Buying on Leaseback

For those looking to own a property in France with the potential for a rental income return, one well-established option might be to buy on a leaseback scheme.

This form of property ownership has been available in France for many years; it was particularly popular among British buyers during the first decade of this century, and is still available today in some new developments. It entails a marked reduction in the actual purchase price, but does have a number of direct limitations and potential risks.

If you are thinking of buying a property on a leaseback scheme, it is worth understanding the various advantages and disadvantages before signing the reservation contract. And to understand the situation, it is worth exploring exactly what a leaseback property is.

In an effort to promote the financing and construction of high quality holiday accommodation in popular tourist resorts, the French state offers a discount on the purchase price of new-build properties. In general, the purchase price of a new-build property is subjected to TVA (French VAT, applied at 20%); in a leaseback purchase, this TVA element is exempted, subject to various criteria. That then results in a discount in the purchase price of almost 20%.

In addition to the discount in the purchase price, there is a reduced charge to notaire’s fees, from an approximate 7.5% that would apply for a purchase of an existing property to about 3.5%. This is due to a reduction in the stamp duty element. That reduction is not exclusive to leaseback properties: it applies on all new-build purchases. However, taken in tandem with the exemption to TVA, it does result in an attractive incentive for prospective buyers when looking to purchase real property in France.

For developers, selling off many units in advance of the construction is of course good for cashflow. As is generally the case with French new-build properties, the buyer will pay for the property by instalments and the work progresses.

The developer will have entered into an agreement with a holiday company in advance of the work progressing. There are several very well-known holiday resort companies in France who use the leaseback scheme for a supply of good quality accommodation.

The exemption to TVA is offered on the proviso that the buyer enters into a contract to lease the apartment to a holiday company, the lease commencing as soon as the property is available for occupation. The building itself becomes a holiday complex, and it is a requirement that at least 80% of the units sold are subject to the leaseback arrangement. Certain other services must be available on site, such as food and beverage.

The holiday company is entitled, under the terms of the lease, to let each out for holidaymakers. This generates an income, from which the holiday company in turn pays its regular rental payments to the owner.

It follows, of course, that as the property is rented to the holiday company the actual owner does not automatically have any right of occupation. In principle the benefit enjoyed by the owner is in the form of the rental income. Commonly however the owner will be offered the opportunity to opt for a number of weeks of occupation each year, albeit with a commensurate reduction in the rent paid.

For those who are looking to buy a property in France with the primary aim of taking a rental return rather than for their own use, this scheme can offer an opportunity. The rental yield is likely to be a little lower than if the owner were to rent their property out to holidaymakers directly, although there should not be the same concerns about marketing, maintenance and so on: such issues would be addressed by the holiday company, to which the apartment has been leased.

Yet if all this sounds too good to be true, there are a few words of caution to consider before rushing off to sign a reservation contract.

It should be borne in mind that the legal documentation, the regulatory framework and the taxation arrangements are all quite complex. In relation to the fiscal situation alone, the buyers will need to be registered for French TVA. Recourse to a French accountant is generally going to be a requirement: quite often, leaseback promoters will have a block agreement with a firm of accountants to carry out the relevant TVA registration, as well as TVA and income tax returns.

It is important to note that wherever you may be resident for tax purposes, there will be a need to declare the income to French tax in the first instance. So if you are UK resident, and make annual tax returns to HMRC, you will need to declare the French income to the French tax office, then subsequently include the income on your UK return. You are entitled to claim relief in the UK for the tax already paid in France. This applies equally to standard rental arrangements as well as for leaseback properties; it is, though, always worth underlining this point. Failing to declare the income in France can constitute an offence.

So as we see, the main tax complications relate to TVA. While the need to register for TVA in France can be overcome simply by retaining a French accountant, there is another point to consider. The exemption to TVA on the purchase price depends on the property remaining within the leaseback scheme for 20 years. If it were to terminate, the French tax office can require payment of a proportion of the allowance previously granted. That proportion is calculated on the number of years remaining, each year being worth 5% of the total TVA allowance.

Why would the leaseback arrangement terminate? There are a number of ways this can happen.

If you decide to sell the property at any point within the 20 years, and your buyer does not want to take on the lease, then that is one potential way. It is worth bearing in mind, though, that terminating the lease can be difficult and may bring other penalties.

There have been instances in the past when the holiday letting businesses have failed. In some such cases another holiday company may step in to take over the business, but if that does not happen, not only would you not receive any more income from your tenant, but the tax office may then call for a payment of some of the previously exempted TVA. And if a new company does take over, there is no guarantee that the terms of a new lease would be the same as before: they could well be less attractive.

The lease that you will be asked to sign with the holiday company is likely to be for a period of 9 years. There is also a good chance that the holiday company will have an automatic right to renew at the end of the term. If you do need to break, it is likely that this would only be possible at the end of a nine year period. You may have to justify a specific reason for breaking – such as a need to sell – and you may be obliged to compensate the holiday company for termination of the lease. That can prove expensive.

Overall, leaseback arrangements can be a good, long-term investment. It is important, however, to consider all of the risks in detail. As with any commercial property arrangement there is always a risk the tenant business would fail. Given the complexity overall, detailed specialist advice is important.

Contact our French law solicitors today

If you have any questions or would like advice on exclusivity clauses, please get in touch with our specialist French Legal Services team through this website or by calling 0330 404 0768.