Commercial Leases and "Leasebacks"

Commercial leases in France

Commercial leases in France are governed by the law of 30th of September 1953  décret No 53-96o. The principle governing commercial leases in France is designed to give the lessee a considerable degree of security of tenure so that if for instance the lessee successfully builds up for business they do not have to worry unduly about being evicted.

In essence a commercial lease in France must be for a period of 9 years and over and the lessee has an automatic right of renewal after the 9 year period failing which the lessor will have to provide compensation to the lessee for failure to allow
renewal of the lease by the lessee.

The amount of the compensation is fixed by the Court and is therefore difficult to quantify precisely however the Appeal Court in Bordeaux have recently indicated that they would be looking to award an amount in the region of 1 to 3 years worth of net loss to the lessee.

French Leaseback arrangements

The leaseback concept originates from the French Government desire to provide tax incentives for private investors to finance the building of good quality property in prime locations suitable for rental to tourists.

Thus in order to try and create more wealth and more jobs the French Government designates certain areas as being suitable for para-hotellerie activities. Thus planning permission for new constructions will be given on the basis that a certain percentage of these constructions will be managed specifically for short-term letting to tourists, being tourists from abroad and also domestic tourists.

Thus for you to obtain a refund of the French VAT on the purchase price you must enter into a commercial lease with a tenant who will be a management company dealing specifically with tourist lettings.

Although you will be able obtain a refund of the French VAT on the purchase price of your property, the rental income received by you under the lease will be subject to French VAT on lettings which is currently 5.5 %.

In the case of a qualifying leaseback you will not be able to opt for the option of being exempt from French VAT on rental income which is an option generally available if your rental income is less than about 76,000 euros per annum.

This is because the French Government eventually recovers the VAT which he refunded on the purchase from the long term rental which you receive under the lease and also on the rental charge by the management company to the sub-tenant being the tourist.

Leaseback arrangements can be suitable for certain types of people but are definitely not suitable for everyone.

With leaseback arrangements, the devil is in the detail of the reservation contract and the commercial lease (bail commercial). Professional advice is recommended.