The leaseback scheme was an initiative by the French to promote tourism and development in certain parts of France and has been around for many years but became very popular with French developers from 2000 on. The idea is that the French government department gave certain ‘residence du tourisme‘ developments leaseback status, which meant that the buyer could ‘reclaim’ the VAT paid on the purchase price. The VAT on new build homes in France was 19% in 2009.
In return, the owner agreed to lease the property to an operator for a minimum period of 9 years to be used as tourist accommodation. This lease is a ‘bail commercial‘ – a commercial lease with legal and tax implications. The lease was agreed with guaranteed rent payable each quarter. A typical lease allowed for 5% rent with a maintenance charge of €18 per m sq deducted. This was understood by buyers to include all maintenance (remember the ‘hassle-free‘ part in the sales documentation).
Some buyers chose a lease with a certain number of weeks usage of the property each year, with a corresponding decrease in the ‘guaranteed‘ rent. Others signed a full investment lease with no usage.
What is the VAT implication ?
The fact that VAT could be reclaimed was a big marketing point. However you could argue that the 19% VAT was added on to the selling price anyhow, so there was was no ‘real’ saving. In many cases, the developer handled the VAT payment to the French revenue and subsequent re-claim. In reality, the French government would never have received this VAT amount as we would never have bought these properties without the ‘guaranteed’ rent.
But if owners fail to have a lease and fail to rent out their property then they must pay this amount to the French revenue. And 19% of €200k is lots of bobs.
The VAT liability diminishes at the end of 20 years with a pro-rata liability each year. Thus if the lease was not renewed after the 9 years then the VAT liability would be 11/20 of original. This is still lots of bobs on a property which is next to worthless.
It is possible for owners to not have a lease and rent out the property themselves if they fulfil certain criteria. As with other things French this is not transparent. Operators will frighten owners in to keeping a lease at all costs and there is no direction from the French authorities in this regard. Read more on avoiding payment of VAT.
What happens at the end of the lease ?
According to the French Notaire website, the tenant has the right to renew the lease. If the unfortunate owner, having realised that the whole enterprise has been a financial disaster for him, wants to get out of the lease, there is ‘compensation’ to be paid. Yes, more to be paid. It really is never-ending.
There is little mention here of the rights of owners.
At the end of nine years, the tenant has the right to have their lease renewed for the same term, at a rent that may not exceed an upper limit. If the landlord does not wish to renew the lease, they are required to pay the tenant compensation for non-renewal of the tenancy. The tenant is entitled to be fully compensated for the loss. The compensation may correspond to the market value of the business.
Read more (in English) from the official Notaire.fr website on commercial leases.
The ‘compensation’ may be up to 2 years revenue (this is the operators revenue, not your rent) and may be up to a judge/court to decide. Again, there is no transparency. If you have been through this demand for ‘compensation’ please get in touch.
I suggest that your Why point 3 section on French mortgages should be amended and extended to include information on what could be argued to be malpractice by some unscrupulous French mortgage brokers.
We (www.bestfrenchmortgage.com) were, and still are, being approached by developers offering to “sell” us French leaseback mortgage clients provided we add a substantial broking fee to be paid by the applicant. This fee supplement can be as high as an additional 5%. A large part of this supplement is expected to be paid over to the promoter or their agent.
Essentially this has created the conditions for a perfect storm as follows.
1. The property is overpriced to start with.
2. The management charges are insufficiently transparent and often considerably higher that could be deemed reasonable.
3. An unrealistic income stream and yield are stated by the promoter.
4. The mortgage fees are inflated.
5. The mortgage dossier submitted by the broker to the bank can often be “creative” to get a mortgage that would not, on the basis of utmost good faith and full disclosure, otherwise pass the bank’s underwriters.
6. The mortgage broker’s client is never informed that it is almost impossible for any potential subsequent buyer of the property to get a French mortgage because French banks will seldom (<1% of cases) offer a mortgage on an ex leaseback property. Effectively this makes it impossible for the leaseback owner to cut their losses and bail out by selling unless they can find a cash buyer.
The net effect that the leaseback buyer can have been charged up to around 10% in brokerage fees to get a mortgage that they should never have been offered.
We, as a point of principle, feel that this sort of brokerage behaviour should have been prevented but was too lightly regulated.
Under present French mortgage lending rules, the complete breakdown of broking fees – amounts and recipients – must be set out in the bank mortgage offer.
Perhaps potential clients who see how the high brokerage fees are being split between the broker and the promoter/agent might look more deeply into the value of the “deal” they are being offered.
We are now regularly getting enquiries from people with leaseback mortgages that appear to have been miss sold to them. Unfortunately, the problem only appears 7-9 years downline when the leaseback income stream dries up.
For the record, for most French mortgage clients, fees should range from 0% (the banks pay all mortgage brokers a commission) to1% unless there are special circumstances.
If you’d like help on drafting an full explanation of how this collusion works just ask and I’ll help you draft it so it’s factually correct with representative example figures.
I do think the key thing to underline in relation to a mortgage for a French leaseback property is that there is NO ‘guaranteed rent’.
Income for many dried up, or reduced significantly, long before the end of the lease.
Is it certain that David Romano will get a notification about my reply to his post, requesting whether he can provide independent view as a witness statement to the High Court in London.
Can you please notify David Romano about my reply if possible.
The Banks and Notaries knew about it and chose to withheld this crucial information that is the bedrock for decision to even consider French leasebacks.
It is also the reason for the Notaries not registering (i.e. authenticating) the rental guarantee.
So, Notaries have actually acted in bad faith, in favour of banks, completely throwing out their independence, impartiality, being without conflict of interest and abusing public trust, though Notaries were paid by French leaseback buyers.
This is deception, fraud and perjury at the extreme level.
Dear David Romano,
My name is Kidner Shanthikumaran, and I go by Kidner Shanth for sake of easiness.
I want to contact you.
I am adversely affected by French leaseback. It is the usual story, lease was broken even before it started, and I believe the Notary and the Bank are in collusion.
The Bank (BNP Paribas) is after me for the mortgage by the legal route of EEO (European enforcement order), and my argument is basically it must have never happened in the first place, mis-selling, unfairness, against natural justice.
I have already put a set aside in London High Court, laying out my fundamental arguments.
I want to know whether you are willing to give witness statement or as an affidavit of what you have said in the comment so that it be used as an independent view of what happened and is happening in UK High Court.
I am willing to pay reasonable amount for your service.
Hi Kidner I tepresent a group of now 55 leaseback owners on the P&V Center Parcs site. We are currently defending a small number of our group being threatened with an EEO. Your insight having been subjected to one would be useful. Would you be kind enough to contact me at email@example.com
In retrospect, I have always been astounded that French Banks gave mortgages on these properties, in my case I was an expat given a 20 year mortgage on an illiquid commercial property, that it now turns out was overvalued and had no guaranteed income stream.
From a mortgage lenders perspective that is reckless lending. There must have been some collusion form the banks to have accepted valuations which it seems were often 100% overvalued, otherwise why would they tie themselves into such a poor deal for them. How would they ever get out in the case of default?
To me there were 3 major elements behind the sales info that gave them authenticity…
The properties were in Europe, where one would have expected terms like Guaranteed wouldn’t have been allowed unless it meant something,
There was an inferred guarantee that was backed by the French Govt.
The fact that mortgages were being offered by Barclays and HSBC , not some small regional bank.
These weren’t get rich quick schemes being sold in Eastern Europe they were being sold and still are in a highly regulated part of the EU, with mortgages from the worlds largest banks, all things that should have counted for something.