Who owes the eviction compensation?
The landlord of premises rented to a retailer can give notice to their tenant within 6 months before the end of the contract.
The tenant can also request a lease renewal 6 months before or after its expiration.
The landlord therefore has the option to accept the lease renewal or refuse it within 3 months of the renewal request.
Unless the landlord accepts the renewal, the landlord must then, in principle, pay eviction compensation to their tenant.
A recent decision of the Court of Cassation dated January 11, 2024, clarifies that if the landlord sends notice to their tenant with a lease renewal offer containing clauses and conditions that differ from the previous lease, other than the price, such as changes to the size of the premises and the tenant’s maintenance obligations, it must be considered a notice with refusal of renewal, entitling the tenant to eviction compensation. (Cass, 3rd Civil Chamber; January 11, 2024, No. 22-20-872). This solution applies even if the tenant remains in the premises after the notice.
Thus, when the landlord gives notice to his tenant, he must offer the same terms as the previous lease, except for the price if he intends to increase it.
In the case of a division of ownership, only the usufructuary, who has the status of lessor, is responsible for the eviction compensation and can terminate the lease (Article L145-14 of the French Commercial Code).
While the usufructuary cannot grant or renew a commercial lease without the bare owner’s consent, he can terminate the lease without the bare owner’s consent: the usufructuary alone has the status of lessor, assuming all obligations towards the lessee. The eviction compensation is the sole responsibility of the usufructuaries (Cass, 3rd Civil Chamber, December 19, 2019, No. 18-26.162).
Are there any exceptions to this obligation to pay the eviction compensation?
There are three exceptions to this obligation.
The landlord may provide a serious and legitimate reason against the tenant: for example, it could be a sufficiently serious breach of the lease: significant late or non-payment of rent, entering into a sublet without the landlord’s consent, entering into a lease management agreement, or major work not authorized by the landlord.
It is up to the landlord to prove the tenant’s breach, for example, that the tenant carried out work without the landlord’s authorization (Versailles Court of Appeal, 12th Chamber, January 5, 2023).
It may also be the case that the tenant is no longer registered with the RSC (Regional Trade and Companies Register) or no longer operates the business.
If there is no serious and legitimate reason, this does not invalidate the notice or refusal to renew. This means that the landlord is obligated to pay the eviction compensation to the tenant.
Similarly, a commercial tenant is entitled to eviction compensation if the landlord has not served a formal notice by bailiff prior to the refusal to renew.
This formal notice, which gives the tenant one month to rectify the situation, may be served up to the day the landlord gives notice, and in the same document as the notice. Waiting two years after the refusal to renew the lease to send a formal notice entitles the tenant to eviction compensation (Court of Cassation (3rd Civil Chamber, May 21, 1970).
This formal notice must require the tenant to cease the lease violations (non-payment of rent, failure to enjoy the premises with due care, i.e., failure to maintain).
A complete absence of formal notice (or a null notice due to a formal defect) is not sufficient to render the notice null and void, but entitles the tenant to receive eviction compensation from the landlord (Rennes Court of Appeal, May 11, 2022, No. 18/07816).
The building is declared unsanitary by the administrative authority and must be completely or partially demolished, or if it is established that the building can no longer be occupied safely due to its condition.
Note: If the landlord notifies the tenant of a notice of termination with refusal of renewal accompanied by an offer of eviction compensation, and then the premises are destroyed by fire and can therefore no longer be used, the trader can no longer request payment of the eviction compensation (Articles 1722 and 1741 of the Civil Code). The absolute and definitive impossibility of using the leased property, or the need to carry out work whose cost exceeds its value, is considered to be the total loss of the leased property” (Paris Court of Appeal, May 13, 2020, No. 18/20097).
- The lessor intends to occupy the residential premises incidental to the business or to reassign the premises as residential premises, or to build residential premises on vacant land. This is a right of repossession.
There is one condition: the beneficiary of the repossession does not have a corresponding dwelling.
to meet their normal needs and those of their family members who usually live or reside with them.
However, repossession cannot be exercised on premises used as a hotel or furnished rental.
The same applies if repossession of the residential portion of the commercial premises seriously disrupts the operation of the business or if the commercial and residential premises form an indivisible whole.
