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A means by which when buying property in France you can
save nearly 20% of the purchase price and have most of the
mortgage paid for you.
Stephen Smith is a specialist in French property (purchases
or sales), tax and estate planning and wills. For further
information please contact Stephen Smith by e-mail at
firstname.lastname@example.org (Telephone: 01473
437186 Fax: 01473 436573).
A leaseback (nouvelle propriété) exists
when you buy the freehold of a new or totally rebuilt
property in a classified tourist residence in France,
and immediately lease it back to the developer’s
onsite management company ('your head tenant') for a
fixed period of between 9 to 20 years. Your head tenant
then sub-lets the property to tourists throughout the
year in return for which you receive a significant
French VAT (‘TVA’) discount off the
Example: You pay £95,000. You receive a
guaranteed income from the developers of some
£4,750 per annum for 9 years. You negotiate as
many as 6 weeks of the year when you may occupy the
property and the developer manages, cleans and looks
after it during the leaseback period. You also pay no
TVA on the purchase rather than £18,620.
We have at present leaseback properties available in
many parts of France where there is likely to be
considerable property appreciation over the next 9
years. This includes Paris, the French Alps and
Côte d’Azur, Normandy, Brittany and
Charente. Mortgage finance is available, in many cases
for 95% of the price paid, at about 4.2% fixed rate or
3.8% at variable rate. You can therefore invest a
relatively small amount of your own money and, with
capital appreciation in some cases, multiply your
potential return by up to five times.
Do not however sign anything until you have taken
competent independent legal advice. For example, the
French wording of your lease (not an English-language
translation which is often wrong) should be carefully
checked to ensure that:
It fully complies with the requirements of
Décret 53-960 of 30 September1953 (‘the
You also get a guaranteed fixed rental income
(typically around 4.5%) index-linked payable in
arrears net of French income tax and TVA.
You can either occupy the property yourself free of
charge (typically for a period of between 1 and 6
weeks each year spread over high, mid and low
seasons, (renting any additional necessary time back
from your head tenant); or allow others to occupy
the property in your place; or surrender your right
of occupation in return for a higher payment from
your head tenant.
Throughout the term of the lease your head tenant
will pay all the rates (except taxe foncière
which you must usually pay yourself) water,
electricity and service charges, and the costs of
insurance, maintenance, repairs and (if it belongs
to you) furniture replacement.
Your head tenant will return the property to you in
good condition when the lease expires.
When the lease expires the property is yours to do
as you please, and your head tenant cannot claim
financial compensation from you.
New or totally rebuilt properties in France usually
carry TVA at (currently) 19.6% of the sale price. For
example, a £100,000 property will cost you
£119,600. If, however, you lease the property
back to your head tenant for a period of 9 or more
years who in turn sub-lets to tourists, you are deemed
to be running a business (fonds de commerce) from the
premises (Article 632 of the Code de commerce). Some
developers will credit you with the TVA and recover it
on your behalf so you could save yourself, on day one,
19.6% of the purchase price.
For example, you buy a furnished flat in Paris listed
at £100,000. Deducting TVA of 19.6% the net price
you in fact pay is approximately £80,000 to which
must be added French legal fees of about 3% of the net
purchase price. Your total investment is therefore
around £82,500, up to 95% of which (approximately
£76,000) can be funded by mortgage. Over 10 years
your monthly repayments will be about £775. Of
this about £250 will be interest and the rest
capital repayments. These payments can be reduced by
taking the mortgage over 15 years (£570 per
month) or 20 years (£470 per month).
Your guaranteed income will be (say) £4,000 per
annum or £333 per month. All of your interest and
a large part of your capital repayments can therefore
be covered by the net rent you receive from your
tenant. This income should be tax-free (ensure that
French income tax and TVA has been paid by your
head-tenant) and there are additional annual tax
allowances that may be set against any other income you
make in France.
It is possible to buy leaseback properties in several
locations, so giving your family and friends the
possibility of holidays in (say) Paris, the Alps and
the Côte d’Azur at varying times during the
year. Such a portfolio can be put together for a
capital outlay of about £15,000 and a monthly
topping up payment of about £500. At the end of
the 9 year period you would have three properties which
were worth about £250,000 at cost plus whatever
amount they had grown in value over the 9 year period.
It would not be unreasonable to expect a 100% increase
in value over this period if the properties were chosen
If you decide to terminate the lease and keep the
property for personal use before the 9 years is up you
must repay TVA on a pro rata basis. Leaseback owners in
a development which loses its tourism classification
(regulated by an Arrêté of 14 February
1986) may also have to reimburse some or all of the TVA
they avoided on purchase.
Rights of renewal
Among the provisions of the 1953 Law is one that at the
end of the term of the lease your head tenant is
entitled to the renewal of his lease for further
successive periods of nine years. If you refuse to
renew the lease your head tenant is entitled to
compensation (indemnité d’éviction)
for the loss suffered by such refusal. Article 8 of the
1953 Law contains general rules for the calculation of
this compensation to be based on the market value of
your head tenant's business, to which must be added the
cost of the removal and setting up of the business
elsewhere, including the legal and other costs
involved. With your head tenant doubtless successful in
his business, you are prima facie faced with payment of
possibly considerable compensation or a forced renewal
of the lease, which is in effect perpetually renewable.
Since this does not form part of the intentions of the
parties at the outset, some head tenants will offer to
indemnify you or to procure the indemnity of another
company in an amount equal to the amount to which the
head tenant would be entitled on refusal of a renewal.
The difficulty is, of course, that the company
providing the indemnity may have gone out of business
in 9 years time.
The solution is to get the head-tenant to execute a
waiver of his rights to renewal (rénonciation
des droits de renouvellement). This by law cannot be
done in the lease itself nor at the time of execution
of the lease can your head tenant bind himself to
execute this waiver (Article 35 of the 1953 Law).
However, French case law does permit a waiver if it is
provided in a document which postdates the lease.
Therefore, whatever promises are made in this respect
you will be at risk for a short period of time.
Such a waiver in not binding on an assignee of the
lease. Therefore you should also insist on the
introduction of a carefully worded clause into the
lease prohibiting assignments of the lease without your
consent, and requiring that you are a party to any
assignment so that you can impose the effect of the
waiver on the assignee.