Eviction compensation for a tourist hotel

How to calculate eviction indemnity for a tourist hotel ?

The bottom line: judges use the average of 3 methods to calculate eviction compensation

In this case regarding eviction indemnity, the legal expert applied the sales method, the cash flow method and the EBITDA (gross operating profit) method. The court accepted the average of the three results obtained using the three accounting methods (i.e. an average value of €374,225).

Facts

On January 1, 2000, Mrs B. signed a commercial lease with S.A.R.L. Hôtel des Chênes for a property complex including a three-star hotel in PUJOLS, for a period of nine years, i.e. until December 31, 2008. On November 25, 2008, Mrs B. sold the property to SCI Pujols Bel Air, which intervened in the current proceedings. SCI Pujols Bel Air reiterated its refusal to renew the lease and offered to pay an eviction indemnity to be determined by expert appraisal. S.A.R.L. Hôtel des Chênes served SCI Pujols Bel Air with a writ of summons to set the eviction indemnity in accordance with article L415-14 of the French Commercial Code. An expert appraisal was ordered.

Claims of the parties relating to the calculation of eviction compensation

Under the terms of article L 145-17 et seq. of the French Commercial Code, the eviction indemnity includes the market value of the business, determined in accordance with professional practice, plus various expenses. To evaluate the eviction indemnity, Monsieur VIDEAU, as is customary, used three cross-checking methods:

• the method based on sales according to the usual scales applied by the profession and by the tax authorities (the Lefevre scale and the Blatter scale),
• the cash flow method,
• the EBITDA valuation method.

The main eviction indemnity

Under the terms of article L 145-17 et seq. of the French Commercial Code, the eviction indemnity includes in particular the market value of the business, determined in accordance with professional practice.

Accounting methods

S.A.R.L. Hôtel des Chênes firstly criticizes the two methods calculated by Mr. B., i.e. the estimate based on financing capacity and the estimate based on gross operating surplus, on the grounds that these methods are only valid for the valuation of a company and not for the valuation of a business, which is a broader concept with a strong patrimonial and fiscal connotation. However, S.A.R.L. Hôtel des Chênes will be told that the value of a business is not the same as the value of the company operating the business. The valuation of a business cannot be made in abstracto, but must correspond to an economic reality. As the appraiser points out, the potential buyer must have the means to finance the acquisition on the basis of the actual existing business. This is why valuation methods that include financing capacity and EBITDA are essential. The expert rightly points out that when the G. consorts bought the shares in S.A.R.L. Hôtel des Chênes in March 2005, they borrowed €275,000 and contributed €150,000 to the partners’ account: if their valuation method were adopted, the debt would triple, and S.A.R.L. Hôtel des Chênes would immediately be in suspension of payments. As soon as sales fall (which is our case), the value of the business must fall accordingly.

The coefficient used

S. A.R.L. Hôtel des Chênes believes that the usual coefficient for the hotel industry is an average of 2.63, and that the lowest coefficient in the Lot et Garonne region is 2.02. The company is therefore requesting that this coefficient be applied. It therefore requests that this coefficient be applied. The expert retained a coefficient of 1.5. First of all, with regard to the coefficient usually used in the profession, it is inaccurate to say that the average is 2.63. This average is based solely on Blatter and Perbos. The reference works are Blatter and Lefèvre. However, Lefèvre 2007 suggests a valuation of between 0.80 and 3.5 times sales for 3* hotels, while Blatter mentions a coefficient of 2 to 4 times sales for tourist hotels (regardless of category). Perbos mentions a coefficient of 2 to 3.5, with no further explanation. But we don’t ask an expert to apply an average range. He is asked to apply a coefficient appropriate to the situation of the business being appraised. He concludes by pointing out that it would appear random to base a valuation on more than 1.4/1.6 times annual sales. In the light of these factors, it is appropriate to retain the upper range of Monsieur VIDEAU’s reasonable valuation, i.e. a multiplying coefficient of 1.6, which brings the amount of the valuation by sales to €431,963.

The estimate retained for the main indemnity will therefore be calculated as follows:

• Estimate based on sales: €431,963
• Estimate based on cash flow: €314,316
• Estimated gross operating surplus: €376,398

For an average value of : 374.225 €. The first decision will be reversed on this point.

Ancillary indemnities

Re-use costs

As the value of the business is slightly higher than that recommended by the expert, the re-employment costs will be slightly modified as follows:

• duties on transfers for valuable consideration of business assets :
  0 à 23 000 € = 0 %
  23.000 à 200.000 € : 3 % = 5.310 €
  200.000 à 374.225 € : 5 % = 8.711 €
  Total: €14,021
• search costs for an equivalent fund:
  374.225 € x 5 % = 18.711 €
  TOTAL re-use costs: €32,732.

Commercial disturbance

This involves compensation for the loss suffered by the evicted tenant during the period of removal and reinstallation, or, in the absence of reinstallation, during the period of cessation of operations. According to the expert, jurisprudence usually sets the compensation at three months’ net income. The expert suggests that the court should increase this indemnity, given that the notice of termination was issued with effect from January 1, 2009, i.e. more than two years ago, and that as a result of this notice of termination the tenant can no longer implement the essential modernization projects. He points out that sales are almost identical to those of 2007. However, S. A.R.L. Hôtel des Chênes has pointed out that sales rose by 13.88% in the first four months of 2011, which would suggest that the eviction procedure has had no impact on the hotel’s business. He therefore proposes to retain an indemnity equivalent to six months’ net income. The first judge retained an indemnity of four months, closer to the average indemnity, but taking into account the long period that had elapsed since the date of notice. His assessment will be retained and his decision confirmed on this point. The other heads of compensation are accepted by both parties.

Amounts of damages constituting the eviction indemnity

The Court:

• Fixes the principal indemnity at €374,225,
• Fixes the re-employment indemnity at €32,732,
• Commercial disturbance: €10,255
• Staff redundancy costs: €3,580
• Unamortized works and improvements: €16,011
• Administrative and miscellaneous costs: €10,000

Consequently, orders SCI Pujols Bel Air to pay S.A.R.L. Hôtel des Chênes the sum of €446,803 as eviction compensation. CA Agen April 24, 2013 n° 12/01276 , ch. civile