Lease management is very common. It allows the owner who has operated a business to entrust its management to a lessee-manager who runs the business and reaps the profits, in exchange for the payment of a fee.
Lease management is useful for a business owner:
– who does not have the capital, the possibility of obtaining a loan, or sufficient means to buy a business. This allows them to build sufficient financial resources, particularly to later acquire the business they are operating or another;
– who wants to test the potential of the business before acquiring it, alone or with partners.
Sometimes, the business owner wants to increase the value of their business. They therefore place the business under a lease management agreement with professionals whose sole activity is business valuation increase. Since the Soilihi Law of July 19, 2019, a business owner is no longer required to operate the establishment for two years before leasing it out.
The business owner must verify that there is no clause in their lease prohibiting them from entering into a lease-management agreement.
If such a clause exists, the risk is that:
– the landlord, invoking the nullity of the lease-management agreement, will request termination of the lease for having entered into an unauthorized lease-management agreement;
– the lessee-manager fails to pay the business owner the lease fees and will also request the nullity of the lease-management agreement due to the business owner’s fault (Cass, Commercial Chamber, October 24, 2018, No. 17-10.620).
If the lease-management contract is void, the lessee-manager may nevertheless be required to pay the owner of the business compensation for the provision of the business, the clientele and the goodwill from which he has benefited from (Ccass. 3e civ. 12 July 2018, n° 17-18.628).
Duration and Fees
In practice, there is often a purchase offer in favor of the lessee-manager or a unilateral promess to sell binding the owner and attached to the contract.
The lessee-manager can therefore, on a specific date corresponding to the end of the contract or on another date, buy or sell the business at a price fixed in advance, regardless of fluctuations in business activity during the period. This allows them to develop the business during the lease-management period without fear of the sale price increasing simply due to increased revenue.
The lessee-manager pays the owner of the establishment a fee. This amount includes:
– the principal rent paid by the owner of the business to the owner of the premises;
– the expenses related to the business (operations).
The amount of the lease fees is freely negotiated between the prospective lessee-manager and the business owner, for example, a fixed sum and/or a percentage (of profits, turnover, or both), the latter being the most incline to represent the reality and the economic fluctuations.
The fee amount must not be overestimated, otherwise the tax authorities may consider it a pre-determined portion of the sale price, concealed to avoid future capital gains tax payments by the seller.
Non-compliance of premises
One of the main difficulties faced by tenant-managers is the non-compliance of the premises or one of its components upon taking possession.
An inventory of the premises, equipment, and installations must be drawn up upon entry. If such an inventory is not completed or fails to mention any non-conformities, the landlord will assume that the tenant-manager received them in good repair, in accordance with articles 1731 and 1732 of the French Civil Code. Often, the tenant-manager only becomes aware of the non-conformity of the premises, or parts thereof, or of the business itself, later on, particularly during operations or during an inspection by the prefectural hygiene department, the town hall, or other relevant authorities.
The lessee-manager should also pay close attention to any clauses in the lease that absolve the business owner of any responsibility. For example: “The manager will take the currently leased business and its subsidiaries in their existing condition on the date of taking possession, without being able to take any legal action against the lessor for any reason whatsoever and without being entitled to any compensation or reduction of the rent stipulated below.”
The clause stipulating that the lessee-manager takes the business in its existing condition does not prevent the lessee-manager from requesting certain repairs from the owner of the business (referred to as the “commercial tenant”). The commercial tenant must ensure that the business is delivered in conformity with the lease agreement, that is to say, a business that is suitable for its intended use.