Securing the purchase of a business
When purchasing the business assets of a bar, brasserie, hotel, café, restaurant, or nightclub, the buyer must take several precautions, as the commercial lease is transferred to them. They must verify the remaining lease term, the rent amount and the risk of rent increases, the suitability of the leased premises for their business activity, and check the condominium regulations.
Given the complexity of this transaction, it is advisable for the buyer to be assisted by a lawyer specializing in the hospitality industry to best protect their interests.
Including Essential Information When Drafting the Preliminary Agreement
Before the Law on Simplification, Clarification, and Modernization of Corporate Law (known as the Soilihi Law) No. 2019-744 of July 19, 2019, the deed of sale of a business had to contain several mandatory clauses (Article L141-1 of the French Commercial Law Code):
– the name of the previous seller, the date and nature of their acquisition, and the purchase price for intangible assets, merchandise, and equipment;
– the status of any liens or pledges on the business;
– the turnover achieved during the three fiscal years preceding the year of the sale, this period being reduced to the duration of ownership if it was less than three years;
– the operating results achieved during the same period;
– the lease, its date, its duration, and the name and address of the landlord and the seller, if applicable.
The omission of any of these elements could, at the request of the buyer made within one year, render the deed null and void (Article L141-1 of the French Commercial Law Code). Otherwise, the claim was time-barred.
Since the Soilihi Law repealed Article L141 of the French Commercial Law Code, there are no longer any mandatory disclosures, the absence of which would render the deed of sale null and void. An action for annulment remains possible, not on the grounds of a lack of disclosure, but on the grounds oferror, fraud, or duress (Articles 1130 et seq. of the French Civil Code). This action is available for five years. Furthermore, the seller may also be sued for damages for breach of their pre-contractual duty to disclose information (Article 1112-1 of the French Civil Code).
In practice, it is strongly advised, when drafting the deed of sale for a business, to continue including these details to legally secure the transaction in the interest of both parties:
– the seller will have proven that they fulfilled their obligation to disclose essential elements of the contract, and therefore acted in good faith, thus minimizing the risk of legal action, particularly for fraudulent concealment (in other words, for having withheld essential information);
– the buyer will have peace of mind when taking over the business, knowing all the details; otherwise, they take a very significant risk with their investment.
Other elements can also lead to the sale being declared null and void if they have been concealed by the seller: those that the buyer would not have entered into the contract had they been aware of them at the time of signing.
Conditions Suspensive for the Benefit of the Buyer
To secure the purchase of a business, the buyer must include conditions precedent. If a condition is not met, the beneficiary of the preliminary agreement is generally released from their commitments and has the right not to acquire the business, without having to pay any compensation.
However, they must prove that a condition precedent has not been met. If they cannot do so, they will have to pay, in order to withdraw from the sale, the deposit or the amount stipulated in the penalty clause included in the preliminary sale agreement.
A common condition precedent is the prospective buyer obtaining a bank loan. If the bank loan is not obtained, the buyer has the right not to purchase, unless, of course, they are responsible, for example, if they failed to submit the loan applications with the required supporting documents within the deadlines.
Preliminary sales agreements frequently include the elements listed below.
A suspensive clause for lease renewal under the same conditions
For example, a buyer agreed to purchase a business, specifically subject to the condition precedent that the commercial lease be renewed under the same conditions. The landlord agreed to the renewal between the preliminary sales agreement and the sale. However, they demanded a rent increase from €535 to €569, taking into account the indexation clause in the lease. The buyer attempted to withdraw from the agreement. The Cour d’appel dismissed their claim, as they were aware of this indexation clause when signing the preliminary sales agreement (CA Douai, May 31, 2018, No. 16/04360).
A clause authorizing the landlord to add a new activity
Before purchasing a café, hote or restaurant (HRC), it is advisable to request the condominium regulations, which specify the permitted activities, to avoid any surprises. Furthermore, it is the activity, or one of the activities, stipulated in the lease that can be carried out by the tenant and can therefore be transferred. If the prospective buyer wishes to undertake a new activity, they must ask the seller to negotiate with the landlord (or initiate a simple or full change of use procedure). They can also purchase the business themselves. In this case, the tenant risks a rent increase (or a rent increase beyond the current cap) from the landlord.
In any event, the tenant can negotiate with their landlord all the activity clauses permitted by the condominium regulations. For example, signing an amendment to the lease authorizing a crêperie-waffle shop to expand its business to include a restaurant (a pizzeria). Of course, the landlord must ensure the premises comply with regulations: they must install an extraction duct suitable for the new restaurant activity.