In the context of commercial transactions, it is not unusual for the terms "leasehold rights" and "business assets" to be mixed-up. However, they are two very distinct legal concepts, the specific features of each must be clearly identified before taking steps to sell or acquire a business.
TRANSFER OF LEASEHOLD RIGHTS
The sale of leasehold rights is an act by which a tenant (assignor) will transfer his/her rights to a third person (assignee). The assignee buys from the assignor the right to benefit from a current commercial lease agreement, which has been concluded with the owner of the premises (lessor), for the remaining period of time and under identical conditions, in particular with regard to the rent.
He/her also benefits from the guarantees of a commercial lease agreement toward the lessor, who must renew the lease agreement. If he/she refuses and if the alleged motives are not considered serious and legitimate with regard to the outgoing tenant, he/she will have to pay an indemnity equal to the business loss caused by the failure to renew the lease agreement, as a commercial property and in accordance with the law no.490 of 24 November 1948 regarding tenancy agreements for commercial, industrial or trade use.
The tenant who is willing to transfer his/her leasehold rights or to make a contribution to a company must inform the lessor beforehand, as law no. 490 grants him/her a right of pre-emption under certain conditions. Most of the time, in order to keep the same conditions as the current commercial lease being transferred, the assignee must have the same corporate purpose as the assignor in order to keep the same intended use.
Indeed, unless the lease is considered to be "all businesses", the activity must be clearly defined in the commercial lease agreement. This way, the assignor will not be able to transfer without the lessor's agreement if the new activity considered by the assignee is different. The lessor will have two options, he/she can either simply refuse the new activity or accept it. If the lessor would grant it, a new lease agreement would be drawn up and the conditions would be at that time, freely set by the lessor.
In addition to these new conditions, the lessor could also require the payment of a so-called "despecialisation" indemnity, of his/her chosen amount.
In order to fix the value of a leasehold right, the following elements must be taken into account:
- the amount of the rent : lower the rent is, the higher the valuation will be,
- the purpose of the lease : broader the purpose is, simpler will be the transfer and the better the value,
- the features : condition, size and location of the premises.
In all cases, the value of the leasehold rights is not linked to a turnover.
This leasehold right should not be confused with the right of entry or key money, which is a sum of money that can be paid by the purchaser of the leasehold rights directly to the leased commercial premises’owner in addition to the rent agreed in the lease contract.
Upon signature of the deed of transfer, a copy of which is given to the lessor, the purchaser shall pay a registration fee of 1% of the sale price + 0.70% notary fees, i.e., a total of 1.70%. Nevertheless, although it is strongly advised, it is not compulsory to use a notary for this type of transaction.
In addition, costs of advertising in the “Journal de Monaco” must be added, as well as the annual 1% tax on rents and any credit and pledge fees.
If the sale is carried out with the assistance of a real estate agency, the buyer will have to pay a commission equal to 6% of the sale price + VAT and the seller a commission equal to 3% + VATl., according to the prices laid down by the Monegasque Real Estate Chamber.
It is also important to remind that not all businesses necessarily benefit from a commercial lease agreement. Indeed, some of them have a precarious or temporary lease agreement (limited to a maximum of 35 months), or a lease agreement for office defined by the Law no. 1 433 of November 18th, 2016 (no commercial activity, no reception of customers and goods allowed). In both cases, this does not confer any commercial property to the tenant, and is therefore not transferable.
THE SALE OF BUSINESS ASSETS
The business assets concept is much broader than the leasehold rights, which is one of its constituent assets. It can be sold, contributed to a company, leased or granted as a guarantee for the reimbursement of a loan, for example.
It refers to all the following elements:
- tangible: material, visible and appropriable elements within the framework of the commercial activity,
- intangible: non-quantifiable and unseizable elements, but needed for the achievement of the business activity.
Thus, the purchaser not only buys the leasehold rights but also the equipment, goods, furniture, order book, current contracts, sign, trade name, clientele, employees, licences and authorisations, patents, trademarks, industrial designs, literary and artistic property rights, domain names, e-mail addresses, this list being not restrictive.
Inventory is generally not included in the value of the business assets and must be valued separately at the time of the sale. Debts, receivables and real estate properties are also excluded.
The business assets evaluation exercise is closer to a company valuation and requires significant financial analysis and audit. It is therefore clearly recommended to seek the assistance of a specialist, as a chartered accountant, to determine the sale price. Real estate agents will only be able to fix a price concerning the leasehold rights.
For certain small businesses, particularly in Monaco where the real estate is really expensive, the main asset of a trade is often be formed by the leasehold rights. This is a reason why there is frequently the confusion between them.
Once the sale price has been agreed and the buyer found, the parties can then sign a preliminary sales agreement.
As a transfer of leasehold rights, the lessor will have the possibility to exercise his/her right of pre-emption, which is granted to him/her by article 32 bis of law no. 490 above-mentioned.
Nevertheless, unlike a transfer of leasehold rights, which often involves a change of activity, the purchaser of a business assets generally remains with the same activity as the assignor. As a result, the lessor cannot be opposed to it.
However, the lease agreement may include clauses and conditions restricting this freedom to sell the business assets by requiring the approval of the lessor regarding the new purchaser, especially based on solvency or worthiness by the
On the other hand, if the business assets sale project involves a partial “despecialisation” of the lease (the addition of an activity complementary to the existing one for example), the lessor will be free to grant or withhold authorisation for the change of use. This situation will give the lessor the opportunity to review all the terms and conditions of the lease agreement and possibly request compensation for “despecialisation”.
Upon signature of the deed of sale, the purchaser will be required to pay a 6% registration fees on the sale price + 1.5% notary fees, i.e. a total of 7.5%. In addition, costs of advertising in the “Journal de Monaco” must be added, as well as any credit and pledge fees.
Finally, if the sale was made with the assistance of a real estate agency, the commissions due by each party are the same as those due in case of sale of the leasehold rights.
In summary, there are three options given to the owner of a business assets:
- Sale of the business assets and termination of its activity
- Sale of the leasehold rights, if he/her benefits from a commercial lease agreement and wishes to pursue his/her activity elsewhere.
- Lease-management, which allows the owner of a business assets to grant a person (the lessee manager) the right to freely run his/her business assets at his/her own risk and liability, subject to the payment of a fee and the approval of the lessor.
The main differences between the transfer of the leasehold rights and the sale of the business assets are about the purpose of the sale and the price. Indeed, for identical premises, leasehold rights will necessarily be less expensive than business assets, this latter including many more elements. However, we should have in mind that the acquisition of a business assets, unlike the acquisition of leasehold rights, allows to take over a pre-existing activity.
The Valeri Agency team, with its extensive knowledge of commercial real estate, is at your disposal to assist you in any transaction, whether it involves business assets or leasehold rights, and to help you make the right move.
