A business assets should be understood as a set of elements enabling the operation of a professional business, such as the clientele, the premises, the merchandise and equipment, any contracts, the website, the furniture, leasehold rights of the premises in which the business is running, the sign and the trade name.
The lease management consist of running a business based on a lease agreement granted by the owner of the business (the lessor, who is not necessarily the owner of the premises) to an individual or legal entity (the lessee manager) in exchange of a rental payment named a fee.
The lessee manager has the right to run the business freely and temporarily at his/her own risk and without the lessor granting him/her ownership.
In Monaco, this type of operation is governed by law n°546 of 26/06/1951 which regulates the lease management.
The lease management should not be confused with the exploration by a hired person managing the business, which consists of running the business in exchange of salary, on behalf and at the risk of the owner of the business assets. In this case, the hired manager does not have the status of an independent trader.
Regarding the lessor:
If the lessor, owner of the business assets, holds a commercial lease without owning the premises, he/her must obtain the express authorisation of the owner of the premises to enter into a management lease.
On the other hand, if the lessor is also the owner of the premises in which the business assets is run, no authorisation is required.
As the lessor no longer carries out commercial operations (buying and reselling), he/she loses his/her trader status and is no longer registered at the Monegasque Trade and Industry Register.
There are no conditions regarding the duration of the business. Thus, an individual who inherits a business assets and who cannot run it may immediately grant a lease management. Therefore, a person inheriting a business assets and who cannot operate it may immediately grant a lease management agreement.
Regarding the lesse manager:
He/She must have commercial capacity and the trader status.
Official business permit is required for persons of foreign nationality. If lease management is granted to a legal person, the regulations applying to the legal form chosen must be complied with.
Any person wishing to run, according to a lease management, one of the businesses provided for in Articles 66 and 89 of the Order of June 6th, 1867 related to national police force or in Articles 8, 16 and 25 of the Order of July 11th, 1909 on the municipal police force, must obtain the prior authorisation provided for in each of the said Articles. The businesses concerned are wine shops or other beverage shops, butchers, bakers, and those selling foodstuffs, and the professions concerned are those of hotelier, innkeeper, lodger, caterer, restaurateur and cafe owner.
In both cases, the authorisation is valid only for the current duration of the lease management. It shall automatically suspend, for the same period, the effects of any authorisation held by the lessor.
When business authorisation is notified or when the certificate of deposit of a new business declaration has been issued, notice of lease management of the business must be published in the Journal de Monaco.
For further information, please consult the Government website:
THE ADVANTAGES AND INCONVENIENCES
Generally managing the business assets, the lease management contract is a way of keeping the ownership of the business while taking a step back from its activity (in periods of questioning, early retirement or illness...).
The lessor cannot interfere in the management of the business by the lessee, even if it is bad, even though he/she owns it.
|He receives fees without carrying out any activity.||
The lease of the business assets is also "at the risk and peril" of the lessor, who could see his/her business devaluate because of bad management by his/her lessee-manager.
|If the lessee manager is competent and increases the turnover, this may increase the value of the business assets in case of a sale.||
At the lease management expiration, the current employment contracts continue between the lessor and the employees, provided that the company has kept its identity and its activity has been maintained.
The lessee manager can test a business for a simple rent and evaluate its potential more effectively, before investing to buy the business assets. He/She minimises the financial risk.
The operation of the business is at his/her own risk, he/she is responsible for the debts incurred during the operation.
|This makes it possible to operate more quickly, since the authorisations relating to the conformity of the premises will already have been requested by the lessor, who owns the business assets.||
The work done during the period of lease management cannot be valued.
He/She may even penalised himself/herself by increasing the value of the business assets if he/she intends to buy it back and the conditions have not been agreed beforehand.
|As he/she does not have to make any major financial investment at the start, this removes a major entry barrier into the Principality and encourages entrepreneurship.||
He/She is not entitled to automatic renewal of his/her lease management agreement.
He/She does not own anything at the end of the contract; even if he/she has made the business done well, he/she is not entitled to any compensation.
THE LEASE MANAGEMENT CONTRACT
A lease management agreement, which sets out the conditions of use and operation of the business assets, must be drawn up either as an official deed by a Monegasque notary, or as a privately-signed deed registered with the Department of Tax Services of the Principality.
It is submitted when the application for authorisation or declaration to operate is filed. Then, when the authorisation to operate is notified, or when the receipt for the declaration to operate is issued, the lease management is published in the Journal de Monaco.
