A commercial tenant whose landlord refuses renewal is waiting for its eviction compensation (indemnité d’éviction); the landlord then objects that the tenant’s entry in the trade and companies register (registre du commerce et des sociétés, RCS) does not match the business run in the premises, without ever having asked it to put this right. In a reported decision of 22 September 2016, the Third Civil Chamber of the Cour de cassation (the French supreme court for civil and commercial matters) held that registration must cover the activity actually carried on and that the landlord may, on that ground, deny the tenant the statutory regime of commercial leases (statut des baux commerciaux, the regime that gives it a right to renewal or, failing that, to eviction compensation) without prior formal notice (mise en demeure). For the valuer instructed to quantify the compensation, reading the K bis extract (the register extract) therefore comes before any calculation.
The facts
On 7 July 2010 a company holding a French commercial lease (bail commercial) requested its renewal. On 29 September 2010 the landlord served a refusal of renewal with an offer of eviction compensation. After a formal demand invoking the termination clause (clause résolutoire), served on 23 December 2010, it sued for a finding that the lease had ended by operation of that clause, in the alternative for termination of the lease through the tenant’s fault and, in any event, for a declaration that the tenant had forfeited (déchéance) the right to eviction compensation, as the tenant was not registered for the activity actually carried on in the premises.
On 25 March 2015 the Paris Court of Appeal rejected the claim for forfeiture. Assessing the condition at the date of the renewal request, it noted that the company had always been registered for the sale of works of art, carved wood, miniatures and ivories and for the import and export of luxury goods, and that the activity shown on its K bis extract should have been amended after the change of activity. It nevertheless took the view that this failure to amend was not a breach serious enough to justify forfeiture, since the landlord had never given the tenant formal notice to put matters right and the law expressly provides only for the obligation to register. It therefore held that the company was entitled to eviction compensation, postponed the decision on the amount and ordered an expert appraisal.
The Cour de cassation’s reasoning does not say which activity was actually carried on in the premises; only the landlord’s grounds of appeal refer to the sale of tourist goods.
The decision
The Cour de cassation quashed the judgment on that point (Cass. 3e civ., 22 September 2016, appeal no. 15-18.456, reported), under articles L. 145-1, I, L. 145-8 and L. 145-17 of the French Commercial Code (code de commerce). It criticised the Court of Appeal for ruling as it did “whereas the denial of the right to the statutory regime of commercial leases on the ground of a failure to register need not be preceded by a formal notice” (translated from the French), and whereas it had found that the tenant was “registered in the trade and companies register for an activity which was not the one actually carried on in the leased premises”. That court, “which did not draw the consequences of its own findings, breached the above-mentioned texts”.
The summary published in the Bulletin draws out the rule: “Registration in the trade and companies register, which is the condition for the right to renewal of the lease or to payment of eviction compensation, must be made in respect of the activity carried on in the leased premises.” The first of the texts cited makes statutory protection conditional on the tenant’s registration.
The quashing was limited to the parts of the judgment that recognised the tenant’s right to payment of eviction compensation following the refusal of renewal of 29 September 2010, postponed the decision on its amount and ordered an expert appraisal. The case was sent back to the Paris Court of Appeal, differently composed.
The Court did not itself declare the forfeiture. Nor did it discuss the date at which the condition is assessed, which the Court of Appeal had set at the day of the renewal request, or the effect of the offer of compensation that the landlord had attached to its refusal.
What this changes for valuation
The right to compensation is checked before the amount. Eviction compensation makes good the loss caused by the non-renewal of a lease within the statutory regime of commercial leases; without that regime, there is nothing to quantify. Here, the expert appraisal fell with the right it presupposed. The report therefore flags in its first pages the documents on which the tenant’s right depends, and quantifies the compensation without prejudging that question, which is for the judge.
The K bis extract is read alongside the activity observed. The valuer gathers the extract at the dates the parties rely on, in particular that of the renewal request used here by the Court of Appeal, compares it with the use clause and the activity observed during the inspection, and records the discrepancies without characterising them legally.
The actual activity also drives the calculation. The compensation includes in particular the market value of the business (fonds de commerce), determined according to the customs of the trade (article L. 145-14 of the Commercial Code). Those customs, like the sale references, are those of the activity actually run, the one whose turnover the accounts record. The finding used to check registration therefore also guides the choice of method.
How long the landlord may deny statutory protection. On 7 September 2017 the Cour de cassation held that a landlord which has offered eviction compensation after exercising its option (droit d’option) may deny statutory protection as long as the compensation has not been finally set (denial of statutory protection after the option). The two decisions complement each other: the 2016 ruling says what registration must cover, the 2017 ruling how long the landlord has after an option. In 2016 the refusal had been given from the outset, without an option, and that question did not arise.
Other situations in which compensation is not owed. An offer of replacement premises by a landlord taking back the premises to rebuild, and the time bar on the tenant’s claim, are governed by other rules, discussed separately (the replacement premises offered, the time-barred tenant).
What the valuer takes from it
- The registration on which the right to renewal or to eviction compensation depends must cover the activity carried on in the leased premises.
- The landlord may deny statutory protection on that ground without prior formal notice.
- Before any calculation, the valuer compares the K bis extract, at the relevant dates, with the use clause and the activity observed, and records the discrepancies without characterising them legally.
- The activity actually carried on underpins both the check of the condition and the valuation of the business.
Further reading
The Eviction compensation page describes the assignment, how it is conducted and its fee. The guide My landlord refuses to renew my commercial lease and the glossary entries indemnité d’éviction, bail commercial and fonds de commerce complement this article. Two other reported decisions of 2016 are discussed separately: Occupation indemnity during site restoration: the lease rent and Replacement premises offered by a landlord must exist at notice. On the same theme: Denial of lease status after option: until compensation is set and Eviction compensation: once time-barred, the tenant has no title. The decision is available on Légifrance.
What next
Is your landlord disputing the eviction compensation because the K bis extract does not cover the activity you run?
Before quantifying the eviction compensation, I compare the K bis extract, the use clause and the activity observed on site, at the relevant dates. The report records these facts without characterising them and establishes the compensation from the accounts and market references, for the landlord, the tenant or the court.
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