Résidence de Tourisme : Successful lease renewal

Tourist residence: The pitfalls of commercial lease renewal

When a commercial lease comes up for renewal, negotiations take place between the lessor (owner) and the operator (lessee). These often resemble blackmail rather than genuine negotiations. Some large operators simply propose a very substantial, unilateral rent reduction. The operator of a tourist or student residence will sometimes enclose a one-sided and totally biased expert report. Finally, the contact details of a law firm are sometimes included at the end of the letter, to discourage lessors from challenging the unilateral rent reduction in court. However, the judge is always more favorable than the operator who decides unilaterally.

The operator’s erroneous tax argument

Commercial leases in tourist residences offer buyers tax advantages, such as exemption from VAT, provided the property is leased for a period of 20 years, under penalty of having to reimburse the pro rata VAT for the years the apartment remains empty in this context. For example: if the lessor has rented out the property for 10 years, he must refund half the VAT; 18 years, only 2/10ths of the VAT. Operators sometimes use a false tax argument, threatening lessors with the obligation to refund 100% of VAT if the commercial lease is not renewed (in return for a drastic reduction in rent). This assertion is false. The lessor only reimburses the prorata of the years remaining on his commitment (generally 20 years), so after an initial 9-year lease and one year of tacit effect after the end of the lease, for example, 11/20 of VAT remains to be reimbursed.

Nevertheless, the total rent reduction must be calculated over the next nine years. What’s more, it leads to a sharp drop in the selling price of the apartment, which is sold at the annual yield (% of rent to selling price / year). This loss is often far greater than a hypothetical VAT refund. Not to mention the fact that the lessor operating the apartment directly will earn much higher revenues. Some lessors use platforms such as Airbnb or homelidays. Others hire local real estate agents to rent out their apartments to tourists throughout the year, depending on the season or half-season.

Tourist residences: the situation of the owner-lessor

Some heavyweights in the tourist residence sector play on this to obtain “amicably” a reduction that sometimes reaches 75%. Non-renewal would result in VAT reimbursement in addition to the absence of rental income. Operators wishing to renegotiate rents must first give notice and have 6 months in which to submit an amendment to the lease contract to the lessor. In most cases, the operator is in a position of strength, and the lessor…alone.

Renewal is not tacit. If the contract continues without renewal, the lease contract continues with the risk of the tenant’s departure. If the rent is deemed too high, the landlord can always withdraw and decide to pay the eviction indemnity within one month of the court decision.

If the owner decides not to renew the commercial lease, he is obliged to compensate the operator for the loss suffered. This is the justification for the commercial lease statute. These legal provisions protect the tenant, who is normally the weaker party in the lease contract. This is obviously not the case in tourist or student residences, where the lessor is faced with groups of property management companies. Even so, the rules are virtually the same, and the courts are only just beginning to re-establish some sort of balance on an ad hoc basis. Non-renewal with eviction compensation can nevertheless be an opportunity to increase rents if they are undervalued, or to sell at a capital gain without a commercial lease. However, the lessor must have the cash flow to advance the eviction indemnity costs before cashing in the proceeds of the sale or rentals over several years.

Alternatives for the lessor

The first option is to negotiate, with the help of an independent lawyer specializing in tourism residences. The residence manager has a legal obligation, confirmed by a ruling of the Cour de Cassation (French Supreme Court), to provide the lessor with the operating account in addition to the balance sheet, the occupancy rates of the residences and the evolution of expenditure and revenue items. This will serve as the basis for negotiations. Managers requesting a rent reduction must provide proof that this is essential for sound management.

As part of the negotiations, operators sometimes propose to “associate” lessors with the result by providing for a fixed rent accompanied by a share that fluctuates according to results. This share must necessarily be in the minority, otherwise the tax authorities will requalify the contract. Landlords can also demand a waiver of the eviction indemnity in exchange for a reduction in rent, BUT this can only be done after the new lease has been signed.

The second hypothesis is that the operator does not wish to renew the commercial lease of a residence he does not consider profitable enough. They often offer palliatives that pay a percentage of sales, with no guaranteed rent to lessors (e.g. maeva.com). In this case, of course, there is no eviction indemnity to pay. The lessor must then find a new operator, or risk having to reimburse the tax authorities for the remaining years of VAT up to the twentieth year, which is the period stipulated by law for benefiting from the tax advantages of renting out tourist residences. In recent years, a number of end-of-lease specialists have appeared on the scene, but the residence must be in an attractive location, and dishonest buyers – of which there are many – must be avoided.

The third option is to create your own operating structure to avoid VAT refunds if the property is not of interest to any operator. This option is subject to the precise conditions laid down by the law that created the tax-free property sale and rental scheme.

RECOMMENDED ACTIONS

1. Do not sign the first commercial lease renewal proposal sent by the operator of the tourist residence.
2. Ask a tourist residence lawyer a free question.
3. Take time to reflect on the right strategy, so as not to lose your assets by following the wrong legal and tax advice.
4. Join a tourist home lessor group

If you have any questions, please contact us using the contact form at the bottom of the page.