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.