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On 5 May 2022, 8 lessors of the Adagio Val d’Europe tourist residence succeeded in having the Meaux court order PV RESIDENCES & RESORTS France (PV CP CITY), part of the PIERRE ET VACANCES group, to pay €124,508 (Covid rents: €121,628 and €2,880 under article 700 of the French Criminal Procedure Code).

The Cour de Cassation confirmed this solution in its two rulings and its press release of 30 June 2022.

No “partial loss of the rented property

The operator, a company in the PIERRE ET VACANCES group, claimed that the confinements resulting from an administrative decision could be likened to a partial destruction of the rented property.

The aim was to avoid having to pay arrears of commercial rent for this tourist residence.

The Meaux court rejected this argument in the following terms:

“Temporary unavailability of the leased property, as a result of an administrative decision, is in no way comparable to partial destruction. The very nature of destruction is that it is definitive.

However, in the case in point, what is involved is a temporary administrative closure that cannot be equated with partial destruction of the rented property.

The plea alleging “partial loss of the rented property

Temporary unavailability of the leased property as a result of an administrative decision cannot in any way be equated with partial destruction. In fact, the very nature of destruction is that it is definitive.

However, in the case in point, what is involved is an administrative closure of a temporary nature that cannot be equated with partial destruction of the leased property.

The plea will be rejected.

Judgement of the Meaux judicial court of 5 May 2022, 1st chamber, No. RG 21/01536

Judgement by the Bastia judicial court (45,617 euros)

13 landlords in a tourist residence obtained an order from the Bastia judicial court for the operator of the Belambra tourist residence to pay 45,617 euros in covid commercial rents (41,717 euros in principal; 3,900 euros article 700 of the CPC, legal costs).

Judgment of the court of Bastia, 20 September 2022, 1st civil chamber, No. RG 21/00266

Tourist residence: Eviction compensation for Adagio Charras

Rejection of Pierre et Vacances’ claim to ignore 2020 and 2021

The interim relief judge of the Nanterre court confirms that the years 2020 and 2021 must be taken into account when calculating the eviction compensation claimed by Pierre et Vacances for the tourist residence, a former student residence at the end of the lease:

“In its written submissions at the hearing, PV CP CITY, without contesting the expert’s report in principle, requested that the years 2020 and 2021 be excluded from the scope of the expert’s assignment, on the grounds that they were not representative of the normal operating conditions of the business in light of the administrative measures taken as part of the Covid-19 health crisis.”

Compensation for eviction must be calculated at the time when the loss is incurred, i.e. either on the date of eviction or on the date when the tenant ceases to occupy the premises on a regular basis. The value of the business assets must be assessed on the date on which the courts rule when eviction has not yet occurred (Com. 30 June 1959, Bull. civ. III, no 292; Civ. 3e, 24 Nov. 2004, no 03-14.620), it being noted that the value of the business must be determined on the basis of the lessees’ last three years’ turnover before the eviction (Civ. 3e, 20 March 2007, no 06-11.040).

With regard to the assignment, although the defendant argues that the years 2020 and 2021 are not representative of its business in terms of the measures taken to manage the health crisis, it does not specify the measures to which it refers or their impact, and it does not submit any documents to the court to support the alleged effects, even though the scope of the expert’s assignment is disputed and consequently the elements put forward in its defence cannot be taken for granted. Consequently, there is no reason to exclude the last two years of activity from the mission entrusted to the expert.

(Judgment of 25 May 2022 No. RG 22/00259)

It will be recalled that the Cour de Cassation stated in a clear statement that the unpaid rents in 2020 and 2021 by Pierre et Vacances and the other operators were due:

“The general and temporary measure prohibiting the reception of the public does not result in the loss of the rented property and does not constitute a breach by the lessor of his obligation to deliver. A tenant is not entitled to rely on this as force majeure in order to escape payment of his rent”.

Cour de cassation, no. 21-19.889 – no. 21-20.127 – no. 21-20.190

Adagio Paris Tour Eiffel tourist residence (rue du théâtre)

The Paris judicial court has ordered Pierre et Vacances, which operates the Adagio Paris Tour Eiffel residence, to pay covid for unpaid rent.

