Real Estate Leasing

Verified 12 March 2024 - Directorate for Legal and Administrative Information (Prime Minister)

In order to meet the companies' need for premises, some specialist establishments offer the subscription of a contract for the property leasing. This type of contract allows companies to rent real estate and, in a second stage, become owner.

The building lease agreement corresponds to the leasing, by a specialized establishment (the lessor), of immovable property for professional or commercial use, for the benefit of a company (the lessee). This company has the opportunity to acquire the property at the latest when the lease expires.

The building lease agreement therefore includes 2 essential elements :

  • One lease : the company rents real estate (e.g. premises, offices, warehouse) to carry out its business. It pays rent to the specialized establishment (e.g. a bank).
  • One unilateral promise of sale : the specialized establishment undertakes to sell the property to the company at the end of the lease. As for the company, call option. In other words, they have the opportunity to purchase or not purchase the property at a pre-determined price. The price takes into account the rents already paid, we are talking about residual value.

FYI  

Any professional can be lessee (business or sole trader) whatever its legal form and sector of activity. In contrast, only a bank or a specialized financial business can be lessor. One directory of authorized financial businesses is at your disposal.

In general, the procedure is as follows:

  1. A company chooses a property that meets its needs and negotiates the terms of purchase with its owner (a seller).
  2. The company presents its project to the Financial business (lessor) who is free to accept or reject the case. In making its decision, the lessor generally relies on the financial situation of the company, its debt capacity and the characteristics of the property.
  3. In the event of acceptance, the financial business buys the property and leases it to the company for a specified period with the possibility of purchase at the end of the lease.

This mechanism allows the company to finance a real estate investment without initial intake, or bank lending. In addition, leasing debt is not in the accounting balance sheet but only in the annexes. Thus, leasing does not affect the debt capacity of the company, which retains its capacity to borrow.

Please note

Leasing can be for real estate under construction. In this case, the lessee retains the contracting authority. It has the option of paying pre-rents during construction.

Contract Terms

The building lease agreement must include certain mentions, including:

  • Identity and contact details of the parties
  • Rents and lease term : they are freely fixed. The landlord may require payment of an initial rent plus security deposit which will be returned at the end of the lease.
  • Option Thrown Amount : for the purchase of the property
  • Conditions for early termination : the lessee may waive the option before the lease expires, at the expense of paying compensation to the lessor. A minimum rental period (usually at least 5 years) is provided for in the contract.

Reciprocal obligations of the parties

Credit-lessee

The tenant (lessee) has a peaceful enjoyment obligation of the good and undertakes to ensure the good maintenance of the building. Therefore, until the option is lifted, the lessee cannot sell or allocate a mortgage the rented property.

Nor can he assign the leasing contract or sublet the building without the authorization of the lessor.

The lessee cannot change the exclusive destination of the property, i.e. to use the goods for a purpose other than that originally intended. For example, the lessee may not use as commercial premises a building intended to house offices.

Please note

The lessee shall also, as lessee, to insure premises and to take out liability insurance to cover risks that could harm persons and property belonging to third parties.

In addition, the lessee shall to pay rent at maturity. Otherwise, the lessor may terminate the lease.

Lessor

The lessor first has a obligation to issue of the rented immovable property, without which the lease would no longer be appropriate.

It is accompanied by an obligation to eviction guarantee in respect of the lessee (lessee). In other words, the lessor must to compensate the customer for defects and defects of the building which prevents its use, even if it had not known them when the lease was concluded.

Please note

However, the parties may free to derogate in the contract to that guarantee obligation, in particular if the lessee himself carried out construction work on the leased building.

The lessor shall be bound to a duty to advise with the lessee. For example, it can be held liable when it has put in place a financial package that it knew would be a total failure. This may result in the liability of the lessee being charged to the lessee.

The lessor credit shall also be subject to a duty to provide information with the lessee. For example, he must inform him of the need to take out insurance, by sending him the documents relating to his membership of that insurance.

Please note

However, this obligation to provide information and advice disappears if the lessee is an experienced professional who has already used leasing operations on several occasions.

In addition, the lessor must allocate to the lessee, when the latter carries out new developments or constructions, an allowance equals:

  • Either to the increase in value recorded by the fund
  • Or the cost of materials plus the price of labor.

