Calculating the eviction indemnity: methods and scales

Evicting a commercial tenant is a delicate procedure that commits the landlord financially. Far from being symbolic, the eviction indemnity (indemnité d'éviction) may represent several years of rent and turn a profitable property transaction into a financial sinkhole. The Law of 30 June 1926, codified in Articles L. 145-14 et seq. of the French Commercial Code, strictly governs this indemnity in order to protect the tenant's business (fonds de commerce). This article sets out the calculation methods recognised by case law, the scales applied and the pitfalls to avoid in order to assess this indemnity accurately before any eviction project.

Legal basis of the eviction indemnity

The eviction indemnity derives from Article L. 145-14 of the French Commercial Code, which lays down the principle of full compensation for the loss suffered by the evicted tenant. This provision protects the asset value of the business, recognising that the commercial location is often the main asset of the tenant business.

The landlord may always refuse renewal, but must in principle pay the evicted tenant an eviction indemnity equal to the loss caused by the lack of renewal (Article L. 145-14), including where the refusal is made in order to build or rebuild the premises (Article L. 145-18). By way of exception, the landlord is exempt from any indemnity if it can show a serious and legitimate reason against the outgoing tenant, or if it is established that the building must be demolished because it has been declared insalubrious by the administrative authority or can no longer be occupied without danger (Article L. 145-17). The Commercial Code provides for no increased indemnity in the event of an unreasoned refusal; Article L. 145-27 merely gives entitlement to an indemnity equal to the loss suffered where the landlord has exercised its rights with a view to fraudulently defeating those of the tenant. The grounds for refusal that the landlord may raise against the tenant are detailed in our article on the non-renewal of a commercial lease.

The indemnity is equal to the loss caused by the lack of renewal, the owner being entitled to prove that this loss is lower (Article L. 145-14, paragraph 2). This logic of compensating the actual loss directly influences the calculation methods adopted by court-appointed experts.

Article L. 145-14, paragraph 2, lists the heads of compensable loss: the market value of the business, the normal costs of moving and reinstallation, and the transfer costs and duties payable for a business of the same value. According to settled case law, this list is not exhaustive.

Methods for calculating the eviction indemnity

Asset-based method: valuation of the business

The asset-based method is the reference approach for calculating the eviction indemnity. It consists in assessing the market value of the business operated on the premises, that is, the price a buyer would agree to pay to take over the operation. On valuation methods and the disputes they give rise to outside eviction, see our analysis of the valuation of a business.

This valuation is based on several cumulative criteria. The turnover achieved over the last three years makes it possible to assess the profitability of the location. Experts generally apply a multiplier to annual turnover, which varies according to the business sector. For a local food shop, this coefficient ranges between 0.3 and 0.8. For a pharmacy benefiting from the pharmaceutical monopoly, it may reach 1.2 to 1.5.

The clientele is the second valuation element. Its loyalty, solvency and longevity directly influence the value of the business. A hair salon established for fifteen years in a stable residential area has a more highly valued clientele than a recently created business.

Geographical location significantly modulates this value. A restaurant located on a busy thoroughfare is worth more than an identical establishment in an outlying area. Experts analyse pedestrian flow, visibility from the public highway, ease of parking and surrounding competition.

The profitability generated by the operation is the third pillar. The operating profit for the last three financial years, adjusted for exceptional expenses, determines the earning capacity of the business. This accounting approach supplements the turnover analysis by revealing the actual margin of the activity.

Income capitalisation method

This financial method values the business by discounting foreseeable future profits. It is particularly suited to service activities where the clientele generates recurring income: professional practices, estate agencies, beauty salons.

The calculation is carried out in three stages. The expert first determines the normalised net profit by restating the manager's personal expenses and neutralising exceptional items. This reference profit, calculated over three to five financial years, reflects the structural profitability of the activity.

The capitalisation rate applied varies according to sector risk and the stability of the activity. For a low-risk activity such as a pharmacy, this rate is between 8% and 12%. For a seasonal business or one exposed to strong competition, it may reach 15% to 20%.

The calculation formula: Value of the business = Normalised net profit / Capitalisation rate.

Consider an accountancy practice generating a normalised annual profit of €120,000. With a capitalisation rate of 10%, the value of the business amounts to €1,200,000. This method is particularly relevant for the liberal professions, where value lies in the client relationship rather than in stock or equipment.

Comparative method using sector scales

Sector scales, drawn up by professional organisations and validated by court practice, offer a standardised approach for certain activities. These scales express the value of the business as a percentage or multiple of annual turnover.

The restaurant sector traditionally applies a scale of 40% to 80% of turnover depending on location and standing. A restaurant generating annual turnover of €500,000 in a business district will be valued at between €200,000 and €400,000 depending on the quality of its location and its profitability.

Specialist food shops (butchers, bakeries) are generally valued at between 50% and 100% of turnover. This range reflects the importance of the commercial location for these local businesses.

Pharmacies benefit from specific scales that take account of the pharmaceutical monopoly. The value ranges between 80% and 120% of turnover, adjusted for local medical demographics and competition from parapharmacies.

