Business Lease Agreement
Term and Definition
Ein Business Lease Agreement is a civil law contract that governs the temporary or permanent use of an entire business or significant business units by a third party. In German law, the term refers in particular to the situation in which a company, known as the lessor, permits another company, the lessee, to operate its business or part of it independently, without changing the legal ownership structure. The purpose of a business lease agreement is to enable the lessee to economically exploit the business with all associated economic opportunities and risks.
Distinction from related types of contracts
Business Lease versus Employee Leasing
The business lease agreement differs significantly from employee leasing under the German Employee Leasing Act (AÜG). While in employee leasing, employees are assigned to a third party to perform work, in a business lease agreement, control over employees and business operations remains with the lessor or is completely transferred to the lessee, without standard employment relationships transferring to the lessee.
Business Lease versus Lease and Rental Agreements
In contrast to a classic rental or lease agreement pursuant to §§ 581 ff. BGB, a business lease agreement does not only extend to the transfer of objects (such as machinery, buildings), but usually also includes operational processes, operating resources, intangible assets, and often the workforce of the business. Depending on its design, however, the business lease agreement overlaps with the lease agreement in certain aspects, particularly regarding the right of use for economic units and the obligation to return them at the end of the contract.
Legal framework and regulatory content
Contracting parties and formal requirements
The parties to a business lease agreement are usually two legally independent companies. As a rule, there is no formal requirement; however, for legal certainty, written form is recommended.
Essential elements of the contract
A business lease agreement should regulate the following essential elements:
- Object of the lease: Definition of the business or business unit, precise designation of equipment, inventory, intangible assets, and, if applicable, workforce.
- Duration of lease: Commencement, term, and the possibility of ordinary or extraordinary termination.
- Remuneration: Determination of the lease fee, payment terms, adjustment clauses.
- Business management: Scope of the entrepreneurial decision-making powers transferred to the lessee.
- Allocation of risk and liability: Regulation of maintenance, insurance, liability for damages.
- Rights and obligations towards third parties: Rights to existing contracts, handling of liabilities and receivables, handling of employment relationships.
- Return obligations: Preservation of the original condition, regulations on return after the contract ends.
Employment law aspects
Handling employment relationships
A central issue in business lease agreements is the status of employees. If employment relationships are also transferred as part of the lease, it must be carefully examined whether the conditions for a business transfer within the meaning of § 613a BGB are met. If only the management of the business is outsourced, without a genuine business transfer taking place, the employment relationships generally remain with the lessor. Otherwise, the employees will be transferred to the lessee with all rights and obligations in accordance with § 613a BGB.
Co-determination rights and works council
Business leasing can have far-reaching effects on the existing co-determination rights of works councils under the Works Constitution Act (BetrVG). In particular, the information, consultation and, where appropriate, approval rights of the works council must be observed, for example, pursuant to §§ 111, 112 BetrVG in the event of business changes.
Tax and social security issues
A business lease agreement may entail various tax consequences, for example in the area of value-added tax, trade tax, and corporate income tax. The transfer of use may be subject to VAT if there is a consideration. For social security purposes, the question arises as to who is considered the employer within the meaning of social security law and who is responsible for making contributions.
Antitrust and regulatory aspects
In certain industries and specific market conditions, when concluding a business lease agreement, antitrust law must be considered, particularly merger control under the German Act Against Restraints of Competition (GWB). In addition, in some sectors (e.g. healthcare, energy, transport), regulatory approval requirements may apply.
Termination of the business lease agreement
Upon termination of the contract, the lessee is obliged to return the business or business unit in the contractually agreed condition. Disputes may arise from the interpretation of the return obligation, the handling of investments and changes during the lease period, as well as the condition of the inventory. Any agreed arrangements regarding dismantling, compensation, or indemnification are usually specified in detail in the contract.
Summary
A business lease agreement is a complex contractual instrument for transferring a business or part thereof for independent use by a third party. Careful regulation of rights and obligations in the areas of employment law, tax law, liability, as well as adherence to antitrust and regulatory requirements, are of central importance for the success of the lease. The contract must be individually tailored to the two participating companies and the specific circumstances of the business to be leased, in order to achieve economic objectives and legal certainty.
Frequently asked questions
Legally, who is considered the employer of the leased employee in a business lease agreement?
In the context of a business lease agreement – also referred to as an employee leasing contract – the legal employer of the leased employee is always the lending company, i.e., the lessor. The employment relationship between the lessor and the temporary worker continues in full. The borrowing company (lessee) exercises the right of direction during the period of assignment but does not legally assume employer functions regarding payment of wages, social security obligations, or general protection against dismissal. However, under the so-called “Arbeitnehmerüberlassung” according to the German Employee Leasing Act (AÜG), certain shared responsibilities and obligations may pass to the lessee, for example, in occupational health and safety or in ensuring equal treatment and equal pay for temporary workers compared to the permanent staff. If there is a so-called “covert employment relationship” resulting from abuse of law or unauthorized employee leasing (e.g., lack of permit by the lessor), the employment relationship may be established directly with the lessee (§ 10 AÜG).
