Eviction indemnity: how judges assess the value of the leasehold right

Imagine: you own commercial premises in Collioure, let for years to a neighbourhood grocery store. The lease expires, and you want to recover the premises to set up your own business. How much must you pay the tenant to compensate them for their forced departure? This question is asked every year by hundreds of landlords and tenants, often without knowing the precise rules governing it.

The judgment handed down by the Court of Cassation on 19 January 1968 (No. 65-13.660) has become a reference for answering this question. It sets out the criteria that judges must use to determine the value of the leasehold right in calculating the eviction indemnity. And it is not simply a question of turnover: floor area, restrictive clauses, location… everything counts.

This article deciphers for you this decision, its practical implications, and gives you the keys to anticipate or contest an eviction indemnity. Whether you are a landlord in Cabestany or a tenant in Perpignan, you will leave with a clear vision of your rights and obligations.

The facts: a story that happens every day

The company "L'Union commerciale" operated a business in premises rented from a landlord in Collioure. At the expiry of the commercial lease, the landlord refuses renewal. He must then pay an eviction indemnity to the tenant, intended to compensate for the loss of the business and the leasehold right.

But the amount offered does not satisfy the tenant. She takes legal action, claiming that the indemnity is insufficient. The trial judges (Court of Appeal) set an amount that the tenant still contests, arguing that the value of the leasehold right was not correctly assessed. The case goes up to the Court of Cassation.

The heart of the dispute: how to assess the value of the leasehold right? The tenant argued that the judges should have based themselves solely on the operating results (profits). The judges, however, took other elements into account: floor area of the premises, absence of outbuildings, lease clauses prohibiting certain sales, lack of profitability of a purchase at a higher price, and above all the excellence of the location in Collioure. The Court of Cassation validates this global approach: the eviction indemnity is not reduced to a simple mathematical formula.

The reasoning of the court — dissected

The Court of Cassation, in its judgment of 19 January 1968, approves the reasoning of the trial judges. It recalls that the eviction indemnity must compensate the entirety of the prejudice suffered by the evicted tenant. This prejudice includes the value of the business (clientele, goodwill) AND the value of the leasehold right (the ability to occupy the premises at an advantageous rent).

To calculate this value, judges must take several factors into account:

• Operating results: this is not the only criterion. A business may be unprofitable but have a strategic location.
• Floor area of the premises: extra square metres increase the value.
• Restrictive clauses in the lease: if the lease prohibits certain activities (e.g., sale of fresh produce), this reduces the value.
• Location and situation: in Collioure, a busy pedestrian street is worth more than a side street.
• Absence of outbuildings: no storage, no cellar… this counts.

The Court thus validates a concrete and global approach, refusing to reduce the assessment to a single indicator. The legal basis is Article L.145-14 of the French Commercial Code (formerly the Decree of 30 September 1953) which provides for the right to indemnity in case of refusal of renewal.

Note that this decision is not a departure from precedent, but a confirmation of earlier case law: trial judges have a sovereign power of assessment, provided they give reasons for their decision based on several criteria. It has been followed by many subsequent judgments.

What this means for you — practically

For landlords: if you refuse renewal, you must compensate the tenant. The indemnity can be very high if the premises are well-located and the lease advantageous. Concrete example: in Cabestany, an 80 m² premises with a terrace (outbuilding) and a moderate rent will be worth more than a 50 m² premises without outdoor space, even if the turnover is identical. Anticipate by having the value of the leasehold right assessed by an expert.

For tenants: you can contest an indemnity that is too low by showing that the judges did not take all criteria into account (e.g., exceptional location, abusive lease clauses limiting your activity). Do not hesitate to provide evidence: photos of the neighbourhood, pedestrian flow studies, rent comparisons.

For purchasers of businesses: check that the potential eviction indemnity has been correctly assessed in the purchase price. A miscalculation can cost you dearly in the event of non-renewal.

If you are in this situation, you must act quickly: the deadline to contest the amount of the indemnity is two years from the refusal of renewal. After this deadline, you lose all recourse.

Four tips to avoid this type of dispute

• Have a joint valuation carried out: as soon as the refusal of renewal is notified, instruct an expert specialised in commercial leases. Amicable expert appraisal often avoids litigation.
• Negotiate an exit clause when signing the lease: provide for a fixed amount of eviction indemnity or a clear calculation method. This reduces uncertainties.
• Document the location: for the tenant, keep evidence of the attractiveness of the place (footfall counts, photos, market studies). For the landlord, prove that the location has lost value.
• Consult a specialist lawyer before any refusal: a simple letter of refusal can engage your liability. In Perpignan as elsewhere, it is better to be advised beforehand.

Further reading: related case law and developments

This 1968 decision has been confirmed by many judgments. For example, the Court of Cassation recalled in 2005 (Civ. 3e, 9 March 2005, No. 03-19.764) that the value of the leasehold right must be assessed in concreto, taking into account all circumstances. Another decision of 2012 (Civ. 3e, 20 June 2012, No. 11-18.523) specified that improvements made by the tenant to the premises (layout, renovation) can also be included in the indemnity.

The current trend is towards increasingly fine-tuned assessment: judges do not hesitate to use econometric methods (rent comparisons, discounted cash flow). In the future, we can expect environmental criteria (energy rating, accessibility) to play a growing role. Thus, a poorly insulated premises in Collioure could see its value decrease.

Summary and next steps

Frequently asked questions:

• What is the eviction indemnity? It is the amount due by the landlord to the tenant when he refuses to renew the commercial lease. It compensates for the loss of the business and the leasehold right.
• How is it calculated? By reference to the value of the business, including clientele, and the value of the leasehold right, assessed according to criteria such as location, floor area, and lease clauses.
• Can I contest the amount? Yes, before the judicial court, within two years from the refusal. It is advisable to be assisted by a lawyer.
• What if the landlord does not pay? The tenant can obtain a payment order and, in case of urgency, have the amount sequestered.
• Is an amicable agreement possible? Yes, and it is often preferable. Mediation or a settlement can avoid a long and costly trial.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →