How to handle sale-and-leaseback mess?
Your questions answered
Q. I'm considering buying an investment property in Poland. I've been sent a brochure about apartments which are up for sale there and they seem incredibly cheap. However, when I showed the brochure to a Polish friend of mine, she advised that the apartments were overpriced.
She said most Poles wouldn't be able to afford to buy such a property or to pay the rent which the brochure claims could be earned on the property. Should I proceed with this? And if I decide not to go ahead with this property - but to look for another overseas investment, how should I go about it? Tom, Clontarf, Dublin
Whether you are buying in Poland or anywhere else, you should instruct an independent valuer to advise you on any purchase of an overseas property. In particular, you need independent confirmation as to the year-round rental levels. You should also visit the region and assess the area yourself. Some holiday destinations are only rentable for six weeks of the year.
You should also seek the services of an expert lawyer: Irish embassies can usually provide you with a panel of reputable firms in whatever country you are interested in investing.
Apart from the basic commerciality of buying any overseas property, you also need to assess the tax implications and the costs of tax compliance.
You should generally never pay the asking price. You may find some great deals by purchasing from distressed sellers. If you are buying outside the eurozone, it might be advisable to finance the acquisition in the local currency so as to avoid adverse exchange rate fluctuations.
Default on French mortgage?
Q. I invested in a French sale-and-leaseback scheme about 10 years ago. It has been a nightmare. Management fees have been doubled. Rental income (which I had been relying on to repay the mortgage on the property) is being withheld. The property won't sell. I took out a mortgage with a French bank to finance this investment and am considering defaulting on the mortgage now because it is such a financial struggle to meet the repayments. If I stop repaying my French mortgage, what could happen? Is it worth me approaching the French bank and coming to a deal where either some of the debt is forgiven or the term of the loan is extended? Or is there another solution here?
Cathal, Co Dublin
A. You are in a similar position to hundreds of other Irish people who participated in such schemes. Many investors were lured by the promise of a 5pc guaranteed rental return and a VAT rebate. However, many properties were priced 30pc and more above their actual market value at the time.
As you are coming to the end of your 11-year lease, you should take specialist legal advice so that the lease is not automatically renewed. You should determine if an owners' group has been established for your particular development as it could provide you with advice on your options.
If you stop paying the mortgage, the bank is likely to repossess the property and sell the property as a 'distressed property', which would likely increase your losses. The bank would then seek to recover any residual debt from you. It would first have to obtain a judgment against you in France. You could defend the proceedings on possible grounds of mis-selling, as many of the loans were organised through the developers. If the bank does obtain a judgment against you, it could then enforce that judgment through the Irish High Court by obtaining a European enforcement order against you. The bank could effectively attack the equity in your Irish home.
Whether the bank would engage in any debt forgiveness would depend on a number of things, including the merits of your defence and your own financial circumstances. If you ask the bank to extend the mortgage, it will seek details of your financial circumstances to assess your capacity to pay. One option to consider, particularly, if you also have Irish debt problems, is to see a Personal Insolvency Practitioner about the possibility of doing a personal insolvency arrangement or a debt settlement arrangement.
Inheritance tax woes
Q. I've inherited a property from an aunt. I'd like to hold onto it as a possible holiday home but I simply don't have the money to cover the €60,000 inheritance tax bill. Do banks offer loans to fund inheritance tax bills? Or could I strike a deal with the Revenue Commissioners where I repay the tax bill monthly over the next few years? I'm reluctant to sell the property so that the tax bill can be settled.
Sorcha, Kinsale, Co Cork
A. Banks do offer loans to pay inheritance bills. Another option is to pay the tax in monthly instalments, over a five-year period, to the Revenue. If you exercise the option to pay by monthly instalments, the first instalment is due and payable on the October 31 immediately after the valuation date - and interest must be paid with each instalment. The current rate of Revenue interest is 8pc. Revenue does allow longer payment terms in exceptional cases but would be unlikely to offer you a longer term, as it is not going to be your family home.
Depending on the rental earning capacity of the house, the rental income might be able to cover most of the monthly instalments to the Revenue. As the Revenue rate of interest is relatively high at 8pc, you would save money by borrowing from a bank, particularly if you could obtain a top-up mortgage on your existing home.
Q. I bought a commercial buy-to-let property with some others a few years ago. We've always met the repayments on this loan but one of us has defaulted on the repayments on an unconnected loan and the bank has appointed a receiver to the commercial buy-to-let property. Is the bank within its right to do that? If so, is there any way this could be resolved without us losing the property?
Seamus, Athlone, Co Meath
A. Generally speaking, most terms and conditions of a loan contain what are called Material Adverse Conditions (MAC) clauses - which set out the parameters under which a bank may call in the loan and appoint a receiver. Whilst the bank may have been legally entitled to call in the loan, it should have first complied with the Central Bank's code of conduct on lending to small and medium enterprises (SMEs). It was introduced to provide SMEs some breathing space in dealing with any loan arrears. The code operates in a similar fashion to the mortgage arrears resolution process (MARP) for home owners.
Some banks deal with breaches of MAC clauses differently. Those banks which have decided to exit the Irish market place will seize upon any opportunity to call in a loan and appoint a receiver. If you are dealing with a bank that has decided to exit the market, you face an uphill struggle. You should seek legal advice as to whether you have good grounds to obtain an injunction restraining the receiver from selling your property.
If the bank's motivation was to sell the property and release any equity in it so that the defaulting partner's debts could be paid, then the bank might entertain a proposal from the remaining partners to contribute sufficient cash to 'buy out' the equity.
Sunday Indo Business