The article below has previously appeared in leading market publications or our own booklets or newsletters.

Please note that the law may have changed since the date of publication and that information given on this website does not constitute legal advice. Please read our disclaimer.

1. Overview

2. 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 purchase price.

   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 1953 Law’).
   • 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.
3. TVA discount

4. 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 wisely.

   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.

5. Rights of renewal

6. 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.