The Adagio residences are operated by a company in the Pierre et Vacances group, PV CP CITY. The Adagio brand is owned by Pierre et Vacances and the ACCOR group.

A procedure initiated by 31 lessors

On 22 March 2023, Pierre et Vacances (PV CP CITY) was ordered by the Paris Magistrates’ Court to pay €848,649 to 31 lessors (€845,549 in unpaid rent and €3,100 in article 700 CPC) of the Adagio Paris Tour Eiffel residence.

Application of Court of Cassation case law from 2022

The 18th civil division of the court dismissed the operator’s arguments in accordance with the case law of the Cour de cassation of June 2022. The Court of Cassation has issued a statement to give its decisions greater weight in the courts responsible for applying this solution.

Rejection of the plea of non-performance based on an alleged breach of the lessor’s obligation to deliver and force majeure

The plea of non-performance and force majeure were rightly rejected, in view of the positive law established by the Cour de cassation.

Responses from the Board of Directors to shareholders’ written questions

The operator favours its shareholders over its lessors, despite the public aid it receives:

“Rent expense is virtually stable compared with the previous financial year (up €3 million) lease renewals (€20 million) being offset by lower rental savings in discussions with the Group’s lessors than those recorded in the previous financial year (€47 million in FY 2021 vs. almost €70 million in FY 2020).

Rental savings in FY 2021 are limited to :

– the net savings achieved by applying the endorsements signed by 59.3% of individual lessors as at 30 September 2021 (deductible equivalent to 7.5 months’ rent, including 5 months in respect of FY 2021, i.e. a saving for the Group of around 29 million euros over the year, largely offset by a charge of 28 million euros corresponding to the face value of the vouchers awarded to signatories of the endorsement).

The result for the year also includes a saving of 7 million euros relating to suspended rental payments to non-signatory lessors for periods of administrative closure during which the Group considers, on the legal basis of the exception of non-performance or on the basis of the provisions of Article 1722 of the French Civil Code, that the rental debt is extinguished.

– the net savings achieved by applying the agreements signed with institutional lessors, representing an amount of around €39 million for FY 2021 (rent-free periods / variable rents with guaranteed minimums, net of the provisioning of rents under financial recovery clauses).

The 2019/2020 financial year saw rental savings of almost €70 million (€30 million in respect of rents from individual lessors suspended during the administrative closure period and €40 million in respect of agreements negotiated with institutional lessors).”

(Brochure_de_convocation_AGM 31 March 2022, page 8)

“The Group has based its assessment on the legal basis of the exception for non-performance and on the provisions of Article 1722 of the French Civil Code. As a result, no liability has been recognised in this respect at 30 September 2021.

This position has been validated by the Group’s statutory auditors.

…

– What are the texts, decrees or administrative regulations referred to under the term “administrative closure” used on page 15 of the Notice of Meeting brochure, in respect of the period considered “mid-March to the end of May and November to mid-December 2020”?

The texts applicable to the period from “mid-March to the end of May and November to mid-December 2020” are as follows:

Ministerial orders of 14 and 15 March 2020 and decree no. 2020-293 of 23 March 2020

– Decree no. 2020-548 of 11 May 2020, amended by Decree no. 2020-604 of 20 May 2020

– Decree no. 2020-1310 of 29 October 2020

Debts due in respect of all unpaid rents to non-signatory individual lessors for the period from 1 January to 30 June 2021 are recorded as liabilities (under trade payables in the Group’s parent company and consolidated financial statements) in an amount of approximately €32 million at 30 September 2021.

To date, these debts represent only €16 million, the share of non-signatory lessors having been halved compared with 30 September 2021. The suspended rents for the other so-called interim periods (periods between administrative closures) have also been paid in full.

The Group, with the support of its legal advisors, considers that the rental debt relating to the administrative closure periods has been extinguished. The Group relies on the following legal bases:

– The exception of non-performance due to the breach of the obligation of peaceful enjoyment (articles 1219 and 1719 of the French Civil Code); and

– the grounds of partial destruction (loss) of the premises (article 1722 of the Civil Code).

Accordingly, no provision has been recorded in the Group’s consolidated financial statements in this respect.

(Responses from the Board of Directors to written questions from shareholders, Combined General Meeting of 31 March 2022)

State guarented loans and public subsidies to Pierre et Vacances

Lastly, the court noted the significant public subsidies received by the tourist residence group.

Statutory auditors’ report of 30 September 2021

The auditors’ report of 30 September 2021 states that 551 million euros of debt had been converted into capital and that “25 million euros of the PGE had been maintained”.

The PIERRE ET VACANCES group will therefore not be obliged to repay 215 million of the 240 million of the first PGE.

The new and second EMP for 34.5 million euros

The PIERRE ET VACANCES group benefits from a new and second PGE amounting to 34.5 million euros.

(Statutory auditors’ report of 30 September 2021, pages 17, 19 and 43)

Closure aid

The operator obtained so-called “closure” aid from the State amounting to €24 million “to compensate for the fixed costs not covered by companies whose business is particularly affected by the Covid 19 epidemic”.

(Statutory auditors’ report of 30 September 2021, page 44)

Refusal to sign agreements unfavourable to lessors under the pressure of pseudo-conciliation before the Commercial Court

The operator intends to make the lessors pay for its operating risks, despite the fact that it is not sharing the healthy profits from the record years for tourism in Paris in 2018 and 2019 with its “investors”, the individual lessors.

The operator tried to get the lessors to sign an amendment under which they acknowledged that they had breached their obligation to deliver in exchange for non-existent concessions such as the payment of rent for subsequent quarters.

Court orders Pierre et Vacances to pay unpaid rent covid

The landlords can congratulate themselves on not having given in to pressure and untruths.

Rent deferral, not a waiver of the covid rents

Lack of impartiality of the conciliator before the commercial court

The tenant, operator of the leaseback property, proposed a rent waiver amendments to the lessors. The Pierre et Vacances Group put pressure on landlords to agree to rent waivers for the Covid period. In particular, it financed 100% of a conciliation before the commercial court, while refusing the conciliations proposed by the judicial court, which would have provided guarantees of impartiality. The role of the conciliator before the commercial court is to have claims waived (to save the failing company). Legal untruths were written to the lessors in an attempt to convince them to give in. Our firm refused to take part in this conciliation, as it did not offer the minimum guarantees of impartiality.

Waiver Covid: Legal reason of the Court of Paris

The court of Paris interpreted PV CP CITY’s waiver no. 2 as follows:

“It is clear from these documents that the lessor grants the lessee a deductible of 5 months  contractual rent excluding taxes and charges, including the entire period from March 15, 2020 to June 13, 2020.

Reciprocally, the lessee undertakes to pay the lessor the positive difference between the contractual rent and the above-mentioned waiver, net of rent already paid, in respect of the restrictive measures periods on December 31, 2021.

Consequently, it follows from these waivers that the lessee’s rent payments will be deferred, and not that the lessor will remit rent for the period from March 15, 2020 to June 13, 2020.

The claim to dismiss the action for payment brought by Mr. and Mrs. I. and by the company I. is inoperative.”

(Judgment of the Paris District Court, 18th Civil Division, March 22, 2023)

Failure to sign the waiver

The court of Paris rejected also the claim of Pierre et vacances regading the waiver of other lessors, but based on a different legal ground.

“Finally, it should be noted that Mr. A., Mrs. C. and Mr. E. did not sign these endorsements. The claim is also inoperative.”

(Judgment of the Paris District Court, 18th Civil Division, March 22, 2023)

The tenant failed to prove the signatures of these waivers.

The question of the waiver concerned only some of the lessors of this group of 40 owners, the rest having refused to sign a transaction devoid of reciprocal concessions.

As a reminder, the lessee was ordered to pay 31 de la résidence Adagio Paris Tour Eiffel 845,549 euros in unpaid rent and 3100 euros in legal fees (article 700 CPC).

Total eviction compensation of €15,549

Nexity Studea the tenant operating the student residence in the parisian suburb Clichy was asking for eviction damages after the refusal of the renewal of the lease by the owner. This claim is based on on French code of commerce.

The first step is to ask the court to appoint an expert to calculate the evictions costs for the owner. After the expertal report, it is often possible to reach an agreement with the tenant.

