Occupation indemnity under a commercial lease: fixing, precariousness discount and recovery

Between service of a notice terminating the lease with refusal of renewal and actual vacation of the premises, rarely less than two years pass: court-appointed expert report, judgment, appeal, then the period of Article L. 145-29 of the French Commercial Code. Throughout this period, the tenant remains in the premises and the landlord receives consideration whose amount, starting date and recovery arrangements are negotiated or litigated. Badly framed, this period results in an outright loss of rental income at the very moment the landlord must make provision for an eviction indemnity (indemnité d'éviction). Well framed, it is a lever: the occupation indemnity (indemnité d'occupation) is set at the market rental value, without capping, and may significantly exceed the contractual rent. This guide deals with the fixing regime, the precariousness discount (abattement de précarité), the tools for early recovery and the interaction with the landlord's right of repentance (droit de repentir) under Article L. 145-58.

The occupation indemnity claim: basis, nature and scope

The right to remain in the premises under Article L. 145-28

The starting point is Article L. 145-28 of the French Commercial Code, which governs the evicted tenant's right to remain in the premises:

No tenant who may claim an eviction indemnity may be required to leave the premises before having received it. Until payment of that indemnity, the tenant is entitled to remain in the premises on the terms and conditions of the expired lease. However, the occupation indemnity is determined in accordance with the provisions of sections 6 and 7 of this chapter, taking into account all relevant factors.

Two consequences structure the whole analysis. First, the tenant is not an occupant without right or title: it has a statutory right to remain, enforceable against the landlord, which bars any application for eviction until the eviction indemnity has been paid. Second, the lease has expired. What remains are its terms and conditions, transposed to a precarious occupation, with the exception of the price, which is expressly removed from the contractual regime and referred to the rules on rental value. The interaction between payment of the eviction indemnity, the right to remain in the premises and the landlord's right of repentance is detailed in our article on that question.

The occupation indemnity is therefore not rent. Nor is it damages. It is the consideration for the enjoyment of the premises, which has concrete effects as regards VAT, guarantees and treatment in collective insolvency proceedings, developed below.

Distinguishing the statutory indemnity from the indemnity of an occupant without right or title

The most frequent confusion, and the most costly in procedural strategy, is to treat in the same way two claims of a different nature.

The statutory occupation indemnity of Article L. 145-28 is owed by the tenant holding a right to remain in the premises, pending payment of the eviction indemnity. It is set at the rental value, reduced by a precariousness discount.

The ordinary-law occupation indemnity is owed by the occupant who no longer holds any title: a lease terminated by operation of the termination clause (clause résolutoire), notice for serious and legitimate grounds within the meaning of Article L. 145-17, refusal of renewal without indemnity upheld by the court, or remaining beyond the vacation period of Article L. 145-29. This indemnity is of a mixed nature, compensating for the enjoyment and making good the loss caused by the unlawful occupation. No precariousness discount is justified here. The landlord may on the contrary claim an uplift, and rely on the lease clause setting the occupation indemnity by agreement at a multiple of the rent, subject to the judge's power to moderate manifestly excessive penalty clauses (Article 1231-5 of the French Civil Code). On the procedural route open to the landlord against such an occupant, see our analysis of the summary proceedings (référé) procedure to evict an occupant without right or title.

The switch from one regime to the other changes the base of the claim. It must be identified when the summons is drafted.

The starting point: which act converts rent into indemnity

The starting date of the claim mechanically determines the volume of cash recoverable, all the more so as the two-year limitation period of Article L. 145-60 of the French Commercial Code governs actions brought under the statutory regime.

In the classic scheme of a notice terminating the lease with refusal of renewal and offer of an eviction indemnity served by extrajudicial act, the occupation indemnity is owed from the effective date of the notice, that is, the day after the lease expires. The rent ceases to be payable on that date, the indemnity takes its place.

Where the tenant has taken the initiative of a request for renewal and the landlord refuses it, the switch occurs on the effective date of the renewal requested and refused by the landlord.

Two situations deserve particular attention on the institutional landlord's side. The first is the tenant's right of option: Article L. 145-57 allows a tenant who does not accept the price of the renewed lease to give up the renewal within one month of service of the final decision. The renewed lease is then retroactively destroyed, and the occupation after the effective date of the renewal must be recharacterised, with an account to be drawn up between the parties. The second is that of the tenant who, in practice, continues to pay the old rent after the effective date of the notice: this payment does not amount to a fixing, it is an advance payment to be set against the occupation indemnity to be fixed. It should be expressly noted in the pleadings to avoid any argument that the indemnity was tacitly fixed at the amount of the contractual rent.

The basis of calculation: market rental value, without capping

The criteria for rental value

The calculation of the occupation indemnity refers to section 6, that is, Articles L. 145-33 et seq., supplemented by Articles R. 145-1 et seq. of the French Commercial Code. Rental value is determined having regard to the characteristics of the premises, the use of the premises, the respective obligations of the parties, local commercial factors and the prices commonly charged in the neighbourhood. The decree also provides methods specific to single-purpose premises and premises used exclusively as offices, for which reference to neighbourhood prices takes precedence over analysis by weighted surface area.

