The conclusion of a business leasing-management agreement ("gérance libre" in the Principality, under the terms of law n°546 of June 26, 1951) offers many benefits to the lessor. He can entrust the operation of his business to a third party, who can neither claim any rights to the business nor to the commercial ownership of the premises. At the end of the contract, the business will be returned to the lessor, together with the staff assigned to the business, in theory without compensation for the lessee-manager.

If the lessor selects his lessee carefully and monitors his relationship with him correctly, he will be able to benefit from his lessee's good management by increasing the value of his business, in addition to the royalties paid to him in accordance with the contract.

However, this method bears risks. Most issues shall be adressed in the business leasing-management agreement to ensure that the lessor does not find himself in difficulty at the end of the contract. The most obvious risk when it comes to business-leasing management remains the risk of impairment of the goodwill in the event of poor management by the lessee, but there are other pitfalls to be avoided.

Monitoring the risk of goodwill impairment

As far as the management of the business is concerned, reporting and sanction mechanisms are essential to detect any malfunctions and, if necessary, immediately put and end to the business leasing-management agreement to limit the lessor's loss when possible.

The business leasing-management agreement may also provide for minimum marketing expenses and investment obligations imposed on the lessee-manager, as well as business development objectives. However, these investments shall not consist of the very creation of the business, which the lessor must be able to prove existed prior to the lease.

A strategic plan can also be defined with the lessee-manager, but it is essential that the lessor does not interfere in the management of the business, failing which he may be held liable for any operating loss.

Monitoring the risk of contract requalification

At the end of the business leasing-management agreement, the lessee-manager may seek its requalification into a commercial lease, in order to claim the payment of an eviction indemnity. It is therefore imperative to gather evidence of the pre-existence of the business before it was leased.

This evidence must cover the constituent elements of the business, i.e. the premises or the leasehold rights, the equipment, the contracts necessary for the operation of the business, the telephone line, the website, the employment contracts, the merchandise, the clientele, the sign, the trade name, and so on.

It is not required to have previously operated the business before leasing it out. Also, the lessor may not be a merchant and may, for example, be a civil society.

The lessee-manager may also seek to have the business leasing-management agreement reclassified as a salaried management contract in order to benefit from the favorable provisions of Monegasque labor and social security laws, including paid vacations, working hours, the application of disciplinary procedures, enhanced social protection, and so on.

The financial impact of a requalification could be highly prejudicial for the lessor, who should pay a posteriori the social security taxes (employee and employer taxes) related to the royalties paid and, where applicable, additional remuneration (for example, additional wages, paid leave, overtime pay and other benefits in kind which are used to in the lessee's company, etc.).

In such a situation, the lessee-manager will seek to establish a subordinate relationship with the lessor. Again, the lessor shall not interfere in the management of the business, and shall refrain from giving any instructions to the lessee-manager, particularly concerning the working hours.

Monitoring the risks inherent to the business' employees

Finally, if the lessee-manager hires employees to run the business, it should be noted that the mandatory provisions of article 15 of law 729 of March 16, 1963 on the mandatory transfer of employment contracts cannot be set aside if the lessee-manager ceases to operate the business and in the absence of continuation of the same activity by a third party.

As a result, it is highly recommended that the provisions of the business leasing-management agreement enable the lessor to retain control over the number of new hires by the lessee-manager, the number of conversions from fixed-term to permanent contracts, and the hiring criteria to be applied.

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The business leasing-management relationship is therefore based on a clever blend between control and autonomy of the lessee-manager, bearing in mind that the judge is not bound by the legal status chosen by the parties and will rather assess the situation in concreto. The lessor, for his part, will need to document the relationship and include safeguards in the contract he proposes to his lessee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.