Concerning an apartment in the Nexity Studea Clichy residence, the court apointed expert’s report proposes the following amounts for eviction compensation and ancillary compensation:

“The main compensation is set at €12,673 (twelve thousand six hundred and seventy-three euros).

The ancillary compensation is set at €2,878 (two thousand eight hundred and seventy-eight euros)

For a total of €15,549 (Fifteen thousand five hundred and forty-nine euros)”.

Nexity Studea’s qualification as a student residence

The residence is a student residence and not a service or tourist residence, as NEXITY STUDEA claims.

A student residence has very few fixed costs, and is more akin to a property management business than a hotel. Leases are annual, and very few staff are dedicated to the residence, and almost none are full-time. NEXITY employees work on several residences at the same time.

The operator’s name is NEXITY STUDEA, studea referring to the English verb “to study”.

NEXITY STUDEA operates a student residence, which it is expected to rent to students.

This qualification is important, hence NEXITY’s attempt to pass off a student residence as a tourist residence.

Jurisprudence has established the methods and prejudices to be ruled out in matters of eviction compensation for a student residence, and still qualifies NEXITY STUDEA residences as student residences.

The turnover method in student residences like Nexity Studea

Following the case law, the expert applies the turnover method, but at coefficients much lower than the coefficient 4 requested by NEXITY, which applies to hotels and not student residences.

The Versailles Court of Appeal upheld the judgment of the Nanterre Regional Court, which applied a coefficient of 1.75 to average annual sales in NEXITY STUDEA student residences:

“The commercial lease covers an apartment and a parking lot in a student residence with 110 lots. The sales method should be applied, as for a property manager, with a coefficient of 1.75 applied to average annual sales.

(Versailles Court of Appeal, 12th Chamber, May 29, 2018, 17/02845, JurisData number: 2018-009760, summary)

The Versailles Court of Appeal has upheld the judgment of the Nanterre Regional Court, which applies a coefficient of 2 to average annual sales over three years, before applying the median with EBITDA, in the NEXITY STUDEA student residence in Issy-Les-Moulineaux :

“Calculating the capitalization by the average sales over the same three years of the three disputed lots, the expert concluded to an average sales excluding VAT of 7,823 euros, to which he assigned a coefficient of 2,

In view of the specific nature of serviced residences and the lack of precedent enabling a method of proven relevance to be adopted, the median retained by the expert between restated EBITDA and average sales will be validated by the court.

(CA Versailles, 20-06-2017, n° 12/05809)

The Paris Court of Appeal confirmed the experts’ choice of a coefficient of 1.75 for average annual sales in student residences: “Concerning the valuation of the main eviction indemnity, the method used for furnished hotels is not appropriate.  In a student residence, the majority of sales are generated by rents, the payroll is very small and the studios are rented to students on a year-round basis.  The average of two methods should be used, as was done by the legal experts: the sales method, assessed as for a property manager, with the application of a coefficient of 1.75 to average annual sales”.

Paris Court of Appeal, Pôle 5, Chamber 3, May 2, 2018, No. 16/04691, JurisData number: 2018-007308

On the same date, the Paris Court of Appeal issued another ruling along the same lines.

(Cour d’appel de Paris, Pôle 5, chambre 3, 2 mai 2018, 16/10156, numéro JurisData : 2018-007141)

In this case, the location of the student residence NEX in Clichy-la-Garenne cannot lead to a coefficient of average sales higher than 1.75.

Leaseback Property : Adagio Paris Tour Eiffel  (rue du théâtre)

Adagio residences are operated by a company of the Pierre et Vacances group, PV CP CITY. The Adagio brand belongs to Pierre et Vacances and the ACCOR group.

A procedure initiated by 31 lessors

Pierre et Vacances (PV CP CITY) was ordered on March 22, 2023 by the Paris judicial court to pay 848,649 euros to 31 lessors (845,549 euros in unpaid rent and 3100 euros in article 700 CPC) of the Adagio Paris Tour Eiffel residence.

The case law of the Cour de Cassation (Supreme/High Court) of 2022

The 18th civil division of the judicial court dismissed Pierre et Vacances/PV CP CITY’s arguments in accordance with the case law of the Court of Cassation of June 2022.