When the building was acquired for consideration, the lessor must have acquired the premises at least 6 years before refusing renewal.
Of course, in the event of partial repossession, the rent will be reduced accordingly due to the removal of the residential portion. The beneficiary of the repossession must personally occupy the premises within six months of the evicted tenant’s departure and for a minimum period of six years, failing which the evicted tenant is entitled to eviction compensation (unless there is a legitimate reason).
Must a commercial tenant vacate the premises if the landlord has not paid the eviction compensation?
There are two scenarios (apart from the three exceptions above):
– the landlord offers eviction compensation;
– the landlord does not offer eviction compensation.
In both cases, the tenant who is entitled to eviction compensation may remain on the premises and only leave after the landlord has paid this compensation.
It is even strongly recommended that the tenant not leave until this compensation has been paid.
If the tenant vacates the premises before receiving this compensation, they may have difficulty recovering it and may even find the landlord re-renting the premises.
However, even if this presents a greater risk, the tenant may, if they wish, vacate the premises on the date indicated in the notice. This will not prevent them from receiving compensation at a later date.
If they voluntarily vacate the premises, the assessment of their loss will be based on the date of their departure (and not later) (Cass. 3rd Civil Chamber, March 14, 2019, No. 18-11.991 F-D).
The trader must be vigilant because they have two years from the date the notice was given by the landlord to claim payment of the eviction compensation. They must therefore file a claim with the court within this time limit.
If the landlord first brought the matter before the court to have a notice of termination validated without payment of eviction compensation, the tenant can then contest the notice and claim the eviction compensation in the same proceedings. The business owner then saves the costs of another proceeding. The only condition is that the landlord must comply with the two-year deadline (Ccass. 3rd Civil Chamber, February 7, 2019, No. 17-31.807).
The landlord has two years to bring the matter before the court if he wishes to have the notice validated, from the date he issued it.
The landlord’s action to have the absence of eviction compensation ruled on for serious and legitimate reasons runs from the date he became aware of the tenant’s breach of the lease. Thus, the landlord must pay eviction compensation if they have given notice with refusal to renew to a commercial tenant who had sold the business nine years earlier without informing them, because the landlord brought the matter before the court more than two years after becoming aware of the sale (Chambéry Court of Appeal, 1st Chamber, judgment of October 15, 2019, RG No. 18/00398. In this case, the seller had notified the landlord of the proposed sale of the business, and the new tenant had been paying rent directly to the landlord for nine years).
Once the eviction compensation has been paid to the commercial tenant, the premises must be returned to the landlord after a period of three months (Article L145-29 of the French Commercial Code).
For the landlord, it is more prudent to ask the court to sequester the compensation or a portion thereof, particularly if the tenant has unpaid debts to the landlord (occupancy compensation, rental repairs, etc.) or to third parties (taxes, etc.) upon leaving. Otherwise, these amounts will most often be more difficult to recover.
Business owners therefore have an interest in paying their debts to their creditors before requesting payment of an eviction compensation and in providing proof of this to the landlord, to avoid having the compensation sequestered for several months while the debts are fully settled.
From the time the lease is terminated (or refused renewal) and pending the determination and payment of the eviction compensation, the tenant who remains on the premises no longer owes rent, but an occupancy compensation.
The amount of this occupancy compensation corresponds to the value indicated in the lease agreement, and most often the rental value of the premises (and not the amount of the last rent due) (Ccass. 3rd Civil Chamber, December 13, 2018, No. 17-28.055).
When the tenant remains in the premises until the eviction compensation is paid, the landlord remains bound by his obligation.
The tenant must provide the tenant with compliant premises; otherwise, the tenant is required to repair the consequences (Cass. 3rd Civ., November 28, 2019, No. 18-8862).
The tenant may obtain compensation or damages from the landlord for the losses suffered as a result of the landlord’s failure to fulfill his obligation to deliver the premises (Paris Court of Appeal, Division, Chamber 3, November 30, 2022). In this case, the tenant lacked access to the cellar for 26 years and successive water damage from the apartment above the commercial premises, also belonging to the landlord, for four years.
Finally, only the actual delivery of the keys to the owner of the premises, or proof that the latter refused to accept them, constitutes effective release of the commercial premises (Cass. 3rd Civ., December 3, 2020, No. 19-22.443).
