The French dream that became a nightmare
For many Irish people, the idea of a French leaseback was a no-brainer - a holiday home with a guaranteed income that's yours to keep afterwards. But, as Sinead Ryan learns, it didn't always work out that way
Published 25/09/2016 | 02:30
Where were you on holidays this year? A rustic gite in Provence? An all-inclusive in Spain or perhaps a city apartment overlooking the Trevi fountain in Rome?
Whatever your destination, did you peer into the windows of local estate agents to check out the properties available in the area? Did you sigh at the romanticism, the price, the pool? Were you secretly wondering whether you could retire here?
For many, a foreign holiday home is a dream; others have made it a reality. Whether they use it themselves, or rent it out, it can seem like an idyllic way of life - a home from home in warmer climes and with cheaper wine.
One of the most popular purchases for us Irish during the boom was the French leaseback. A VAT rebate scheme with mortgages loaned by French banks, it was a popular option for many Celtic Tiger families. Guaranteed rents, a professional management company, and yours to keep afterwards. However, like many of the property-related 'alternative pensions', they didn't always stack up.
When Kerry-based Catherine Woods saw a newspaper article on leasebacks in 2004 it caught her eye. Further investigation led her to buy a three-bed house in the Vendee - popular with families - for €152,000, with a VAT saving of around €30,000. She paid another €10,000 to furnish the property along with fees of €4,500 on a nine-year lease. "We had 15 weeks personal use each year between April and November. Our lease states rent is to be paid to us yearly at the rate of 55pc of rental achieved by the letting agent and it would be paid no later than 31 December each year. At the end of the nine-year lease, we had the option of renewing or not renewing the lease."
It seemed perfect, but things started to go wrong in 2007 when the letting agent sold the leases to another company. "Rent was never paid on time and was often three to six months late. Then the agents decided to pay us 44pc instead of 55pc and ignored all our correspondence."
At the end of the term, Catherine decided not to renew. When she didn't receive confirmation, she was advised that as the letter didn't emanate from a solicitor, the lease had been auto-renewed for a further nine years. "The letting agent is advising owners that we must now pay significant amounts of money (compensation) to exit the lease - anything from €13,000."
She has found additional concerns in upkeep, security and utility bills and was forbidden from accessing the property in low season. She has taken legal advice but is finding it costly and lengthy. She's not alone.
Chris McKay was also tempted by the scheme after visiting France and meeting a developer. "We explained we would only use it ourselves for six weeks a year as we were not yet retired in 2007, and he suggested a leaseback to secure some income for nine years and decide what we wanted for the future. We paid €400,000 for a detached villa in Le Domaines des Fontenelles. Our understanding was to save VAT of 19.6pc and use the villa for 15 weeks of the year. In return we could expect 55pc of any rental income the management company earned. We were happy to sign as there was a clause in the lease stating that the landlord or the tenant could terminate without any compensation."
In reality, it wasn't so simple. "The first term of the nine-year lease is up on 31 December this year. We informed the management company that we would not be renewing. To our horror they asked for €32,000 in compensation. When I pointed out the non-compensation clause they told me that this was void, had no legal binding and was superseded by a French commercial code. In effect I feel I was duped into signing a lease in perpetuity."
Chris has also taken legal action which he reckons could take a year to progress.
"Quite a lot of Irish have fallen foul of being mis-sold these developments. The French government is only too aware of what is going on but seem not prepared to act - it really is a national scandal that they hope will go away. My message to other people considering purchasing in a leaseback scheme is do not touch them with a bargepole."
However, Dubliner Carol McSherry has had a more positive experience and can speak from both sides of the fence having purchased two leasebacks, in 2004 and 2006. "It was bought as our pension", she says. "We bought off plan after viewing five properties in Beziers. The first one didn't work out. We were told we could exit our 20-year lease with a 10pc repayment of the VAT, but not so. It went fine for two years and we used it in low season, letting it in the summer."
Like Catherine, the rental company sold the leases to another company after going bankrupt and Carol found herself with a vague agreement and non-payment of rent. "We got a solicitor to take a class action and had to pay back the VAT but at least we owned the property." Deciding to sell up last September she reckons the exercise cost her €8-10,000.
Her second investment was much better. "My mother had just died and left me €30,000. With a mortgage, we bought again in 2006."
This time it was via Pierre and Vacances, a market leader, and she kept emotion out of the deal. "We never even saw the house. It was pure investment in a Center Parcs development southwest of Paris. It has done what it said on the tin. We've never looked back and the rent is always paid on time.
"Again, it's a 20-year lease and we renewed this year and we'll revisit as we go. The rent has been renegotiated down slightly but we've had no issues and remain very happy with it."
As a tax-saving vehicle the market for leasebacks all but collapsed with the recession and they are hardly sold now, but leaseback expert Annette Mink of FP Investments says there is still to be value had if you look for it.
"Many people bought them as part of a pension portfolio. For the bigger developers they have, for the most part, worked out well. We've had no problems with the likes of Pierre and Vacances, for instance.
"Leaseback is not a get-rich-quick scheme. Certainly some buyers found some smaller companies a nightmare to deal with; rent was paid sporadically or not at all. Many went bust in the recession leaving customers at a loss. In the UK they are still extremely popular, and the French still buy them with some companies reporting their best year yet. The difference for the Irish is that they find the French banks ruthless - the transaction is complex and they will chase for arrears. Getting good advice is vital."