Rejection of the exception of non-performance based on an alleged breach of the lessor’s obligation to deliver and force majeure

The exception of non-performance and force majeure were rightly rejected, in view of the positive law established by the Court of Cassation.

State guaranteed loans (PGE) and public subsidies for Pierre et Vacances

Finally, the court noted the significant public subsidies from which the group of leaseback properties benefited.

The operator favors its shareholders over its lessors, despite the public aid it receives:
“Rent expense is almost stable compared to the previous year (up 3 million) renewal of leases (20 million euros) being offset by rent savings in discussions with the Group’s lesser lessors than those recorded in the previous year (47 million euros in FY 2021 vs. nearly 70 million euros in FY 2020).
Rental savings in FY 2021 are in fact limited to :
– to net savings from the application of the endorsements signed by 59.3% of individual lessors as of September 30, 2021 (deductible equivalent to 7.5 months’ rent, including 5 months’ rent in respect of FY 2021, i.e. a saving for the Group of around €29 million over the year, largely offset by a charge of €28 million corresponding to the face value of the vouchers allocated to the signatories of the endorsement).

7 million relating to suspended rents to non-signatory lessors for periods of administrative closure during which the Group considers, on the legal basis of the exception of non-performance or on the basis of the provisions of Article 1722 of the Civil Code, that the rent debt is extinguished.
– net savings from the application of agreements with institutional lessors, representing an amount of approximately 39 million euro for FY 2021 (deductibles / rent variabilization with guaranteed minimums, net of provisioning of rents under financial recovery clauses).

The 2019/2020 fiscal year recorded rental savings of nearly 70 million euros (30 million euros for rents from individual lessors suspended during the administrative closure period and 40 million euros for agreements negotiated with institutional lessors).”
(Brochure_of_AGM March 31, 2022, page 8)
“The rental debt to non-signatory lessors relating to the administrative closure periods has been extinguished in the accounts of the lessee companies, the Group basing its assessment on the legal basis of the exception of non-performance and on the provisions of Article 1722 of the Civil Code. Accordingly, no liability has been recognized in this respect as of September 30, 2021.
This position has been validated by the Group’s auditors.
…
– What are the texts, decrees or administrative regulations referred to under the term “administrative closure” used on page 15 of the notice of meeting, in respect of the period considered “mid-March to end of May and November to mid-December 2020”?
The texts applicable to the period from “mid-March to the end of May and November to mid-December 2020” are the following
Ministerial orders of March 14 and 15, 2020 and decree n°2020-293 of March 23, 2020
– Decree n°2020-548 of May 11, 2020, modified by decree n°2020-604 of May 20, 2020
– Decree n°2020-1310 of October 29, 2020
Debts due in respect of all unpaid rents to non-signatory individual lessors for the period from January 1 to June 30, 2021 are recorded as liabilities (under trade payables in the Group’s parent company and consolidated financial statements) in an amount of approximately 32 million euros as of September 30, 2021.
As of today, these same liabilities represent only 16 million euro, the share of non-signatory lessors having been halved compared to September 30, 2021. The suspended rents for the other so-called interim periods (periods between administrative closures) have also been settled in full.
The Group, with the support of its legal advisors, considers that the rental debt relating to the administrative closure periods has been extinguished. The Group relies on the following legal bases:
– The exception of non-performance due to the breach of the obligation of peaceful enjoyment (articles 1219 and 1719 of the Civil Code); and
– The basis of the partial destruction (loss) of the premises (Article 1722 of the Civil Code).
Consequently, no provision has been recorded in the Group’s consolidated financial statements in this respect.
 (Answers of the Board of Directors to written questions from shareholders, combined general meeting of March 31, 2022)

Statutory Auditors’ Report of September 30, 2021

The auditors’ report of September 30, 2021 specifies the existence of a debt-to-equity conversion in the amount of 551 million € and “maintenance of a portion of the EMP in the amount of 25 million“.

[learn_more caption=”PGE converted into capital”] The PIERRE ET VACANCES group will therefore not be forced to repay 215 million € of the 240 million € of the first state guaranteed loans [/learn_more].

