For over half a century, the highly protective status of commercial leases in France has primarily benefited tenants operating a business. However, there are certain circumstances in which tenants may be evicted by landlords and may consequently lose their business. Evicting a tenant is a lengthy and cumbersome process, and ultimately, the amount of the eviction compensation (if any) is at stake. Recent case law has revealed certain pitfalls for landlords in this area.
Notice of termination initiated by the landlord
A landlord may force a tenant to leave at the end of a three- year period or at the end of the contractual term of the lease. To do so, the landlord must issue a notice in the form required by the Commercial Code. The purpose of this notice is to avoid an extension of the lease by terminating the contract. The landlord initiating the notice has different options: (i) offering a renewal of the lease to the tenant, thus terminating the contract even though the use of the premises will continue; (ii) refusing to renew the lease thus triggering the termination of the lease agreement at the end of its term.
Challenges of issuing a valid notice
Time is of the essence
The notice to terminate must be issued at least six months before the expiry of a three- year period or the termination date. Thus, regarding a lease with effect as from 1 January, expiring on 31 December, the notice must be issued no later than 30 June (before the sixth month preceding the end of the contractual term).The notice may also be validly issued in advance.
Involve a bailiff
The notice must be issued by a bailiff. Failing that, the notice will be void and it will not be possible to issue a valid notice if the time period set out above has elapsed.
Specify reasonable grounds
The notice must specify the willingness of the landlord to terminate the lease at the end of the period stated and the grounds for doing so. Furthermore the notice must indicate that the tenant has two years as from the date of the notice to challenge the notice before the courts
Although the law regulating commercial leases aims to protect tenants operating a business, the landlord’s right of ownership remains absolute. As a consequence, the landlord is free to refuse to renew the lease where requested by a tenant. Any refusal to renew the lease is offset by a payment of compensation for any loss suffered by the evicted tenant. Note, however, that there are some limited circumstances in which the landlord may refuse to renew the lease without giving compensation.
Eviction with compensation
Tenants’ right to eviction compensation
The eviction compensation payable to a tenant is meant to cover losses due to the loss of the tenant’s business as a result of non-renewal of its lease. The refusal to renew the lease may occur either (i) at the end of the contractual term or (ii) during the tacit extension of the lease following its expiry. The right to compensation is lost if it is the tenant who chooses to leave the premises.
Criteria and methods for assessing eviction compensation
Eviction compensation is based on the market value of the business and is determined according to the practice of the relevant trade or profession. This amount may be increased by ancillary costs such as normal moving and relocation expenses, unless the landlord can show such losses were not in fact suffered by the tenant.
The assessment of eviction compensation is complex and raises many questions. First, the market value of a business is very difficult to determine. However, it is agreed that the date by reference to which the value is to be assessed is the date of receipt of the notice. The assessment of that value takes place as at the date of the court decision after expert valuation reports have been received. The market value of the business will be fixed by the experts, whose opinion is generally followed by the courts. The value of the lease itself is often used as a floor value. In addition, the value of the business is usually determined by two methods: one based on turnover and the other on the implementation of a multiple of earnings or exceeding operating gross. According to recent case law, the turnover to be taken into account for eviction compensation assessment includes VAT.
Finally, where the landlord considers the amount of the eviction compensation to be too high (either following a decision at first instance, or after a decision from the Court of Appeal), it is entitled to change its mind and offer a renewal of the lease, provided the tenant has not already entered into another lease agreement for the same business concern.
Eviction without compensation
In limited circumstances, the landlord may refuse to renew a lease without offering compensation. These are: (i) in cases of tenant misconduct, or (ii) on other serious and legitimate grounds. Such grounds relate to the breach of a contractual obligation, unpaid rent or a change in the tenant’s business activities without the landlord’s consent.
Prior to enforcing this termination right, the landlord must have a formal notice served by a bailiff on the tenant. Only where the breach set out in this notice continues for a further month will the landlord be entitled to use this as a valid ground for termination. If these conditions are not fulfilled, case law indicates that the landlord’s refusal to renew the lease is not invalidated but in these circumstances, the tenant will be entitled to seek compensation.