These scales are a starting point but do not dispense with a detailed analysis. A business located in a struggling shopping arcade may justify a significant discount compared with the sector scale.

Additional compensable items

Moving and reinstallation costs

Article L. 145-14 of the French Commercial Code expressly provides for compensation for moving and reinstallation costs. These costs correspond to the actual costs borne by the tenant to transfer its activity.

Moving costs include the transport of furniture, equipment and stock. For a business requiring heavy equipment such as a printing works, these costs may amount to several thousand euros. Experts generally rely on quotes drawn up by professional firms.

Reinstallation costs cover the adaptation of the premises at the new site: fitting-out works, electrical installation, specific connections. A bakery, for example, must bring its bakehouse into compliance with standards, which may require substantial investment.

Loss of trading during the transition period is a separate head of compensation. This period varies according to the complexity of the transfer: a few days for an office, several weeks for an industrial activity requiring administrative authorisations.

Transfer duties and acquisition costs

Where the evicted tenant must acquire a new business, the eviction indemnity includes the transfer costs and duties payable for a business of the same value (Article L. 145-14). These registration duties are calculated on the sale price according to the scale in Article 719 of the French General Tax Code.

Deed costs, the negotiator's fees and bank charges linked to financing the new business may supplement this compensation where they are justified.

Case law accepts compensation for these costs even if the evicted tenant has not yet found new premises when the indemnity is fixed. This preventive approach avoids penalising the tenant for circumstances beyond its control.

Specific commercial loss

Certain situations give rise to commercial loss going beyond the mere loss of the business. The loss of a non-transferable clientele is the most frequent case. A dry cleaner located in a residential area will not be able to rebuild its local clientele by moving to an outlying retail park.

The loss of licences or administrative authorisations linked to the location may also justify specific compensation. A drinking establishment losing its Class IV licence as a result of the eviction suffers a particular loss, since these licences are subject to quotas and difficult to replace.

Non-transferable contractual exclusivity clauses give rise to a right to compensation. A franchisee benefiting from territorial exclusivity that cannot be maintained at the new location suffers measurable economic loss.

Expert assessment and fixing of the amount

Amicable or court-ordered expert assessment

The eviction indemnity may be assessed in two ways: by an amicable expert assessment agreed between the parties or by a court-ordered expert assessment. Each procedure has distinct advantages depending on the circumstances.

The amicable expert assessment offers flexibility and speed. The parties choose an expert registered with the Court of Appeal and who specialises in business valuation. This procedure allows constructive dialogue and controlled time frames, generally three to six months depending on the complexity of the case.

A court-ordered expert assessment becomes necessary when the parties cannot agree on the principle or the amount of the indemnity. It is ordered by the judicial court (tribunal judiciaire), which has jurisdiction over disputes relating to commercial leases other than the fixing of the rent (Article R. 145-23 of the French Commercial Code), or, before any proceedings, by the judge hearing summary proceedings (référé) on the basis of Article 145 of the French Code of Civil Procedure (Cour de cassation, 3rd Civil Chamber, 18 December 2002, No. 01-14.202, published). This route guarantees impartiality but lengthens the time frames.

The expert must follow a rigorous methodology defined by case law. The expert analyses the tenant's accounts over at least three financial years, visits the commercial premises, studies local competition and consults professional scales. The report details the valuation methods adopted and justifies the amount proposed.

Challenges and remedies

The expert report is not binding on the parties or the court. Each party may challenge its conclusions through reasoned written submissions (dires) and observations. This adversarial phase helps to clarify the disputed points and complete the investigation.

The landlord may challenge the valuation adopted by demonstrating that turnover has been overstated or by relying on depreciation factors not taken into account. A fall in customer footfall or the announcement of disruptive public works are admissible grounds of challenge.

The tenant may argue that certain items have been undervalued: loyal clientele, prime location, recent investments not yet depreciated. It may also claim compensation for intangible elements such as commercial reputation or ongoing contracts.

The court rules definitively on the amount of the indemnity after adversarial argument. Its decision is binding on the parties but remains open to appeal if the stakes justify it. The Court of Appeal may order a new expert assessment if the first has methodological shortcomings.

Specific features by business sector

Retail and large-scale distribution

Retail presents particular valuation features linked to the crucial importance of location. A clothing shop in a historic town centre benefits from a natural flow of shoppers that an outlying shopping centre cannot reproduce.

Analysis of the catchment area is an essential preliminary. Experts study the population within a given radius, its sociological composition and its purchasing power. These data, available from INSEE (French national statistics institute) and retail observatories, significantly modulate the valuation.

The seasonality of the activity also influences the calculation. A toy shop achieving 60% of its turnover at the end of the year presents a vulnerability that the expert must factor into the valuation. This concentration of sales over a short period increases operational risk.

Large food stores are subject to a specific valuation that takes account of their business model. Stock turnover, gross margin on fresh produce and agreements with central purchasing bodies are decisive factors. The sales area and the number of parking spaces directly influence commercial capacity.

Liberal professions and services

The liberal professions require a valuation approach adapted to their specific nature. The value of the practice rests essentially on the clientele and professional reputation, elements that are difficult to quantify using traditional methods.