However, these provisions do not apply to simple improvements which are not new and simple renovations or elevations.

Finally, because of its ownership, the lessor is liable for damage caused to third parties by the leased building, as a result of the lack of maintenance or by the defect of its construction.

Land Advertising

A property lease concluded for a over 12 years shall be subject to publicity with the land advertising service. Advertising must be carried out within 3 months the date of the act.

Who shall I contact

Warning  

In the absence of publication, the lease is not enforceable against third parties.

Such advertising shall give rise to the payment of the land advertisement tax. The amount of the fee shall be set at 0.70% the price expressed plus the charges imposed on the lessee, or rental value the real value of the rented goods if this value is greater than the price plus charges.

The payment of the tax is to be borne by the lessor who still owns the property at the time the lease is entered into.

At the end of the lease, the tenant (lessee) has the choice between one of the 3 alternatives :

  • Acquire the building : the tenant lifts the purchase option
  • Return the property to the lessor : the tenant does not waive the purchase option, he is obliged to vacate the premises
  • Continue Rental : the tenant must obtain the agreement of the lessor.

The lessee may assign the property leasing contract to a third party (e.g. a real estate investor), provided that it obtains the express agreement of the lessor. In the event of an improper refusal of the lessor, the lessee may obtain judicial authorization.

What are the reasons for selling the lease?

Reasons for the lessee

The lessee may consider assigning its lease contract for the following reasons :

  • The leasing costs are too high.
  • The building no longer has an interest in its operation.
  • A buyer makes a financially attractive proposal.
Reasons for the Lessor

The lessor may have every interest in accepting the assignment of the lease by the lessee when the lessee encounters financial difficulties.

In this case, the assignment ensures the receipt of future rents from a new lessee without the need to pay a contractual termination indemnity to the original lessee.

What are the consequences of the divestiture?

Assignment of the immovable property lease contract shall enable the new lessee to enjoy, for the remaining duration of the current contract, all the rights provided for in the contract (enjoyment of the immovable property, eviction guarantee, information and advice from the lessor...)

In most cases, the lease agreement provides that the lessee remains joint and several the payment of rent by the new lessee (the transferee). In other words, he undertakes to pay the rent to the lessor if his successor fails to meet his obligation to pay the rent.

A real estate leasing operation is governed by special tax rules.

Taxation of rents

Rents paid by the lessee (lessee) are deductible expenses income tax (taxable income).

However, where the expected price of the option waiver is lower than the land price, the fraction shall be equal to the difference is not deductible fiscally.

Example :

The annual lease fee is set at €100,000.

The land has been acquired €50,000. The price of the option waiver stipulated in the contract is €20,000.

The sum of non-deductible rents is: 50,000 - 20,000 = €30,000.

In the end, deductible rent amount will be 100,000 - 30,000 = €70,000.

Taxation of option waiver

The lifting of the purchase option entails the entry of the building into the property of the tenant (lessee). The property is then entered in its balance sheet among the elements of fixed assets.

The tenant, who now owns the property, is in the same tax situation as if he had purchased the property as of the date of the conclusion of the property lease agreement. Therefore, it must to reinstate a fraction of the rents paid to tax result company.

The amount of reintegration is obtained through the next calculation :

Value of the immovable property at the date of conclusion of the immovable lease contract - Amount of option waiver - Amount of depreciation that the tenant would have made if he had owned the property as of the date of conclusion of the contract - Amount of non-deductible rents during the lease period.

Example :

The 1er January of year N, a company enters into a real estate leasing contract. The value of the building is €200,000 (either €180,000 + €20,000 for the field).

The annual rent is €20,000.

The amount of the option is fixed at €10,000.

December 31 of the year N+10, the company raises the purchase option and the account dampen the good of course 25 years.

Calculation : 200 000 - 10 000 - ((180 000 / 25) * 10) - 10 000 = 108 000

At the time of the option release, the company will have to make a fiscal reintegration of €108,000.

However, the company (lessee) is exempt from tax reintegration if it meets all of the following conditions:

  • The company is a SMB
  • The lease was signed between the 1er January 2007 and 31 December 2015
  • Leasing lasts for at least 15 years
  • The property is for commercial or industrial use and is located in a regional aid area or a Rural Revitalization Area (RRZ).

Who can help me?

The public service accompanying companies

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