The amount of the eviction compensation
This is the result of negotiations between the landlord and tenant.
Failing agreement, the amount is set by the court, usually after appointing a legal expert at the expense of the landlord, the tenant, or both.
Whether through negotiation or before a court, it is always advisable to seek the services of amicable experts, even if this entails costs, who will determine, with the help of lawyers, the amount of the eviction compensation.
This amicable expert appraisal will allow the tenant and landlord to negotiate. If this fails, it will also be used to appoint a legal expert and assess the compensation, which will be determined by the court.
How and when is the amount set?
The eviction compensation is calculated based on the tenant’s financial performance, business activity, and location.
This compensation includes, in particular, the market value of the business, determined according to industry practice, plus any normal moving and relocation costs, as well as unpaid transfer fees and taxes (unless the tenant suffers lesser damages).
It is assessed on the date of the tenant’s actual departure or on the date of the court’s decision, if the tenant is still present.
There are two types of eviction compensation: replacement compensation and relocation-transfer compensation. These are either one or the other, but in any case, the two are not paid together.
What is replacement compensation?
Replacement compensation compensates for the loss of the business tenant’s business.
It is equal to its value (determined according to industry practice) and allows the tenant to acquire a new business of the same value. To assess the value of the business, the judges choose the method they deem most appropriate.
– Average turnover method: average turnover excluding tax for the last three financial years to which a coefficient is applied (for the application of the multiplier coefficient, which can be from 1 to 4 times, the judges have the final decision).
Example: The owner of a 1-star hotel in the 4th arrondissement of Paris was awarded eviction compensation equal to 3.5 times the average turnover excluding tax for the last three financial years, or the sum of €1,459,535 (3.5 × 417,010 = €1,459,535), taking into account the hotel’s excellent location and renovation possibilities.
– Percentage of turnover method: this method allows for the application of a percentage of turnover based on the nature and balance sheet of the business, the commerciality of the neighborhood, and the geographic area.
Thus, compensation could be equal to 110% of turnover, 125%, or 200%, for example.
– Gross operating surplus (EBITDA) method. EBITDA is the balance of the operating account on the balance sheet.
This calculation method is based on the previous year’s turnover multiplied by a coefficient (e.g., 2). A coefficient determined by the judge is applied (most often after expert opinion). For example, if a hotel is close to a Parisian train station and is very profitable, the coefficient could be equal to 6 times the turnover.
After applying this coefficient to the previous year’s turnover, the EBITDA should be subtracted, taking into account the rent that the tenant would have had to pay in the event of renewal.
– Rent differential method: this is the difference between the current rent and the rent that would apply if a new lease were signed for a new occupant of the same premises. Using this method, it is possible to obtain eviction compensation based on the actual rental situation, but not on the balance sheet of the business in question.
A coefficient will be applied to this difference (for the application of the multiplier coefficient, the judges have the final say: the assessment can be increased from one to four times).
What is the relocation compensation?
When the customer base is linked to the individual retailer, who can relocate nearby without losing them, or if the tenant partially loses the lease, he or she will be paid a relocation allowance;
This allowance is therefore less than the replacement allowance.
The relocation allowance consists of the tenant’s transfer and installation costs in the new premises, the value of the leasehold rights for the old premises, and possibly the cost of a new key money.
To assess these elements, the current practice is to use the rent differential method, between the current rent and the rent that would apply if a new lease were signed for the same premises for a new occupant. A coefficient will also be applied to this difference.
Example: The owner of a fast food and sandwich shop in the 5th arrondissement of Paris was awarded an eviction compensation equal to 5.5 times the difference between the two rents (new lease rent at market price of €15,400 – current rent at €11,550 = €3,850), or the sum of €21,175 (5.5 × 3,850 = €21,175).
The hotel and restaurant sector benefits from specific rules for calculating eviction compensation (multiple of daily revenue for cafes to reflect the reality of the business, percentage of turnover for restaurants and hotels, etc.).
The Court of Cassation ruled that the value of the lost leasehold rights must be taken into account when calculating the eviction compensation, even if the tenant has found new premises (Ccass. 3rd Civil Chamber, March 28, 2019, No. 18-11.739).
The evicted tenant should therefore be assisted by a lawyer specializing in commercial transactions.
What are the ancillary compensations?
