Eviction compensation and serviced residences

A commercial lease is not renewed automatically and, conversely, does not end on its expiry date. At the end of a commercial lease, the operator has a right to renewal: if the landlord refuses that right, it must pay eviction compensation. The lease ends only by means of a notice served at least 6 months in advance. The law requires the landlord to compensate the tenant if renewal is refused: no contractual clause can derogate from this mandatory principle of public policy.

The principle of eviction compensation is to cover the entire loss caused to the tenant by the failure to renew. In practice, operators claim from 1 to almost 3 years of the turnover generated by the unit concerned. This amount can be negotiated or challenged in court: the operator has 2 years to bring proceedings, and the court generally rules on the basis of a valuation report. During this period, the operator may remain in occupation in return for an occupation indemnity.

In principle, the landlord and the tenant must agree on the amount. In practice, it is often a valuer who proposes it, whether in court proceedings or out of court, taking into account the financial loss suffered by the tenant who can no longer operate its business.

The valuer analyses the loss of earnings (lost turnover resulting from the unit’s withdrawal) and the impact of that loss in relation to the residence’s fixed and variable costs. The valuer then determines a multiple of turnover and/or profit in order to give an opinion on the amount. Several factors refine the approach:

• The number of departing landlords: in a residence with 150 units in operation, the withdrawal of one unit has less impact than the withdrawal of 30 units.
• The scarcity of the unit: in a residence made up of 70% two-room flats, the loss of a two-room flat can be offset by a similar unit; the loss of a four-room duplex is more damaging.
• The residence’s break-even point: as owners leave, an irreducible level of fixed costs can make operating the last remaining units structurally loss-making.

Judgment of 21 April 2023 of the Albertville Judicial Court:

• 3 units: 75 m² duplex flat, cellar and parking space
• Estimated value of the units with vacant possession: €450,000
• Contractual annual rent: €6,961
• Annual turnover generated by the operator on these units: €21,500
• Eviction compensation awarded: €61,750

A commercial lease binds the tenant (the operator) and the landlord (the investor). This contract is governed by the commercial lease regime, with features specific to tourist residences. The Novelli Act (No. 2009-888 of 22 July 2009) profoundly changed the relationship between operators of classified tourist residences and LMNP (non-professional furnished letting) investors. It put an end to the practice of certain operators who terminated the lease after 3 years in order to force owners to lower their rent: since 2009, leases must be signed for a fixed term of 9 years.

The law also requires the operator to keep a separate operating account for each residence and to send investor-landlords an annual report specifying occupancy rates, the significant events of the year, and the amount and trend of the main income and expenditure items (Article L.321-2 of the French Tourism Code; Civ. 3e, 28 February 2017, appeal No. 16-21.458).

Even though investing in a tourist residence may seem attractive at first sight, it is essential to quantify the risks of the investment and to factor them into the purchase price. A valuer experienced in these approaches will be able to guide you in your decisions.