Ashton Graham Solicitors Look at Leaseback in France - Risks You Should Consider

Leaseback property purchases can be a very attractive way of buying a property in France. However they do have a number of substantial risks.....

London, United Kingdom, August 15, 2009 --(PR.com)-- Matthew Cameron, Head of Ashton Graham's French Legal Services department looks at how Leaseback property purchases can be a very attractive way of buying a property in France.

They involve an investor buying a property in a new development (usually before it is complete), and then immediately leasing this to a tenant company, which would in turn rent the property to holidaymakers.

They do, though, have a number of substantial risks and potential complications, which any investor should consider in detail before deciding whether to opt for such a deal. Some developments have in the past been sold on the basis that they are fully self-funding. On the basis that there is an exemption to TVA (French VAT) of 19.6%, and if the buyer takes out an 80% mortgage he will not then need to add any more funds other than the fee to the notaire (the lawyer in France), of about 3% of the price. The rental income derived from the leaseback rental scheme should finance the mortgage reimbursements.

This may all sound too good to be true, and more cautious investors would do well to look further. There is not always a guarantee that the rent will be payable at a fixed rate - there are various different forms of lease, which sometimes define the rent as being a percentage of the general profits. In a bad year for tourism, the tenant company may not make a profit, in which case the investor would not receive a rent. If this is so, then the mortgage would need to be serviced from the investor's own resources.

There are instances were a tenant company has been declared insolvent. In such instances there is no person who would have capacity to rent the property.

Furthermore, the French government is prepared to offer the exemption to TVA on the basis that at least 80% of the properties in the whole development is let out to holidaymakers. If the tenant company is ordered into liquidation, such holiday lets may not be possible. The risk then is that the French state will require payment after all of the TVA.

Finally, French landlord and tenant legislation states that at the end of a lease period (all such leases are for nine years), the lease will renew automatically unless specifically terminated. If the investor - the landlord in the rental agreement - were to terminate the lease, then he may be obliged to indemnify the tenant company.

Overall, leaseback arrangements can be attractive. They may perhaps offer a lower yield than could be produced by renting a property directly, but there is much less work involved, so for a long-term investments it can be easier to manage. It is not prudent, though, to imagine that it would be free of income tax - in France or the UK.

The documentation to be completed for such transactions is substantial and complex. It should always be offered for professional scrutiny by expert solicitors in advance of an investor signing the first reservation contract. At Ashton Graham we have the expertise to look at these types of documentation. If you would like to know more please contact Matthew Cameron on france@ashtongraham.co.uk.

Matthew Cameron
Head of French Legal Services
Ashton Graham Solicitors
Tel: 0800 917 0291
Email: france@ashtongraham.co.uk
www.ashtongraham.co.uk/france

Ashton Graham is authorised and regulated by the Financial Services Authority.
Ashton Graham Solicitors is regulated by the Solicitors Regulation Authority No. 50075

This article is for general information purposes only and does not constitute legal or other professional advice. You should seek professional legal advice before acting or relying upon this information.

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