The new and second state guaranteed loans of 34.5 million €

The PIERRE ET VACANCES group benefits from a new and second state guaranteed loans in the amount of 34.5 million euros.
 (Statutory auditors’ report of September 30, 2021, pages 17, 19 and 43)

The “closing” aid

The operator obtained so-called “closure” aid from the State in the amount of 24 million € and “aimed at compensating for the uncovered fixed costs of companies whose business is particularly affected by the Covid 19 epidemic.”
 (Auditors’ report of September 30, 2021, page 44)

Refusal to sign agreements unfavorable to lessors under the pressure of pseudo-conciliation before the commercial court

The operator intends to make lessors pay for its operating risks, although it is not sharing the booming profits from the record years of tourism in Paris in 2018 and 2019 with its “investors,” the individual lessors.

The operator tried to get the lessors to sign a rider acknowledging that they had breached their delivery obligation in exchange for non-existent concessions such as the payment of rent for subsequent quarters.

Lessors can congratulate themselves for not giving in to pressure and untruths.

The pitfalls of tourism residence investment

Investment in French Leaseback Properties seems attractive

Why talking about French leaseback problems ? Because there are a lot !

The buyer benefits of several tax breaks by the French government. At this stage, what the real estate agent promised comes true.

The private investor doesn’t has to bother about the furnishing of the flat. He or she doesn’t have to manage the rent of the apartment.

Better, the operator guarantees the payment of attractive rents not depending on the real occupancy of the apartment. The operator pays the rent even if the flat is empty. It last for the nine years of the lease contract (or should).

However, the lease contract is here a commercial lease, which follows specific rules under the French law. This set of rules applies for businesses. It protect the lessee and the stability of the businesses. It wasn’t designed for private investor, with no knowledge of the French law.

Unfortunately, the commercial lease protects a very long term relationship, ie 9 years and usually 18 years.

But a lot of owners have to face legal issues. The profitability promised when signing the contract disappeared.

Late payments and unpaid rent

On paper, an investment in a leaseback has everything to please: tax reduction, return of VAT, full discharge of rental management and perspective, often too much vaunted, to achieve a good profitability.

But some owners are quickly disappointed. Nobody told you about french leaseback default. They often have the unpleasant surprise of meeting all sorts of difficulties in the payment of their rents: recurring delays going up to the unpaid rent for months or years. Risks that seriously change the attractiveness of investment. The investor should know about the French leaseback problems.

Some managers prefer to control their cash flow to the respect of their contractual duties. Owners find themselves having constantly to claim their rents. That’s why so many articles talk about French leaseback problems or even French leaseback scandal.

In addition, owners can not afford such flexibility with the payment of monthly mortgage loan. Too much delay in payment may lead the lending banks to demand full and direct repayment of the loan. It sometimes put the owners in great financial embarrassment. That’s another big French leaseback problem.

In case of unpaid rent, the owner must act quickly if he wants to recover his arrears of rent.

Lawyer and bailif

At this stage, a simple email/letter isn’t enough. You have to move quickly to the next step. The owner will have to send a “command to pay” (CDP), by bailiff, for the cancellation clause of the lease contract. The official warning will mention that the tenant has a period of one month to pay the rent.

Following the lease term, the landlord/lessor has the right to terminate the contract, after one month. The landlord then has the option to fill a case in court and to request the eviction of the operator.

This threat may be enough to motivate the unscrupulous tenant to pay his unpaid rents promptly. If it does not run, the operator is liable to pay unpaid rent, but also legal fees (bailiff and lawyer), and possibly an occupancy allowance.

Big repairs and refurbishing at the expense of the lessor (owner)

After 9 years, the cost of the repairs is among the first unpleasant surprises of the investor in French leaseback scheme.

Indeed, it is common that during commercial lease, the operator asks for renovation of all the apartments. The bill can then rise to a year and a half of rent. One of the many French leaseback problems for the owners.

Before investing, the buyer should assess the quality of the apartment he is about to buy. He has to check the extent of any repairs to be done. Of course, nobody told you that. They were insisting on a financial and government secure investment.

General expenses of the building are first paid by the operator. The managing company is usually a company of the same group. After 9 years (and a change in the French law), the operating company refuses to pay general expenses of the building. The operator is even pretending the cleaning staff paid by the owners is not cleaning the rooms but only the commons.

