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!