Business model of the residences of tourism in France

In 2014, the France had 2 266 tourist residences representing a total of 183 143 apartments. They are most often located at sea (37% of residences) and mountain (30%), but also in the cities (23%) and in the countryside (10%). Each represents an average annual 31 000 nights. But according to the Federation of real estate developers (FPI), sales of homes in residences with services are declining:-11% in 2015 from 2014.

Under the French law, a residence can be classified "tourism residence" if three requirements are satisfied:

- include at least 100 beds,

-  rent at least 70% of the housing for a minimum of nine years,

- be run by one sole operator

The French public agency against fraud DGCCRF has investigated the compliance with the regulations. DGCCRF established the State of affairs of the investment market in the residences of tourism (lease-back) in France, by ensuring the loyalty of the information given to individuals wishing to invest in this market.

The business model of the residences of tourism in France has long offered a correct return in touristic areas. But now the overabundant offer of apartment led to a drop in rents.

One investor in ten no longer perceives all rents expected to repay his credit payments (according to the owners associations).

Today, co-owners victimsform association to defend themselves against the operators (tenant). The DGCCRF, meanwhile, continues its controls to combat misleading marketing practices of some professionals.

The legal and tax schemes of the residences of tourism involves three main actors:

- the investor,

- the developer / marketer

- and operator-Manager.

The owners have invested in tourism residences to enjoy tax exemption measures and to constitute a heritage and a supplementary income for their retirement. They receive a rent of the Manager to which they are bound by a commercial lease. However, the majority of controlled managers recognizes no longer be able to ensure payment. They pretend to be forced to heavily decrease the rent paid.

According to the DGCCRF, developers now take more into account the planned exploitation established by managers to determine the selling price of housing.

The DGCCRF investigators first analyzed the arguments of sale of internet sites and the marketers then, in a second phase, lease protocols collected and analyzed the problems faced by the main managers of tourist residences in their relations with the owners. To this end, investigators visited 20 lease-back properties, including 6 tourism residences. They also questionned some co-owners-investors.

Article L. 321 - 2 of the French Code of tourism requires operators of tourism residences classified to communicate to owners who request specific to their residence operating account. The operating  company has to communicate once a year to all co-owners its balance sheet and occupancy rate and the evolution of the principal items of expenditure and revenue of the residence.

However, many operating companies do not fulfill these legal obligations. One of the controlled residences had also failed to apply for the renewal of its classification.

Three major types of failure of managers have been identified during the investigation:

-          Unpaid rents

-          Late rents

-          renegotiation of rents during the first leases (in four controlled managers), renegotiation of rents on renewal of leases (five of the operating companies), with decrease  up to 70% of the amount of the initial rent.

Despite improvements, the complaints from owners disappointed by their investments in tourism residences are still many. Investigators of the DGCCRF made correct practices of several controlled professionals, when they were likely to be misleading.

It may be necessary to strengthen regulation, including the information of the buyer/investor in a leaseback scheme. During the operating period, the information of the co-owner-investor should be transparent and reliable (income, occupancy rate, management of common areas and facilities, and major maintenance tasks). These reflections will continue, with professionals, in a working group set up by the Directorate-General of companies (DGE) in coordination with the DGCCRF.

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The dangers of fixed and variable rents on turnover

Lack of transparency on the operator’s turnover

Many owners complain about the lack of transparency on the operators’ turnovers (made mandatory for the operator by a French law passed in 2009).

However, how can a co-owner, who accepts a reduction in rent and a share based on the turnover (clearly a still greater decline), control that the tenant sets the rent at his own discretion?

The risk of a tax adjustment for the landlord

Furthermore, a rent that is mostly or entirely variable posesthe risk of a tax adjustment by the French tax administration for the landlord.

The tax administration could qualify the co-owner as “co-operator” of the leaseback and therefore withdraw its tax benefit.

Negotiation of the commercial lease renewal: what provisions/clauses apply?

Waiver of the eviction compensation by the operator of the tourist residence

The owner can ask the operator to waive his right to claim an eviction/crowding-out compensation in the event of a non-renewal of the commercial lease. This eviction compensation, which must be paid by the owner operator,often amounts to 3 years of turnover on average.

However, each case is different. It is advisable to negotiate with the operator through a lawyer to secure a reasonable eviction compensation amount, meaning through a out-of-court settlement and without having to go through legal proceedings.

Under French law, the usual right of cancellation by the tenant after 3 years does not apply to commercial leases in a leaseback property.

