Replacement compensation (indemnité de remplacement)

Replacement compensation is the heaviest form of indemnité d’éviction (statutory eviction compensation under a French commercial lease). It applies when the refusal to renew causes the tenant to lose its fonds de commerce (the business as a going concern): the clientele is attached to the location and would not follow a move, or no equivalent premises are available nearby. The tenant is then compensated as if it had to buy a business identical to the one it loses.

The alternative is relocation compensation, adopted when the business can be moved without losing its clientele. The choice between the two is a question of fact, often at the heart of the dispute between landlord and tenant, because the difference in amount can be considerable.

Where the rule comes from

Article L. 145-14 of the French Commercial Code fixes eviction compensation at the market value of the business, determined according to the custom of the trade, increased 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. That proof is precisely the proof that relocation is possible.

The Charte de l’expertise en évaluation immobilière (French property valuation charter, Title III § 1.19) specifies that, if the trader loses its clientele, it is compensated on the basis of the value of a business identical to the one it loses, and that, where a declining business has no earning capacity to capitalise, the principal compensation must be valued at a minimum by reference to the value of the leasehold right.

In a valuation report

I first establish why relocation is not possible: nature of the clientele, catchment area, supply of available premises. I then value the business by trade custom (percentage of turnover) and by profitability (multiple of adjusted EBITDA), and compare the result with the value of the leasehold right, which serves as a floor. I add the justified ancillary heads: reinvestment allowance, trading disturbance, redundancies, sundry costs. Removal and reinstallation costs do not arise, since the tenant is not reinstalling itself.

Example

A bar-tobacconist in a village centre has a turnover of €310,000 excluding tobacco and €95,000 of commission on tobacco. Trade custom gives a business value of €250,000; profitability confirms it at €240,000. The leasehold right is worth €60,000. The principal replacement compensation is fixed at €245,000. With the reinvestment allowance (€24,500), trading disturbance (€18,000), redundancies (€12,000) and sundry costs (€3,500), the total eviction compensation comes to €303,000.

Not to be confused with

Relocation compensation, limited to the leasehold right and the costs of moving, and the reinvestment allowance, which is only an ancillary head covering the costs of acquiring a replacement business.