A medical practice generally benefits from a clientele whose loyalty rests on the relationship of trust established with the practitioner. This loyalty often allows the clientele to be transferred to the new site, limiting the eviction loss. The expert analyses the patient renewal rate and the geographical catchment area.

Law firms present a similar issue, with the particular feature of ongoing cases. Eviction during proceedings may give rise to specific loss if the move disrupts the handling of cases. Proximity to the courthouse is often a competitive advantage that is difficult to transfer.

The value of estate agencies is determined by their portfolio of exclusive mandates and their knowledge of the local market. An exclusive sale mandate on a prestigious property may represent significant value that the eviction jeopardises.

Restaurants and hotels

The restaurant sector combines several valuation features. Location determines footfall, but the quality of the operation significantly modulates the valuation. A gastronomic restaurant can create its own clientele independently of passing trade.

The analysis covers several specific indicators: average spend per cover, table turnover rate and seasonality of footfall. These ratios, compared with sector standards, reveal the performance of the operation and its capacity to be transferred.

Drinking establishment licences are a specific intangible asset. A Class IV licence, permitting the sale of all alcoholic beverages, may be worth several tens of thousands of euros depending on the geographical area. An eviction resulting in the loss of this licence gives rise to a loss distinct from the value of the business.

Hotels require analysis of the occupancy rate, the average price per room and the business or tourist clientele. A motorway stopover hotel is valued differently from a boutique establishment in a historic centre. The hotel classification and facilities (spa, restaurant, seminars) directly influence the valuation.

Frequently asked questions

Is the eviction indemnity due even if the lease has expired?

The commercial lease ends only by notice given six months in advance or by a request for renewal; failing that, it continues by tacit extension beyond its term (Article L. 145-9). The eviction indemnity is due where the landlord serves a notice refusing renewal or refuses the tenant's request for renewal, except where there is a serious and legitimate reason or another statutory exception. A tenant who intends to claim payment must bring proceedings before the court before the expiry of a period of two years from the date for which notice was given or from service of the refusal (Articles L. 145-9 and L. 145-10).

How is the reference date for valuing the business determined?

Case law generally takes the date of the request for renewal as the reference date for the valuation. This solution prevents changes in economic conditions between the request and the judgment from unduly benefiting one of the parties. The expert may nevertheless update this valuation if exceptional circumstances have significantly altered it in the meantime.

Can the landlord limit its obligation by offering replacement premises?

Where the landlord refuses renewal in order to build or rebuild the premises, it may avoid paying the eviction indemnity by offering the tenant premises corresponding to its needs and capacities, in an equivalent location. The tenant then receives an indemnity compensating for its temporary loss of enjoyment and the reduction in value of its business, together with reimbursement of its normal moving-out and moving-in costs (Article L. 145-18). Within three months, it must state whether it accepts or bring the matter before the competent court. A difference in location, floor area or accessibility may ground its challenge.

Are the tenant's recent investments taken into account in the indemnity?

Recent investments not yet depreciated are an item of compensation separate from the value of the business. The expert generally adopts the net book value, after deduction of normal depreciation. These investments must be necessary for the operation and have been made in good faith, without knowledge of the landlord's eviction project.

Is the eviction indemnity taxable?

For tax purposes, the eviction indemnity is a taxable business capital gain. It nevertheless benefits from the exemption regimes provided for capital gains on cessation of business, subject to certain conditions: holding period, amount of the gain, age of the manager. Consulting a chartered accountant (expert-comptable) is essential to optimise the tax treatment of this indemnity.

How long does the landlord have to pay the eviction indemnity?

Article L. 145-30 of the French Commercial Code governs this payment: once the fifteen-day period open to the landlord to exercise its right of withdrawal (droit de repentir) (Article L. 145-58) has expired, the indemnity must be paid to the tenant, or to an escrow holder (séquestre), within three months of a formal demand served by extrajudicial instrument reproducing this provision. Until payment, the tenant is entitled to remain in the premises on the terms of the expired lease (Article L. 145-28), and the premises are handed back to the landlord three months after payment of the indemnity or notification of its payment to an escrow holder (Article L. 145-29). The choice between payment, deposit and exercise of the right of withdrawal is discussed separately in our article on payment of the eviction indemnity.

Can the indemnity be reduced if the tenant's business was loss-making?

A loss-making business does not remove the right to an eviction indemnity, but may reduce its amount. The expert must analyse the causes of the losses: temporary economic conditions, poor management, unsuitability of the activity for the premises. If the losses result from temporary external factors, the indemnity may be calculated on the potential profitability of the location. Conversely, structural losses linked to the activity itself logically reduce the valuation of the business.

Calculating the eviction indemnity requires in-depth technical assessment combining legal analysis, financial valuation and sector knowledge. The variety of methods and the diversity of situations make the involvement of a specialist valuation expert essential, whether in an amicable or a court-ordered assessment. Given the often considerable financial stakes, anticipation remains the best strategy: any landlord considering evicting a commercial tenant should have this indemnity assessed accurately before starting the procedure, in order to make an informed decision.