Eviction indemnity: the judge freely sets the starting point for interest (Cass. com., 4 July 2001)

Imagine: you own a commercial property in Tours, rue Nationale, and you decide not to renew the lease of your tenant, a ready-to-wear boutique. The law requires you to pay them an eviction indemnity (a sum intended to compensate for the loss of their business). But from when must you pay interest on this sum? From the date of refusal to renew? From the date of judgment? Or only after a formal notice?

This question, which can represent thousands of euros, was decided by the Court of Cassation in a ruling of 4 July 2001. And the answer is more flexible than one might think: the judge has the power to discretionarily set the starting point for interest. In other words, they can take into account the circumstances of the case to avoid the landlord being unfairly penalised or, conversely, the tenant being compensated too late.

But what does this actually change for a landlord in Loches or a shopkeeper in Tours? How does this decision apply today? Let's dive into the details.

The facts: a story that happens every day

Mr and Mrs X, owners of a building in Tours, had granted a commercial lease of a property to Mr Y, who ran a bookshop and stationery business. In 1995, they refused to renew the lease and offered an eviction indemnity. Disagreement on the amount: the parties ended up before the Tribunal de grande instance of Tours.

At first instance, the judge fixed the indemnity at 150,000 francs (approximately €22,867) and decided that interest would run from the date of the judgment. Mr Y, dissatisfied, appealed: according to him, interest should run from the date of refusal to renew, several years earlier. The Court of Appeal of Orléans (whose jurisdiction covers Tours) partially agreed: it set the starting point for interest at the date of the formal notice (demand for payment) sent by the tenant.

The owners appealed to the Court of Cassation. They argued that the eviction indemnity is not a sum due by way of damages (compensation for loss) but a statutory indemnity, and that interest should only run from the judicial decision. The Court of Cassation, in its ruling of 4 July 2001 (no. 97-20.663), dismissed their appeal and upheld the reasoning of the Court of Appeal. It held that Article 1153-1 of the Civil Code (now Article 1231-7 since the 2016 reform) applies to eviction indemnity, so that the judge has the discretion to set the starting point for interest.

What few people know is that this decision ended a controversy: some courts considered that eviction indemnity fell outside the regime of moratory interest (late payment interest) provided for by Article 1153-1. Now it is clear: the judge has sovereign power to set the starting point.

The reasoning of the court — dissected

The Court of Cassation relies on Article 1153-1 of the Civil Code (former), which provides: 'In contractual matters, the judge may, even of his own motion, order that interest on sums due shall run from the date of formal notice or, where appropriate, from an earlier date if he deems it justified.'

In other words, this text gives the judge discretionary power (free assessment) to make interest run from a date of his choosing, depending on the circumstances. The question was whether the eviction indemnity, provided for by the commercial lease regime (Articles L. 145-14 of the Commercial Code), fell within the scope of this text. The X family (owners) argued that it did not: for them, it was a statutory indemnity, not a sum due 'in contractual matters'.

The Court of Cassation rejected this argument. It considered that the eviction indemnity is a compensatory indemnity for the loss suffered by the tenant due to the refusal to renew. It is therefore of an indemnity nature (compensatory) and falls within Article 1153-1. Consequently, the Court of Appeal was entitled to set the starting point for interest at the date of the formal notice, without being bound by the date of the judgment.

In clear terms, the Court validates the solution adopted by the Court of Appeal of Orléans: interest began to run from the date of the formal notice sent by the tenant, not from the judgment or the refusal to renew. This means that the landlord had to pay interest over an earlier period, increasing the final amount due.

undefined, I have come across cases where the amount of interest represented several thousand euros, simply because the starting point was set several years before the judgment. This is a major financial issue, often overlooked by the parties.

What this changes for you — concretely

This decision has direct practical implications for landlord-owners and commercial tenants. Here is what you need to remember depending on your profile.

For the landlord-owner (like Mr X in Tours): you must know that the judge can make interest run on the eviction indemnity from the tenant's formal notice, or even from an earlier date if he deems it justified. For example, if you refuse renewal in January 2023 and the tenant sends you a formal notice in March 2023, but judgment is not given until 2025, interest may run from March 2023. On an indemnity of €50,000, at the legal rate (around 5% in recent years), this represents approximately €5,000 in additional interest for two years. To avoid this, it is better to negotiate quickly or set aside the sum as soon as possible.

For the commercial tenant (like Mr Y in Loches): this case law is favourable to you. If your landlord delays paying you the indemnity, do not hesitate to send him a formal notice (by registered letter with acknowledgement of receipt) as soon as the amount is fixed or even before. This will allow you to claim interest from that date. Concrete example: a bookseller in Loches, evicted from his premises on Place de la Marne, obtained interest running from his formal notice, 18 months before the judgment, giving him an additional €3,200.

For the buyer of a business: be vigilant regarding the eviction clause in the transfer contract. Ensure that the seller undertakes to pass on to you any interest received if the indemnity is fixed after the sale.

For the co-owner landlord: if you lease out a property forming part of a co-ownership, the same rules apply. Anticipate the cost of interest in your budget.

Four tips to avoid this type of dispute

• Negotiate the amount of the indemnity quickly: as soon as renewal is refused, start a discussion with your tenant to fix an amicable amount. If you reach an agreement, you can provide in the settlement that interest will only run from the date of signature. Example: a landlord in Tours avoided €5,000 in interest by agreeing to an indemnity of €60,000 from the outset, whereas the tenant was demanding €70,000.
• Set aside the sum as soon as possible: if the amount is fixed by expert assessment, place the funds in a sequestered account (blocked account with a notary or bank). This stops interest from running from the date of consignment (deposit of funds). In the case commented on, the Court of Appeal noted that the landlord had not made a formal offer, which justified the starting point at the formal notice.
• Send or have a formal notice sent in good time: if you are a tenant, send a registered letter with AR as soon as the landlord refuses renewal. If you are a landlord, if the tenant delays vacating, give him formal notice to vacate to avoid having to pay interest for an undue period of occupation.
• Consult a lawyer lawyer before any proceedings: commercial lease law is complex and every detail counts. A lawyer can advise you on the strategy to adopt (formal offer, negotiation, expert assessment) and assess the risk of having to pay substantial interest.

Further exploration: related case law and developments

This 2001 decision is part of a consistent line. Already, in a ruling of 10 January 1995 (no. 92-21.474), the Court of Cassation had held that interest on eviction indemnity ran from the formal notice. The 2001 ruling confirms and clarifies this solution by recalling the discretionary power of the judge.

Since then, case law has evolved on a related point: the question of capitalisation of interest (interest on interest). In a ruling of 8 July 2009 (no. 08-16.579), the Court of Cassation held that the tenant could request capitalisation of interest on the eviction indemnity, provided that Article 1154 of the Civil Code (now Article 1343-2) is complied with. In other words, if interest is not paid for at least one year, it itself produces interest. This can further increase the sum due.

In practice, courts use this discretionary power in varying ways. Some judges set the starting point at the date of the decision fixing the indemnity, others at the formal notice, or even at the date of refusal to renew if the landlord has acted in bad faith. The general trend is protective of the tenant, considered the weaker party.

Note however: since the 2016 reform of the law of obligations, Article 1153-1 has become Article 1231-7, but the content is identical. The previous case law therefore remains applicable.

Checklist before acting

FAQ: questions you may ask

• Can I agree with my tenant on the starting point for interest? Yes, if you sign a settlement (amicable agreement) with your tenant. You can provide that interest will only run from the date of signature of the deed, or from an agreed date. This avoids an unpredictable judicial decision.
• What should I do if my tenant claims interest from the date of refusal to renew? You can contest by showing that you made a serious offer of payment or that the amount of the indemnity was disputed. The judge will assess this freely.
• What is the applicable interest rate? The legal interest rate, fixed each year by decree. In 2024, it is 5.07% for debts owed to individuals and 8.01% for business debts (variable by semester).
• How do I calculate interest? The formula is: (amount of indemnity) x (legal rate) x (number of days between the starting point and the date of payment) / 365. A lawyer or accountant can help you.
• Is the eviction indemnity subject to VAT? No, it is not subject to VAT because it compensates for loss, but it is subject to registration duties if paid in the context of a transfer of a business.

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