Specific ancillary compensations are added to the replacement or relocation compensation. These include, for example:
– moving and relocation expenses (if it is a relocation compensation);
– transfer taxes (notary) related to the purchase of the new premises;
– severance pay due to employees if the eviction results in their dismissal;
– compensation for loss of accommodation when the lease includes residential premises ancillary to the restaurant or hotel;
– costs related to the payment of contract termination fees;
– compensation for loss of ancillary activities (e.g., tobacco sales in a liquor store);
– re-employment costs (real estate agency commissions to find new premises);
– compensation for business disruption (loss of image, customer diversion, disrupted business strategy, etc.).
The business may be entitled to re-employment compensation for business disruption and for moving expenses if it has relocated elsewhere. If improvements and equipment necessary for the operation of the business have been installed in the premises, their value must be taken into account when calculating the eviction compensation, even if a clause in the lease provides that they remain the property of the lessor without compensation for the tenant (Ccass. 3rd Civil Chamber, September 13, 2018, No. 16-26.049).
The elements taken into account when assessing the eviction compensation are limited to the losses suffered by the tenant and do not include any potential moving costs related to a sublet.
For example, a landlord gives notice to its commercial tenant with refusal to renew the lease and offers eviction compensation.
The landlord then withdraws the offer of eviction compensation on the grounds that its tenant has improperly sublet part of the premises. The tenant is requesting eviction compensation, assessed by taking into account the costs associated with the subtenant’s move.
The judge considers that the eviction compensation should not take into account expenses related to the subtenant, such as moving or communication costs. He therefore states that “the outgoing tenant’s eviction compensation should only compensate for the loss he or she has suffered” (Cass, 3rd Civil Chamber, October 10, 2019, No. 18-19.662).
Can the landlord withdraw?
Following notice of termination (or refusal to renew) without an offer of eviction compensation, the landlord may withdraw and ultimately offer to renew the lease under the same conditions or with different rental conditions, for example, an increased rent (Article L145-58 of the French Commercial Code). In the latter case, the debate will focus on the reasons given for allowing an increase (increase in local commercial factors, for example, the creation of a post office or a cinema nearby, the addition of an activity, and a significant change in the parties’ respective commitments, etc.).
Thus, the tenant of a commercial lease who remains on the premises during the proceedings is never guaranteed to receive the compensation (and this applies up to 15 days after the court decision becomes final).
The landlord may ultimately choose to renew the lease, for example, because the amount of compensation claimed or the amount set by the court is too high. The tenant will then be able to continue operating their business.
During the interim period between the lease termination date and its renewal date, the tenant will pay an occupancy allowance.
This occupancy allowance is set by reference to the rental value, to which judges often apply a 10 to 20% reduction. For example, if the rental value is €200,000 per year (excluding VAT and charges), with a 10% deduction for precariousness, the occupancy allowance will be set at €180,000 per year (excluding VAT and charges).
This precariousness allowance takes into account the economic uncertainty faced by the commercial tenant, without requiring them to prove the existence of a loss (Rennes Court of Appeal, May 11, 2022/No. 18/08341).
The tenant is advised to seek an expert opinion to assess the rental value of the occupancy compensation, in order to avoid overvaluations, especially when the occupancy is prolonged.
If the landlord uses this right of withdrawal as a means of exerting pressure on their tenant to try to obtain an increased rent, this type of attempt will be doomed to failure because the rent increase generally follows the index in the event of lease renewal.
Finally, the landlord obviously cannot exercise this right of withdrawal and will therefore have to pay the eviction compensation if the tenant has vacated the premises (or if the landlord notified the tenant that they had rented or purchased premises intended for their relocation (Angers Court of Appeal, June 25, 2019).
This is true even if the tenant continued to operate the premises until the notification of withdrawal.
If the landlord decides to exercise their right of withdrawal and accepts the lease renewal, they can no longer request or pursue termination of the lease for previous breaches by the tenant (Ccass. 3rd Civil Chamber, January 24, 2019, No. 17-11.010).
Finally, it is mandatory and advisable to declare actual turnover to the tax authorities when filing the accounts; otherwise, the eviction compensation may be very low.
Sophie PETROUSSENKO
Lawyer
0156810580
cabinet-petroussenko.com/en/