Which legal requirements must the business lease agreement fulfill according to the German Employee Leasing Act (AÜG)?
Section 12 AÜG prescribes clear formal and substantive requirements for the business lease agreement. The contract must be concluded in writing prior to the actual leasing; an oral agreement is insufficient and invalid. The contract must specify the identity of the leased employee, the essential terms and conditions of employment including pay, the period of assignment, and the specific place of work. In addition, the employee leasing arrangement must be explicitly referred to as such in the contract (so-called “identification requirement”). Hidden or mistaken leasing arrangements also result in significant legal consequences. The contract must ensure that the working conditions applicable to the employee during the lease period are at least equal to those of the lessee’s permanent staff (Equal Treatment/Equal Pay). It must also be demonstrated that a valid permit for employee leasing exists. Violations of these statutory provisions may result in significant administrative fines and the legal presumption of an employment relationship between the lessee and the employee.
What are the obligations of the lessor and lessee regarding occupational safety?
Both the lessor and the lessee have independent obligations in the area of occupational safety, as set forth in § 11 AÜG and other occupational safety laws. The lessor remains responsible for contractual protection obligations, particularly in structuring and complying with working time requirements. The lessor must also check the suitability of the workplace in the lessee’s business. The lessee is responsible during the assignment for compliance with occupational safety regulations at the specific workplace, including providing necessary instruction, supplying work equipment, and ensuring a safe working environment. In addition, the lessee must notify the lessor of work-related hazards and any accidents. The statutory “dual responsibility” requires close cooperation between the parties to ensure the safety and health of leased employees.
What statutory limits exist for the period of assignment of temporary workers under a business lease agreement?
Section 1 (1b) AÜG provides for a maximum assignment period of a temporary worker to the same lessee of 18 consecutive months. If this maximum is exceeded, according to § 10 (1) sentence 1 AÜG, an employment relationship arises automatically between the temporary worker and the lessee, unless the employee objects. Exceptions may arise from collective agreements in the relevant sector that allow for longer periods or set other terms. For the temporary worker, claiming this employment relationship may offer advantages, e.g., in terms of protection against dismissal and workplace co-determination. In cases of successive assignments (changing lessors at the same workplace), circumvention arrangements are inadmissible and count towards the maximum assignment period.
What liability regulations apply in connection with the business lease agreement?
As a rule, in the relationship between lessor and lessee, the lessor is liable for the proper selection of its employees, their qualification, and suitability for assignment (so-called selection fault). For damages caused by a temporary worker in the lessee’s business, the lessee is generally liable, as he holds the right of direction and thus is considered the employer in terms of liability. Recourse against the lessor is possible only if selection fault can be proven. With regard to social security contributions and wage payments, the lessor remains solely responsible. If an assignment takes place without the required permit for employee leasing, stricter liability rules apply, making the lessee a de facto employer. In criminal and administrative offense law, both companies may be held jointly and severally liable for AÜG violations.
How is co-determination by the works council regulated when concluding and implementing a business lease agreement?
The works council of the borrowing company has a right of co-determination under § 99 BetrVG regarding the employment of temporary workers. This includes, among other things, consent to hiring, transfers, and classification. There are also information obligations towards the works council concerning the number, place of deployment, and working conditions of temporary workers. In the lending company, the works council must be involved in selecting employees to be leased and in structuring their terms of employment. The works councils of both companies have the right to monitor compliance with equal treatment principles (Equal Pay/Equal Treatment). In addition, pursuant to § 14 (3) AÜG, the lessee’s works council has a special right to inspect the leasing agreement and can request information as part of wage comparisons. Violations of these co-determination rights can render measures invalid and may give rise to injunctive relief.
What sanctions apply in the event of violations of the statutory provisions on employee leasing?
Violations of the AÜG, particularly where there is no permit for employee leasing, disregard of disclosure and identification obligations, exceeding maximum period of assignment, or failure to provide equal pay/treatment, are subject to fines and can be punished with significant fines (up to 500,000 euros) (§ 16 AÜG). The permit for employee leasing may also be withdrawn, which can threaten the lessor’s existence. In cases of unauthorized leasing, the law may establish an employment relationship between the temporary worker and the lessee, which entails far-reaching social security and employment law consequences for the lessee. In serious cases, criminal penalties may also apply (e.g., for illegal employment, non-payment of social security contributions). In addition, employees have a right to bring legal action to have the leasing contract declared invalid and/or to claim differential compensation.