Renegotiation of rent imposed by the operator

At the renewal of the commercial lease, the operator of the residence often seek to revise the amount of rents downwards. Economic conditions and competition are among the most cited reasons for this decreased rent. It is usally the first time you hear about “bail commercial” (commercial lease in France).

Some operators receive an amount paid by the Promoter to purchase the building, whereby they artificially inflate the rents during the first nine years of the Commercial lease.

They know that after 9 years a set of rules will force the renegotiation of the rent and finally the decrease.

These rents do not reflect the state of the local rental market at the time the commercial lease is concluded (i.e. they are very high). Here starts the french leaseback scandal.

It is very likely that the operator will ask to renegotiate a drastically lower amount to renew the commercial lease.

Even if the owner is free to refuse a lower rent, the trap closes when he realizes that he could lose his tax return. And that he will pay the general expenses and the rental management alone if his apartment is not operated by another operator. It is not 100% like that, but usually the owner doesn’t ask for legal counsel of a real french leaseback lawyer.

To get out of this slump, the owner may decide to sell his property.

Resale of the leaseback property might be difficult

However, the government agrees to a 100% VAT refund only if the flat is rented during 20 years.

If not, the owner has to refund to the tax authorities the VAT to run until the 20th year. For example, if it is after 9 years: 9/20 of the tax return.

This fact, weighs heavily in the balance at the renegotiation of rent. The owner is torn between the significant decline in the amount of rental income decreasing the gains of a possible resale of his apartment and the loss of tax benefits.

But the most significant issue is the eviction compensation. It is up to several thousands of euros for a simple flat. The owners don’t to pay the tenant, who is refusing to continue the lease at the same rent.

That’s why you can read about French leaseback scandal or french leaseback nightmare ! The french leaseback forums are full of testimonies of French leaseback problems. Irish owners even wrote a french leaseback petition to the European union commission in Bruxelles.

Irish owners even wrote a french leaseback petition to the European union commission in Bruxelles.

You have to find the right french lawyer to fight for you in french courts !

Please feel free to ask us a written question!

Once the commercial lease is terminated No more expanses of the operator

Leaseback in France

The French leaseback property is a hotel, belonging to a co-ownership of individuals.

Some co-owners   of a flat under a leaseback scheme have terminated their contract with the operating company.

The tenant wants to bill them for some of his commercial and touristic services in the building.

These co-owners of leaseback in France are not required to bear the expenses related to several contracts.

Especially, they don’t have to pay for the reception contract on the ground floor. Meaning, the labors contracts of operator’s employee. These costs were in the common expenses of the co-ownership before. Now, several co-owners are out of the original scheme in which the operating company takes care of everything and send invoices at the end of the year (paid on the rent directly). The leaseback in France is now managed by the operator, but you are no longer a part of it. You cannot continue to pay for the commercial et hotel services provided by the operating company.

The reception corner at the entrance of the building is  a commercial service of the operator, which has no utility or value for this co-owner of a leaseback in France.

The operating company of the leaseback in France lost the case against these co-owners.

French Law

Article D. 321-2 du code du tourisme ; articles 10 et 41-3 de la loi n° 65-557 du 10 juillet 1965

Cour de cassation, chambre civile 3, 18 février 2015, N° de pourvoi : 13-27104

How to terminate the lease of the operator ?

There are several ways to terminate the lease of the operator of a French Leaseback.

Usually, it after the commercial lease ends.

Termination of the Lease by the court

But, if there are several breaches of contract, it is possible to fill a case in court in order to ask for a termination of the commercial lease before the end.

It is a lost of income for the tenant, as a result, it has to a major breaches of contract.

First of all, unpaid rents can be seen by a judge as a major breach. Especially, if the operator didn’t pay after a CDP (commandement de payer) from a bailiff (official warning of termination if the debt isn’t paid within one month.

Late payments of the rent for several years are usually not a major breach of contract. Though, it depends of the judge

The tenant might keep his lease, if he pays the debt just before the hearing. Same result if the judge agrees to a schedule of payment.

Furthermore, non renting to tourist if it is a “tourism residence” according to the commercial lease, is also a major breach of contract. Likewise, Renting to everyone or to the town for emergency purposes of a student house is another breach of contract.