The closing words of Article L. 145-28, taking into account all relevant factors, give a wider power of assessment than that available to the rent judge in fixing the price of a renewed lease. The judge may take into account deterioration in the condition of the premises, loss of commercial attractiveness linked to works under way in the building, an operating restriction resulting from an administrative decision, or conversely the added value derived from improvements made by the landlord.

Why the indemnity may exceed the contractual rent

This is the decisive point for an institutional landlord, and it is too often under-exploited.

The capping rule of Article L. 145-34, which limits the variation of the renewed lease rent to that of the quarterly reference index, does not apply to the occupation indemnity. The latter is set at the rental value, without capping. Yet on a Paris asset held under a lease of nine years or more, whose rent has followed the commercial rent index published by INSEE (the French national statistics institute) while the market rental value has risen faster, the accumulated gap can be substantial. This gap, which capping neutralises on renewal, becomes fully payable again during the period of remaining in the premises.

The economic consequence is twofold. For the landlord, the eviction period is no longer necessarily a period of rental shortfall: it may on the contrary catch up a rent shortfall sustained by capping. For the tenant, the strategic lengthening of the procedure, intended to capitalise on remaining in the premises and to increase the eviction indemnity through the passage of time, becomes a costly calculation. Costing the rental value from the service of the notice, before any discussion of the eviction indemnity, therefore changes the balance of power and feeds a settlement negotiation on the vacation date.

The precariousness discount: basis, order of magnitude and challenge

The basis of the discount

No text provides for the precariousness discount. It is a judge-made construct, consistently accepted by the courts and systematically adopted by court-appointed experts.

Its justification lies in the difference in position between a tenant holding a lease and an occupant remaining in the premises. The latter no longer benefits from commercial property rights: it can neither assign its leasehold right, nor grant a sub-lease, nor obtain a renewal, nor value its business on the basis of a stable occupation title. It does not know the date on which it will have to leave, which rules out any investment in the operation and complicates the negotiation of a relocation site. This instability justifies a reduction of the market rental value, determined for an occupant holding a statutory lease.

The discount applies to the rental value so determined, and not to the contractual rent. Judicial practice most often retains a limited order of magnitude, frequently around ten per cent. This rate has no normative value: it is discussed case by case, on the basis of the elements of the file.

Arguments available to the landlord

The discount is neither automatic nor immutable. Several lines of challenge deserve to be systematically developed.

• The precariousness must be real. A tenant that has remained in the premises for several years, has continued trading without interruption and has taken no steps to relocate is in a situation whose precariousness is largely theoretical.
• The discount decreases as the occupation continues. The longer the period of remaining in the premises, the less substance the argument of uncertainty has. A fixing by periods, with a declining discount, may be sought.
• The tenant's procedural conduct may be relied on against it. Where the lengthening of the procedure results from the occupant's dilatory initiatives, it is hard to justify giving it the benefit of a reduction based on uncertainty that it maintains itself.
• The precariousness discount does not mechanically combine with other reductions. A discount for the condition of the premises, for particular constraints or for works at the tenant's expense follows a distinct logic; an unjustified combination leads to an artificially depressed rental value.

There are also situations where the discount has no place: an occupant without right or title, remaining beyond the vacation period of Article L. 145-29, or a case in which the tenant itself brought about the end of the lease.

Charges, taxes and VAT: the real base of the claim

As the occupation continues on the terms and conditions of the expired lease, the occupant remains liable for charges, taxes, duties and fees that can be re-invoiced under the contractual allocation, within the limits set by Article L. 145-40-2 of the French Commercial Code and its implementing decree for leases concluded or renewed since its entry into force. The obligations of maintenance, insurance and use also survive.

For tax purposes, the occupation indemnity, as consideration for making premises available, follows the VAT regime applicable to rent. Where the landlord has exercised the option provided for in Article 260, 2° of the French General Tax Code for unfurnished premises for professional use, the indemnity is subject to the tax. The reasoning is the opposite of that applicable to the eviction indemnity, compensation for loss, which in principle falls outside the scope. This asymmetry must be built into the cash-flow costing and the drafting of settlement agreements, failing which the landlord bears a reassessment on a claim already collected.

Obtaining cash before the decision on the merits

This is the most decisive aspect in asset management: the final fixing comes years after the triggering event, but the need for cash is immediate.

Identifying the competent court

A routing error costs several months. The fixing of the occupation indemnity does not fall within the jurisdiction of the commercial rent judge (juge des loyers commerciaux). Article R. 145-23 of the French Commercial Code reserves to that judge disputes relating to the fixing of the price of a revised or renewed lease, and refers other disputes to the judicial court (tribunal judiciaire). The fixing of the occupation indemnity owed under Article L. 145-28 belongs to the latter category: it falls to the judicial court seised of the eviction indemnity dispute, sitting as a panel. The application to the commercial rent judge for the fixing of the renewed lease rent, by written statement (mémoire), is dealt with separately in another article.

In practice, the application to fix the occupation indemnity is made in the same proceedings as that relating to the eviction indemnity, which has the advantage of entrusting both valuations to the same expert.

