In the complex and dynamic world of commerce, there are many legal terms and concepts that can seem interchangeable or confusing. Two of these often misunderstood notions are “fonds de commerce” and “droit au bail”. Understanding their essential differences is crucial to avoiding costly mistakes and legal disputes.
Leasehold rights are an element of goodwill
Goodwill encompasses all the essential elements of a business, from tangible assets such as equipment to intangible elements such as clientele and trade names.
The right to a lease is the right to occupy and enjoy commercial premises for a specified period, in accordance with the terms and conditions laid down in the commercial lease contract. It guarantees the stability and continuity of the business, as the tenant benefits from a certain protection against eviction, and can renew the lease under certain conditions laid down by current legislation.
Thus, a business includes the right to a lease, which is an intangible element. In the event of a sale of goodwill, the leasehold right is therefore usually one of the elements transferred.
Leasehold rights can be an independent element of goodwill
It is possible to transfer the leasehold rights without transferring the other elements of the business.
The transfer of leasehold rights alone can occur in a number of different situations. For example, a tenant may decide to assign his or her leasehold rights to another merchant, while retaining the other assets and intangible elements of his or her business. In this case, the transferee acquires the right to occupy and use the business premises, but not necessarily the other elements of the goodwill, such as the customer base, inventory, etc.
The transfer of leasehold rights, like the transfer of business assets, may be subject to restrictions or specific conditions set out in the initial lease agreement. Certain clauses may require the prior approval of the lessor, or require the assignee to meet certain conditions, such as financial capacity or experience in the relevant field of activity.
The risk of confusion
While in theory the distinction between leasehold rights and goodwill seems clear, in practice it’s not uncommon to be confused as to which is which. This is particularly the case when a business is sold without including many elements, and with a high-value right to lease.
Moreover, the parties may prefer one operation to the other.
For example, a purchaser of a business who wishes to take over the name, the lease and the clientele, without committing himself to current contracts, and to take over the employees, could request a transfer of leasehold rights instead of a transfer of business. Similarly, a seller in a hurry to avoid the cumbersome formalities of a business transfer may wish to disguise such a transfer as a business transfer.
Conversely, a seller who has a difficult relationship with the lessor may prefer a business transfer to which the lessor does not always have the right to object, rather than a transfer of leasehold rights which the lessor is more often than not entitled to refuse.
Bypassing the rules governing the transfer of these elements entails legal risks relating to employment law, commercial lease law, creditor reimbursement and taxation. Before committing to a transfer, it’s wise to be certain of its purpose. You may wish to consult a lawyer.
