Terminating a commercial lease agreement can have several consequences, including the tenant’s right to claim goodwill compensation.
We examine this concept in detail, outlining the requirements to access compensation and relevant case law examples.
What is Goodwill Compensation?
Goodwill compensation is a financial payment that the landlord must provide to the tenant upon termination of a commercial lease, provided specific conditions are met.
This compensation acknowledges that the tenant, through their business activity, has generated value benefiting the premises and, consequently, the landlord.
Applicable Regulations
The legal basis for goodwill compensation lies in Article 34 of Law 29/1994, of November 24, on Urban Leases (LAU). This article establishes the conditions and calculation method for compensation upon lease termination.
Requirements for Goodwill Compensation
To be entitled to goodwill compensation, the following requirements are necessary:
- Lease termination: The lease agreement must have ended due to the expiration of the agreed term or other valid reasons.
- Public-facing commercial activity: The tenant must have operated a business in the leased premises that involves direct sales to the public.
- Duration of the lease: The tenant must have conducted this public-facing business on the premises for five years. This period refers to the final five years of operation, not necessarily the whole lease term.
- Intent to renew: The tenant must have informed the landlord at least four months before the lease termination of their willingness to renew the lease for a minimum of five years at a market-rate rent.
- No contractual waiver: The lease agreement must not contain an express clause excluding or limiting the right to goodwill compensation.
Calculation of Goodwill Compensation
Article 34 of the LAU outlines two scenarios for determining goodwill compensation:
- If the tenant resumes the same business in the same municipality: If the tenant starts the same commercial activity in the same municipality within six months of lease termination, the compensation will cover relocation expenses and customer loss.
- If the tenant does not resume the same activity or starts a different one: If the tenant does not continue the same business, and the landlord or a third party engages in the same or similar activity on the premises, the compensation will be one month’s rent per year of lease duration, up to a maximum of eighteen months rent.
Case Law Perspective
Court rulings have clarified various aspects of goodwill compensation.
For instance, on June 24, 2024, the ruling of the Spanish Supreme Court upheld the right to goodwill compensation in a case where the lease agreement specifically defined the tenant’s business activity.
Additionally, several rulings from provincial courts have addressed specific goodwill compensation cases, emphasising the importance of proving that the tenant built a loyal customer base and that the landlord benefited from it. Strong evidence of these elements is generally required to claim compensation.
Conclusion
Goodwill compensation is a key right for commercial tenants designed to offset the efforts and investments made to build a customer base.
However, accessing this compensation requires compliance with the conditions set in Article 34 of the LAU, and, in legal disputes, solid evidence is necessary.
While case law has clarified some aspects, each case is unique and must be analysed individually.
If you need additional information regarding goodwill compensation upon termination of commercial lease agreements in Spain,
