Leaseback Advice
A legal advisor with law firm Elborne Mitchell has come out with a strongly worded statement to protect those considering investment in French Leaseback property. Ed Stanley claims that “investors in the French leaseback market are being dogged by sharp practice and a judicial system that has neither the ability nor the will to bring about effective redress.”
When inspecting the positives of a potential leaseback investment there are some facets which win investors over straight away such as the fact that it is claimed to be a government-approved scheme, it is marketed as a secure investment with a guaranteed income stream, it offers tax rebates and gives the option of some personal use as well as a holiday home that you own will eventually own outright. Stanley says, however, that you should be aware of the things you are not told.
He says that the lease you offer a management company makes it your ‘tenant’ and confers considerable benefits upon it. If it defaults, as management companies often do, you will discover that the sales talk about rental income being guaranteed is not strictly correct. The sales process is handled by Notaires, he claims, who in most cases are appointed by the project developers or promoters, and have no reason to warn you of these pitfalls.
Stanley says that the standard 9-year commercial lease gives the tenant (your management company) a statutory right to cancel every three years and that many management companies hold owners to ransom on this basis. They may well demand a reduction in terms and threaten clients that they will receive no more rent until a reduction is agreed. Management companies, he says, have owners over a barrel because they cannot afford to have the lease cancelled, if they do so the arrangement would no longer be tax compliant and owners would be required to repay the 19.6% VAT rebate on the original purchase. This, of course, undermines the whole reason for purchasing a leaseback off-plan in the first place.
This has become such a problem that it has been recognised by the French government which recently decreed that leasebacks entered into after 22 July 2009 cannot be subject to termination at three years. This is, unfortunately, not retrospective so it does not apply to leases entered into before this time.
Another hidden problem, according to Stanley, is that tenants (management companies) have a right to renew at the end of the term and are entitled to compensation from owners if they don’t agree to this extension. This makes a mockery of the sales pitch that at the end of the lease the property is yours to do with as you wish. Even if you do get to the end of the 9-year lease without having to renew or give compensation, the French revenue will demand return of 11/20ths of the VAT saving, he claims.
So, what do you do if you have a leaseback and your management company says it can’t pay you? Stanley recommends serving a formal “Command de Payer” requiring payment within 30 days. When this is ignored, as it probably will be, a writ is served and a date set for the Defendant to submit a written defence to the Court. In many cases, the defence that gets served says little more than ‘can’t pay, won’t pay’. Judgment is duly entered and served. The next step requires formal service by a Bailiff. The whole thing takes ages, is very costly and the cost is borne by the person taking the case.
Delightful.
For further information visit Elborne Mitchell’s website.
My dear Colleague,
I am practising in France as a lawyer and specialized in the field of building and construction law, and town planning.
I do agree with the main lines of your analysis.
Some important remarks however: the solicitors in France have an obligation to advise the buyer, and this both during the signature of a contract and later, in case of difficulties in the execution of the lease or the sale. Indeed, the solicitor, holding on the a promotor (developer) as this is a most generous source of income in this kind of legal constructions, sometimes have a tendancy “to forget” the buyer, although as much their client as the propotor himself. The opaqueness of the management of this kind of compounds/complexes is more often a rule than the exception, and solicitors sometimes contribute to it in a quite upsetting way!
What I do not subscibe for in your article is the effective possibility to annull clearly excessive or unfair contractual clauses (or the exercise of these) when these can be considered as against consumer protection.
Secondly, a negligent solicitor can be sued for his lack of advise in these matters.
And finally, it is not expensive at all to start an injonction procedure if the tenant tries to oblige the owners in the way you describe, and success is only undermined if he has good reasons NOT to pay hte owner! Lawyers (barristors) can be of real help in here!