By judgment of October 16th, 2017, the Court of Revision of Monaco recognised the mixed nature of the lease management contract: necessarily commercial with regard to the lessee manager, since he/she performs commercial operations as a usual profession, and civil only with regard to the lessor, to whom the trade status is not granted if he/she rents his/her business assets.
The lease management agreement must include the following obligatory notices:
- First names and surnames of the lessor and the lessee-manager
- Domicile of the lessee-manager or address for service in Monaco, if they are resident abroad
- Nature of the business
- Registered office of the business
- Duration of the agreement
- Financial conditions.
As this is a private contract, the parties are free to include clauses relating, in particular, to the duration of the annual closure, the conditions of renewal, the obligations of the lessee manager and those of the lessor, the operating conditions, the work in the premises, the maintenance, the termination of the contract, etc.
Care must be taken to ensure that the terms and conditions are correctly defined, sufficiently strict and sanctioned by an efficient express avoidance clause. At the contract termination, the lessor takes back the business assets in the state as it is: he/she therefore takes the risk of finding a depreciated or worthless business assets if the lease manager has not operated it properly.
Obligations of the lease manager:
In return for the use of the business, the lessee-manager must pay the lessor monthly or quarterly fees.
In addition, the lessee-manager shall comply with the obligations arising from the contract, including the following:
- To operate the business in accordance with its purpose: he may not change the activity or add a new one without the agreement of the lessor. However, the lessor may relieve the lessee-manager of this interdiction by an express written statement which shall be subject to the formality of registration, if it is not already contained in the lease contract.
- The lessee-manager may not assign his right to the lease, nor sublet it, nor transfer it to a third party without the express written consent of the lessor, under penalty of the contract termination at the latter's discretion. In the case that the lessor authorises a substitution, the lessee-manager shall be jointly and severally liable with his successor for the payment of the lease fee and the performance of the contract under the same conditions.
- He must manage the business in such a way that the business does not lose value. He must also exploit the business in compliance with the regulations of the profession so as not to endanger the business (administrative closure, for example), not to modify the sign, to comply with the commercial lease, to make the necessary repairs, not to divert the client to another business, etc.
- Maintain the business in a fit state to operate: he must replace out-of-use equipment, renew patents if necessary, maintain the premises.
- A security deposit is generally required from the lessee-manager to guarantee the equipment and the payment of fees and rents.
Obligations of the lessor:
- The lessor must guarantee the lessee-manager the free use of the business: this includes the guarantee against latent defects (guarantee against a defect which makes the matter unfit for the use for which it is intended, or which diminishes this use so significantly that the buyer would not have bought it or would have bought it at a lower price if he had been informed about it) and the guarantee against eviction (guarantee against disturbances of enjoyment by a third party or the lessor himself).
- The lessor is obliged to hand over to the lessee-manager all the elements of the business, and in particular to give him a business that meets health and safety standards, that can be operated in good conditions and that allows him "peaceful use".
- If provided for in the contract, the lessor may be bound by a non-competition clause prohibiting him from operating a competing business in a specific geographical area.
RENEWAL OR TERMINATION OF THE LEASE MANAGEMENT AGREEMENT
As the contract is concluded for a fixed term, it may not be tacitly renewed. In case that the lessor and the lessee-manager wish to renew it, they must notify each other by registered letter with acknowledgement of receipt, subject to a period of notice to be agreed beforehand. The renewal will then be the subject of an authenticated or private deed published in the Journal de Monaco. Similarly, the end of the management lease will also be published.
The management lease will end automatically in one of the following situations:
- on term’s expiry set out in the contract, in the absence of a desire to renew if the activity is carried out in a personal name ;
- in the case of the declaration of bankruptcy of the tenant-manager ;
- in the case of an offence or misdemeanour leading to the business closure.
The management contract may also be terminated, at the lessor's discretion, in the case of receivership, non-payment of royalties or failure to perform an obligation under the contract.
At the end of the management lease contract, the lessor recovers the right to exploit the business and the current employment contracts continue. The lessee is not entitled to any compensation, even if he or she has contributed to increasing the value of the business through his or her skills.
However, the business may also be transferred or donated to the lessee-manager, or merged or absorbed by the lessor/tenant company.
The conclusion of a management lease contract requires the clauses to be well drafted in order to avoid possible difficulties linked to this situation. The consultation of a law professional is thus greatly advised.
Valeri Agency, strong of its knowledge in commercial real estate is at your disposal to accompany you in your professional projects.
Do not hesitate to consult us!