Advice and tips from a lawyer specialized in leaseback properties

REFUSE TO LOWER THE RENT, AND MAINTAIN THE CURRENT LEASE

If the landlord refuses the decrease in rent, the commercial lease is maintained under the previous conditions.

During the 9 years of the commercial lease, the tenant will pay the same rent and he is not allowed (off course) to lower the rent without the landlord’s written agreement.

At the end of the 9-year time-period, the tenant is entitled to ask for a decrease in rent, but the lessor has the right to refuse.

The tenant must file a case in court requesting a legal expertspecialized in the rental value of commercial leases. This case is to be filed within a 2-year statute of limitation.

The report of the legal expert will guide the rents tribunalin setting commercial rents.

DO NOT TO PANIC, AND NEGOTIATE WITH A COOL HEAD AND THE HELP OF A PROFESSIONNAL

There is no emergency. The owner has time to negotiate with the tenant after having received legal advice.

CONSIDER DIRECT MANAGEMENT OF THE PROPERTY

The idea is to manage the real estate yourself with the other co-owner (or through a real estate agency).

Indeed, in many leaseback residences, the co-owner only needs to rent his property for a few weeks each year to earn the equivalent of what the operator payed him (9% of French leaseback properties are managed by the co-owners).

HIRE A LAWYER TO NEGOTIATE WITH THE OPERATOR

A lawyer with experience in negotiations and court proceedings can effectively represent a leaseback property owner, who faces demands to decrease rents.

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Disputes about breaches Of Real Estate Sales Contracts in France

You are planning to purchase or sale a real estate in France ? Under the French real estate law, there are basically two kind of contracts: the agreement for sale and the sales contract.

Disputes about breaches Of Real Estate Sales Contracts in France

Under the French law, the agreement for sale is called “promesse de vente » and the sales contract « contrat de vente ».

Agreement for sale (promesse de vente) is not a simple offer to purchase. It is binding. Each party will have to perform severalobligations.

If one party may not execute the contract, the other party is entitled to enforce a damages clause called “clause pénale” or “clause d’immobilisation”.

When a contract is subject to a suspensive condition, the contract comes into effect only when the buyer secured a loan for instance (or authorization of the authorities).

Mandatory Suspensive Condition of Loan for a Purchase by an Individual

If the sale will be paid, directly or indirectly, even partially, using one or more loans, the contract is concluded under the condition of obtaining the loans who take on the funding. (Article L312-6 of the French consumer code)

Meaning that if the buyer doesn’t get his loan, he hasn’t to pay damages to the seller. (If he asked for the same loan stated in the contract: same amount, same rate, same duration).

The duration and validity period of this condition (the loan) cannot be less than one month from the date of the signing of the deed.

Clause imposing a filing date of the loan application

The agreement for sale / sale agreement cannot validly impose on purchasers new and increased requirements compare to the rules of the consumer code.

For instance, the contract cannot states that the buyer has to obtain the loan before a date. He has only to provide evidence he asked for.

Evidence of a loan application meets the characteristics defined in agreement for sale (promesse de vente)

The buyer who wants to take advantage of the suspensive condition of loan must prove that he applied for a loan meeting the characteristics defined in the agreement for sale (promesse de vente).

Number of Loan Applications and Banks

Sometimes, the buyer has to ask several banks for his loan under the contract.

The buyer must prove that he filled the number of applications in the number of Bank required under the agreement for sale (promesse de vente).

Required amount of Capital, Interest rate and Duration

The loan application has to meet the requirements of the clause in the agreement of sale, i.e.:

ü same amount of capital,

ü same interest rate,

ü same loan duration.

It means the buyer cannot ask for money to refurbish / renovate / improve the real estate, if he wants to benefit of the protection of the clause of suspensive condition.  

Buyers do not report such evidence, if they just providea letter of refusal of Bank loan, without the capital, interest rates and duration of the loan or the loan application date.

Penalty Clause (clause pénale)

If the buyer does not report such evidence, he will be condemned to pay the penalty clause.

The judge has the power to reduce the penalty clause.

If the amount of the penalty clause appears manifestly excessive in the circumstances of the case, the Court can reduce it.

No penalty clause in the absence of formal notice

The penalty clause is a flat-rate assessment of the damages suffered by the seller.

But, this clause can be enforced only if the seller justifies having put on notice the purchaser to regularize the sale by deed. If not, the damages are not due.

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