Framing the expert's mission from the outset

Where the landlord anticipates the dispute, an investigative measure in futurum based on Article 145 of the French Code of Civil Procedure allows an expert to be appointed before any trial on the merits. The drafting of the mission is strategic: it must expressly refer to the rental value of the premises within the meaning of Articles L. 145-33 and R. 145-1 et seq., the expert's opinion on the principle and amount of any precariousness discount, and a valuation by periods if the occupation is likely to continue. A mission limited to costing the eviction indemnity alone makes it necessary to seek a later extension, with the corresponding loss of time.

Interim payment before the pre-trial judge and in summary proceedings

Two bases allow payment to be obtained before the judgment on the merits.

Before the pre-trial judge (juge de la mise en état), Article 789 of the French Code of Civil Procedure authorises the award of an interim payment (provision) to the creditor where the existence of the obligation is not seriously open to dispute. Before the summary proceedings judge, Article 835, second paragraph, of the same Code gives the same power.

The key to success lies in determining the undisputed core. A tenant remaining in the premises cannot seriously dispute owing consideration for its enjoyment. The amount of the last contractual rent, plus charges, is therefore a floor that is hard to challenge, and it is frequently used as the base for the interim payment. Where the expert report has already concluded to a higher rental value, the interim payment may be sought up to a fraction of that value.

For an institutional landlord, the application for an interim payment should not be put off until the final pleadings. Made from the first pre-trial hearing, it has two effects: it secures a flow of income, and it removes the economic interest the tenant finds in the slowness of the procedure.

Securing recovery against a deteriorating tenant

Personal guarantees and security deposit

A surety is strictly interpreted and does not extend beyond the limits within which it was given, a principle maintained by the reform effected by Order No. 2021-1192 of 15 September 2021. A surety drafted as guaranteeing "performance of the lease" or "payment of the rent" raises a serious difficulty when it comes to covering an occupation indemnity due after that lease has expired.

The consequence is one of drafting and is played out upstream: the surety clause, like the autonomous on-demand guarantee, must expressly cover sums owed for occupation after expiry of the lease, including during the period of remaining in the premises under Article L. 145-28, and until actual vacation. The same care is required for the security deposit clause, the allocation of which to occupation indemnities must be provided for.

Protective measures and collective insolvency proceedings

Against a tenant whose financial position is deteriorating, the occupation indemnity claim, well founded in principle by the remaining in the premises, allows an application to the enforcement judge (juge de l'exécution) for authorisation of a protective attachment under Articles L. 511-1 et seq. of the French Code of Civil Enforcement Procedures, where circumstances threaten recovery. A protective attachment of receivables or a registration of a provisional judicial mortgage over an asset of the tenant preserves the landlord's ranking before collective insolvency proceedings are opened.

If collective insolvency proceedings are opened, the dividing line is the date of the opening judgment. Earlier indemnities are subject to the stay of individual proceedings under Article L. 622-21 of the French Commercial Code and must be declared within the statutory period running from publication in the BODACC (French official gazette of civil and commercial announcements). Later indemnities, consideration for the enjoyment of the premises provided to the debtor during the observation period, fall under Article L. 622-17 of the French Commercial Code: they are payable when due and, failing payment, benefit from the priority provided for by that provision, provided they have been brought to the attention of the administrator or, failing that, the insolvency practitioner (mandataire judiciaire) within one year of the end of the observation period. The landlord therefore has an interest in monitoring month by month the indemnities falling due after the opening judgment and in notifying non-payment without delay.

Exercising the right of repentance and its effect on the occupation indemnity

Article L. 145-58 of the French Commercial Code allows the landlord, until expiry of a period of fifteen days from the date on which the decision becomes final, to avoid paying the eviction indemnity, on condition of bearing the costs of the proceedings and agreeing to renew the lease. This right may be exercised only so long as the tenant is still in the premises and has not already leased or bought another property intended for its relocation. Article L. 145-59 makes the landlord's decision irrevocable.

Repentance does not call into question the claim arising during the period of remaining in the premises. The Cour de cassation holds that the occupation indemnity due between the date the lease expires and the exercise of the right of repentance remains subject to Article L. 145-28 and must be set at the rental value, the tenant being unable to claim retroactive application of capping on the ground that it has become a tenant again (Cour de cassation, 3rd Civil Chamber, 27 November 2002, No. 01-10.058, published in the Bulletin). The rent of the renewed lease, by contrast, follows the renewal rules, including capping in the absence of a ground for lifting the cap, as the same decision recalls. After repentance, the tenant also retains the right of option allowing it to give up the renewal if the rent claimed seems too heavy (Cour de cassation, 3rd Civil Chamber, 17 July 1997, No. 95-21.979, published in the Bulletin).

Before exercising repentance, the landlord must therefore compare three amounts: the eviction indemnity fixed, the occupation indemnity at the rental value for the period elapsed, which remains due to it, and the rent of the renewed lease, which may turn out to be capped. As the choice is irrevocable, this costing must be completed before the fifteen-day period expires.