A landlord can terminate the lease of commercial premises rented to a tenant in the café, hotel, or restaurant sector. In the notice served on the tenant, the landlord can offer or refuse a lease renewal within six months of the contract’s expiration. The tenant can also request a lease renewal within the same timeframe. Whether the notice is given by the landlord or the tenant requests renewal, if the landlord refuses the renewal, they must pay eviction compensation corresponding to the damages suffered by the tenant.
Exception to the Obligation to Pay Eviction Compensation
– If the landlord can demonstrate a serious and legitimate reason against the tenant (late or non-payment of rent, significant work not authorized by the landlord, etc.);
– if the building is declared unsanitary by the administrative authority and must be totally /partially demolished;
– if it is established that the building can no longer be safely occupied due to its condition.
Two scenarios must be considered (apart from the three exceptions mentioned above):
– the landlord offers eviction compensation;
– the landlord does not offer eviction compensation.
In both cases, the tenant has the legal right to remain in the premises and to leave only after the landlord has paid this compensation. However, the tenant may, if they wish, vacate the premises on the effective date of the notice to vacate and receive the compensation afterward. However, this method is risky because they may have difficulty recovering their eviction compensation.
In both cases, the eviction compensation is either agreed upon by the tenant or determined by the court after expert review, if necessary (the court being petitioned by the most diligent party).
How is eviction compensation assessed?
Eviction compensation is calculated based on the tenant’s financial performance, business activity, and location. It is assessed on the date of the tenant’s actual departure or on the date of the judge’s decision, if the tenant is still in the premises.
There are two types of eviction compensation: replacement compensation and relocation/transfer compensation. Either the former or the latter is paid, but in any case, both are not paid simultaneously.
• Replacement compensation
This compensates for the loss of the business. It is equal to its value, determined according to industry standards, and allows the tenant to acquire a new business of identical value.
To assess the value of the business, judges choose the method they deem most appropriate.
First method: average turnover: average turnover excluding VAT for the last three fiscal years, multiplied by a coefficient*.
Example: A one-star hotel owner in the 4th arrondissement of Paris received eviction compensation equal to 3.5 times the average turnover excluding VAT for the last three fiscal years, amounting to €1,459,535 (3.5 x 417,010 = 1,459,535), taking into account the excellent location and the hotel’s renovation potential.
2nd method: Percentage of turnover
Example: A sandwich and fast-food restaurant owner in the 9th arrondissement of Paris received compensation equal to 110% of turnover, amounting to €620,000, due to the decline in the neighborhood’s commercial activity.
3rd method: Gross operating profit: Example of calculating eviction compensation using this method. The previous year’s turnover is multiplied by 2, and the gross operating profit is subtracted, taking into account the rent the tenant would have had to pay upon renewal. A coefficient is then applied to this result*. Note: Gross operating profit is the operating account balance on the balance sheet (operating profit minus depreciation charges on fixed assets).
Example: A bar/brasserie owner near a Parisian train station received eviction compensation equal to four times the turnover calculated using the method explained, amounting to €330,060 (4 x 82,665 = 330,660), due to the business’s very high profitability.
Fourth method: the rent differential method: the difference between the current rent and the rent that would apply if a new lease were signed for a new tenant of the same premises. A coefficient* will be applied to this difference.
Example: A restaurant near the Bastille district was awarded compensation equal to 6 times the difference between the two rents (new lease rent at market price: €35,040 – current rent: €9,717.08 = €25,322.92), totaling €151,937.52 (6 x €25,322.92 = €151,937.52), due to the restaurant’s favorable location.
*The judges have sole discretion in applying the multiplier; the valuation can vary from one to four times the amount.
• Relocation/Transfer Compensation
When the clientele is tied to the restaurateur/hotelier who can relocate nearby without losing, or only partially losing, their clientele, they will receive only a relocation allowance. This allowance is significantly less than the replacement allowance.
The relocation/transfer compensation consists of the tenant’s moving and installation costs in the new premises, the value of the leasehold interest in the old premises, and potentially the cost of a new leasehold interest.
To assess these elements, the common practice is the rent differential method: the difference between the current rent and the rent that would apply if a new lease were signed for the same premises with a new tenant. A coefficient* is then applied to this difference.
Example: The owner of a fast-food and sandwich shop in the 5th arrondissement of Paris received eviction compensation equal to 5.5 times the difference between the two rents (rent for a new lease at market price of €15,400 – current rent of €11,550 = €3,850), totaling €21,175 (5.5 x 3,850 = 21,175).
• Ancillary Compensation
Specific ancillary compensation may be added to the replacement or relocation/transfer allowance, such as: moving and relocation expenses (if it is a relocation/transfer allowance), transfer fees and taxes (notary) related to the purchase of the new business, severance pay due to employees if the eviction results in their dismissal, compensation for loss of housing when the lease includes residential premises ancillary to the restaurant or hotel, costs related to the payment of contract termination compensation, compensation for damages related to the loss of ancillary activities (for example, tobacco sales in a bar), relocation costs (real estate agency commissions to find new premises), compensation for business disruption (damage to reputation, loss of customers, disrupted business strategy, etc.)…
Landlord’s Right to Withdraw
Once the amount of compensation has been determined, the landlord still has the option to The landlord has the option to withdraw their offer and propose a lease renewal. Therefore, a commercial tenant who remains on the premises during the proceedings is never certain, until fifteen days after the judgment, of receiving compensation. The landlord may ultimately choose to renew the lease, particularly after learning the amount of compensation. The tenant can then continue operating their business.
However, the landlord cannot exercise this right of withdrawal if the tenant has vacated the premises or has notified them that they have rented/purchased premises for their relocation. In this case, the eviction compensation will be paid.