Business disruption (trouble commercial)

Trouble commercial (business disruption) is the loss a trader suffers simply from being forced to leave the premises: time spent looking for another location, disorganisation of the business, fall in activity during closure and reopening, energy diverted from running the business. It is distinct from the loss of the fonds de commerce (the business as a going concern: goodwill, lease rights, fixtures, clientele), compensated by the principal compensation, and from the physical costs of the move, compensated on invoice.

It is met in two settings: indemnité d’éviction (statutory eviction compensation under a French commercial lease), where it appears among the ancillary heads, and compulsory purchase compensation for a trader, where it offsets the disruption caused by dispossession.

Where the rule comes from

Article L. 145-14 of the French Commercial Code compensates the loss caused by the refusal to renew the lease, which includes the ancillary heads that the courts have progressively recognised. The Charte de l’expertise en évaluation immobilière (the French property valuation charter, Title III, § 1.19) lists business disruption among the ancillary heads of compensation, “to cover the loss resulting from the interruption of activity”, alongside reinvestment costs, removal costs, reinstallation costs, loss on stock and redundancy costs.

In compulsory purchase, article L. 321-1 of the French Expropriation Code requires the whole of the direct, material and certain loss to be covered; the Cour de cassation (French supreme court for civil and commercial matters) accepts a business disruption head distinct from the principal compensation, as a decision discussed on this site illustrates.

In a valuation report

There is no statutory scale. The most widespread practice is to adopt a few months of EBITDA, often three, or a fraction of turnover, according to the foreseeable duration of the disruption and the nature of the business. A seasonal business evicted just before the high season suffers a heavier disruption than a business with steady trade. I justify the duration adopted and the calculation base by the accounts of the last three financial years, distinguishing the case of replacement, where the disruption is that of winding down, from the case of transfer, where it is that of reinstallation.

The report takes care not to count the same loss twice: a loss of turnover already included in a double rent head or in a partial loss of clientele is not taken up again under business disruption.

Example

A clothes shop has a turnover of €260,000 and an adjusted EBITDA of €36,000, that is €3,000 a month. It is evicted with a possible transfer to neighbouring premises, but the closure for works and reopening will take about three months. I adopt a business disruption of three months of EBITDA, that is €9,000, which I raise to €12,000 because the eviction takes place just before the Christmas period, which accounts for one third of the annual margin.

Not to be confused with

The permanent loss of turnover, which belongs to the principal compensation, and the loss of enjoyment of the expropriated owner, a related concept but one specific to the French Expropriation Code.