Finally, all the breaches of the provisions of the contract could be regarded as major, if there a lot of them. The court decides case by case, depending on the tenant and his defense.

This case law is usually applied to small business. Meaning when the tenant is the weak party in the negotiation. Therefore the protective commercial lease law should not apply if the tenant is a big group, like in leasebacks.
Unfortunately, it is still the case right now.

Non renewal of the Lease

At the end of the lease, the lessor (landlord) can give notice according to the notice period stated in the commercial lease. BUT, the lessor has to pay damages (indemnité d’éviction). It can represent 2,5-3 years of EBE of the operating company.

Consequently, there are here two options. The first option is to negotiate with the tenant (the operator).

The second option is to ask the court to appoint a judicial expert. He will calculate the legal price of the eviction (the kind of damages).

However, lessor (landlord) and lessee (tenant) sign usually a settlement agreement after the demand of appointment of a judicial expert or during the expertise.

Furthermore, the lessor can give notice even after the end of the lease (or there not enough time to give notice within the notice period before the end of the lease).

For example, if the notice period is 6 months, the lessor can give notice after the end of the lease, for a date after six months starting on the next quarter.

You may ask for legal advice from 18 months before the end of the commercial lease.

The lawyer has to be specialized in the field of French commercial lease and French Leaseback in order to be able to give proper legal counsel.

Leaseback Properties Contract written with wilful misrepresentation (indemnite d’eviction)

Leaseback properties in France. Private individuals agreed to a leaseback scheme in France (buying and renting to an operating company)

Summary

• The operator (tenant) waives the eviction compensation in the commercial lease, knowing that this waiver is not valid (not enforceable).
• The judges cancel the lease. The operator of the French leaseback property (tourist residence) is not entitled to an eviction indemnity (damages called in French : indemnité d’éviction).
• The bad faith of the tenant, who drafted the commercial lease turns against him.
• This case law could be a huge step forward in the right of owners of a French leaseback property.

Abstract

The (tenant) lessee, is a company specialized in the management of leaseback properties.

However, the operator writes the lease with bad faith. Because he pretends to waive in advance his right to damages, if the the lessor end the contract. (eviction indemnity/(damages called in French : indemnité d’éviction).

According to the French law, the tenant (lessee) cannot waive in advance and in the lease his right to an eviction indemnity in case of non-renewal of the commercial lease.

He can waive this right to damages AFTER signing the commercial lease.

But in this case, the operator is a pro of this industry. He waives his right knowing well that this clause has without legal ground. Even if, it was for the lessor a substantial condition of the contract, ie one main reason why the buyer agreed to the leaseback.

The tenant (operator) acted with the intention to willfully misrepresented the content of the lease contract.

The operator of the leaseback property falsely reassured the buyer/lessor in the legitimate belief that his renunciation constituted a real commitment.

This behavior is analyzed as a “wilful misrepresentation” (dol in French), meaning a fraud when writing the contract.

Wilful misrepresentation and statute of limitations

Wilful misrepresentation

The buyer of the French leaseback property signed a leaseback contract with a operating company. However only the tenant wrote the lease contract.

The waiver to an eviction indemnity could only appear as a decisive element of the deal. Most importantly, the buyer of the French leaseback would (or might) not have signed the contract.

If their attention had not been attracted by this financial interest, they might not have contracted.

Indeed, the cost of more than € 13,000 claimed as compensation for eviction weakened the profitability of the operation for the owners.

The legitimate belief in a waiver of the lessee  continued throughout the lease. They served a notice without eviction compensation. It was served in accordance with paragraph 6 of the lease.

Statute of limitations of 2 years

Otherwise, the tenant is claiming a statute of limitation of 2 years to cancel the lease. However, the statute of limitation of 2 years begin to run, when the victim is informed. In this case, it is the date of the registered mail addressed to the  owners by the operating company.

That’s why the wilful misrepresentation (fraud) leads the judges to cancel the commercial lease.

Furthermore, the court decides the paid rents were due for operating the leaseback property without a lease contract. The cancellation of the lease means it is like it had never existed.

Cour d’appel de Montpellier, 10 janvier 2017, N° de RG: 14/06714