessed at the date closest to the tenant’s departure. The claim for payment is time-barred after two years (article L. 145-60).

In a valuation report

The report begins with the question of relocation: I examine the nature of the clientele, the availability of premises nearby and the effect of a move on the business. I then value the business according to the custom of the trade, generally by a percentage of turnover or a multiple of EBITDA, and the leasehold right by the differential method. I adopt the higher of the two as principal compensation where the business is lost, the leasehold right alone where it can be relocated, then quantify each ancillary head on supporting documents.

Example

A bakery has an annual turnover of €420,000. Trade custom puts the value of the business between 60 % and 90 % of turnover; I adopt 70 %, or €294,000, given its profitability. The neighbourhood clientele would not follow a move: the compensation is for replacement. To it are added the reinvestment allowance (10 %, or €29,400), trading disturbance (three months’ EBITDA, €21,000), redundancy costs (€18,000) and sundry costs (€4,000). Total: €366,400.

Not to be confused with

The occupation indemnity, owed by the tenant while it waits for payment, and the compensation of a commercial tenant on compulsory purchase, calculated on comparable bases but within the framework of the Expropriation Code.