Eviction compensation under commercial leases: everything you need to know

A commercial lease is not renewed automatically and, conversely, does not end at the expiry of its term. At the end of a commercial lease, the operator has a right to renewal. If the landlord refuses to renew the lease, it must pay eviction compensation.

When does it apply?

The lease ends by means of a notice to quit given at least 6 months in advance, and we focus here on notice given by the landlord. Under the law, if the landlord refuses to renew the lease, it is required to compensate the tenant for the loss caused. This principle is a matter of public policy, and no contractual clause can derogate from it.

The principle of eviction compensation

Eviction compensation is intended to cover the entire loss suffered by the tenant as a result of the non-renewal of the commercial lease. In practice, the amounts claimed often range from 1 to 3 years of the turnover of the premises concerned, depending on how charges are allocated and the type of unit.

The amount of eviction compensation is generally the outcome of negotiation between the landlord and the tenant. However, in the event of disagreement, a property valuer is brought in to assess the amount in court or out-of-court proceedings.

Factors taken into account by the property valuer

The valuer analyses several criteria to assess the amount of compensation:

• Loss of earnings: the loss of turnover resulting from ceasing to operate the premises.
• Fixed and variable costs: the impact of the unit’s withdrawal on the operator’s business model.
• Type of unit: the scarcity and importance of the property within the operation as a whole. For example, the withdrawal of a four-room (T4) duplex in a residence will have a greater impact than that of a standard two-room (T2) apartment.

On the basis of these analyses, the valuer applies a turnover multiple or a profit multiple to propose an amount of compensation. Negotiation or challenge of this valuation can take up to two years and, during this period, the tenant may remain in occupation in return for payment of an occupation indemnity.

Here is a recent example illustrating the assessment of eviction compensation:

• Properties concerned: a 75 m² duplex apartment, a cellar and a parking space.
• Vacant possession value of the units: €450,000
• Contractual annual rent: €6,961
• Annual turnover: €21,500
• Eviction compensation awarded: €61,750

This judgment, handed down on 21 April 2023 by the Tribunal Judiciaire (Judicial Court) of Albertville, reflects the conventional approach to calculating eviction compensation, taking into account both the income generated and the value of the property.

The commercial lease

A commercial lease is a contract between a tenant (the operator) and a landlord (the investor). It is governed by the statutory regime for commercial leases, with specific rules for tourist residences.

The Novelli Act (Law No. 2009-888 of 22 July 2009) profoundly altered relations between tourist residence operators and LMNP (non-professional furnished letting) investors. Since this Act, commercial leases in this sector must run for a minimum fixed term of 9 years.

Mandatory accounts for operators

The law also requires tourist residence operators to keep a separate operating account for each residence. This account must be sent each year to the investor-landlords, with key information such as:

• Occupancy rate of the residence
• Significant events
• Changes in revenue and expenditure

This information enables owner-investors to monitor the performance of their investment, in accordance with Article L.321-2 of the French Tourism Code.

What are the conditions for obtaining eviction compensation?

Eviction compensation is payable when the landlord refuses to renew a commercial lease despite the tenant’s right to renewal.

How can eviction compensation be challenged?

The tenant or the landlord may apply to the court to challenge the compensation offered. This challenge must be brought within two years.

Is eviction compensation always mandatory?

Yes, unless the non-renewal is justified by a serious and legitimate reason or the landlord takes the premises back for personal occupation.

Although investing in tourist residences is often attractive because of its tax advantages, it is essential to take into account the risks associated with commercial leases, particularly as regards eviction compensation. A professional valuation carried out by a valuer can help you better understand these issues and make better-informed decisions.