Rental management
Definition and utility
Lease management (also called free management) is a contract by which the owner of a business temporarily assigns to a person, called tenant-manager, the right to freely exploit this fund at his own risk and against the payment of a fee.
The lease-management allows:
- – to acquire or retain ownership of a fund;
- – to ensure its financing or income, through the collection of royalties;
- – without personally exploiting it.
It can be a good way to prepare the sale of your company and therefore be accompanied by a promise to sell the fund. In terms of distribution, it is also a means of making a network wealthier by making a licensee or franchisee bear the cost of capitalising the purchase price and equipment (if any) of the fund.
Above all, it allows the promoter of the distribution network to be the holder of the lease rights and therefore to perfectly control the commercial locations, and to make himself the entire perimeter of the network. This is the most commonly adopted fixture in burger fast food.
For the tenant-manager, this formula allows him to access the operation of a business without having to immediately acquire the sometimes onerous elements of a business (right to lease, patent, equipment, licenses or others). It is thus a means of accelerating the development of networks.
As part of the preparation of a business transfer, the lease-management allows the tenant to assess the viability of the business he plans to take over.
The lease-management must not be confused with the figure of the employee-manager or the agent-manager. Indeed, the employee-manager will be in charge of the fund under an employment contract while the agent-manager will hold a mandate to manage the fund on behalf of the owner.
Conditions of validity
Previously, the owner of the fund had to have operated the fund for at least two years. Some exceptions to this obligation were, however, provided for by Article L. 144-5 of the Commercial Code. In particular, it was possible to obtain a judicial exemption from the application of this period. This exemption was systematically granted if the needs of the organization of the company and the activity so required. It is this exception that was used by fast food or themed networks using this system to install their licensees or franchisees when opening a new restaurant.
If the commercial lease requires personal use of the land in the leased premises, the owner of the business (lessee) must obtain prior authorisation from his lessor, the owner of
the premises.
You can watch a video here on the legal regime of leasing management.
1 – Obligation of the parties
The lease-management agreement sets the conditions for the use and operation of the fund. It must be ensured that they are correctly defined, sufficiently strict and sanctioned by an effective express termination clause. The lessor takes back the fund in the state in which it is: it therefore runs the risk of finding a depreciated or worthless fund if the tenant manager has not exploited it appropriately. This point is decisive and requires the attention of the brand.
The fund’s equipment conditions and investments must also be distributed by the contract according to the strategic options of the lessor and the financial capacity of the lessee.
In return for the enjoyment of the land, the tenant will have to pay fees to the owner. They are most often expressed as a percentage of the turnover generated by the operation of the fund, with the collection of a minimum flat fee. Any other system may nevertheless be agreed upon. Royalties are payable on a monthly or quarterly basis. Lessors have an interest in providing themselves with contractual financial guarantees such as a possible bank guarantee, which will also guarantee the payment of royalties, in addition to a security deposit.
The lessor is subject to the obligations of a conventional lessor and in particular to compliance with the obligation to issue. The lessor may be questioned by the tax administration, for the payment of the tenant’s direct taxes, established by reason of the operation of the business.
Conversely, the obligations of the tenant-manager are those of a tenant. It must enjoy the substance without alienating the elements or changing the destination. It is also required to exploit the seabed without endangering it (no exploitation defect).
The tenant-manager must return all the elements of the fund, even those created by him at the end of the contract, and in particular the clientele, which he does not have the right to appropriate. The return does not imply that the fund is at the same market value at the end of the lease-management. On the other hand, the tenant-manager shall be liable for the loss of market value of the fund that occurred through his fault.
2 – Effects of the contract on third parties
The creditors of the lessor of the fund may make an application to the Commercial Court within three months of the publication of the management contract to obtain the immediate payment of the debts relating to the operation of the fund when the lease-management creates an insolvency risk.
Indeed, the tenant-manager is not jointly and severally liable for the debts of the lessor and the contracts entered into by the first are unenforceable against the second, except in terms of employment contracts.
On the other hand, the landlord is jointly and severally liable for debts contracted by the manager during the operation of the land, until the publication of the lease-management agreement, for contracts entered into since December 11, 2016. Social security contributions related to the operation of the fund are included but the manager’s personal debts are excluded.
If you want to know more about the interest of lease management as part of a franchise network, you can watch the video on lease management and franchise.
End of contract
The term of the lease-management agreement is back-to-back with that of the license or franchise agreement when they are coupled. The tenant-manager is not entitled to the automatic renewal of the contract when it has expired. The lessor may take back his fund without having to pay compensation at the end of the contract.
If the contract is for a fixed term, it ends at the end of the contract. When the contract is for an indefinite period, it ends with the termination by one of the parties.
The end of the lease-management gives rise to a formality of publicity.
Employment contracts subsist and are transmitted to the owner of the fund.
Elements of the tax system and requalification risks
Fiscally, the royalties constitute taxable operating profits in the category of BIC for the lessor to the RI or to the IS for the commercial company. They are subject to VAT.
For the tenant-manager, these fees are deductible from his taxable profit.
Finally, attention
should be drawn to the fact that the tax administration considers that there is a disguised assignment, when the lease-management agreement is accompanied by a promise to sell and the amount of the royalty is deducted from the sale price. In this case, it shall carry out an adjustment of registration fees.
