Laurent Brisse-correspondence

Dear M. Brisse,

Thank you for your letter dated October 16. I have a few questions that I hope you can answer:

Your options during the year preceding the end of the lease

Question 1: What are "the statutory rules" that fix the rent? Do the owners have the right to increase the rent above the 45% that was paid by HMC during the 11th year?

Non-renewal of the current lease

Question 2: Does each apartment owner make an individual decision on the lease renewal, or is there a requirement that a certain percentage of all owners decide whether or not to renew the lease?

Question 3: What happens if the tenant chooses not to renew the lease? Is the remaining VAT due?

Question 4: What happens if the owners collectively do not renew the lease with HMC, but a new tenant is appointed to manage the property? Is this considered a "transfer"? Is the remaining VAT due, or can the VAT exemption continue for the remaining 9 years under the new tenant?

Regards,

Bob Engelberg

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Dear Mr Engelberg,

Many thanks for your e-mail and queries.

Question 1: I do not catch what you mean.

Question 2: The issue is not the "renewal" but the "continuing" of the lease. To renew it means you can not stop it during 11 years. To continue it means you may stop it whenever you want after its "end". And the continuing or not of the lease only requires a notice to the lodging operator through a bailiff. There is no requirement to have a minimum percentage of owners to stop the lease (nor to continue it) since this is an individual decision.

Question 3: The remaining VAT would be due but it would be quite expensive for the tenant as well (as many notices as there are owners concerned at a cost of around EUR 150 each).

Question 4: In that case, provided that the new tenant takes the same comitments as the current one and that the building is still eligible for "residence de tourisme" system, there is no VAT due.

Best regards,

Laurent

Dear M. Brisse,

Thank you for your e-mail response dated November 6. I am still a bit confused, so I will try to be more precise this time. Referring to your letter dated October 16:

Question 1. Paragraph 2- Your options during the year preceding the end of the lease. Subparagraph (i) states ".., and the rent being fixed following the statutory rules". What are the statutory rules? After year 3, HMC is required to pay the owners 45% of the turnover. Is this percentage part of the statutory rules concerning the rent during the renewal term or can the owners demand a higher percentage (for example 50%)?

Question 2. I don't understand where the term "continuing" suddenly appears. Your letter dated October 16 only refers to "renewal". I do not see a reference to "continuing" versus "renewing" the lease after the initial 11 year term.

Question 3. If the existing tenant (HMC) chooses not to renew the lease after the initial term, how much notice to they have to provide to the owners so that we could find another tenant without having to repay the VAT?

Question 4. Is there a requirement that any new tenant manages the entire property? What if some owners wish to remain with HMC and other owners wish to appoint a new tenant?

Regards,

Bob Engelberg

Dear Mr Engelberg,

Many thanks for your questions.

Question1: French law concerning commercial leases is pretty big. It forsees many things so that contractual agreements are quite fewly possible. Concerning rent increases, the law is restrictive. But it is not really applicable for rents in ARC 1950 which are not a given figure but a proportion of turnover ie rents vary in relation with the turnover of the operator. And the proportion may not be changed except with an agreement from HMC.

Questions 2 to 4: As explained in the letter, at the end of the lease (ie on 30 April following 11th year), there are 3 options:

(i)                   Either offer the renewal of the lease to the tenant, the renewal intervening for a period of 9 years (the tenant would then benefit from an opportunity to terminate the contract every three years), and the rent being fixed following the statutory rules;

(ii)                 Or take the necessary steps (explained hereinafter) in order to put an end to the lease and take possession of the rented premises back;

(iii)                Or do nothing and let the lease go on beyond its contractual end for an undetermined period which can be terminated at any time by both parties by serving a writ with a six-month notice.

(i) this solution will never happen: HMC has renounced to its renewal right and would have to sign as many new leases as there are owners which is pretty long and expensive.

(ii) This is possible but we do not recommend this solution: 9/20 of VAT would be due. Plus there are bailiff's costs

(iii) This is the best solution: nothing changes and the lease continues ("goes on") for an undetermined period of time.

Concerning a change of hotel operator, this can only be a contractual solution. This means a majority of owners would have to wish this change and HMC to accept it. HMC made many investments for this development and does not wish to stop anything at this stage. For the management of the building, there has to be only one hotel operator. I do not see how a company may accept to only manage a part of the apartments and not the whole building.

I hope this answers your queries.

Best regards,

Laurent

Dear M Brisse,

Thank you for your prompt response. I am getting a little closer to understanding the situation, but I am still confused.

You said that (iii) is the best solution: nothing changes and the lease continues ("goes on") for an undetermined period of time.

If (iii) is the best solution, then what is the value of HMC renouncing it's renewal right ? And, why would HMC have to "accept" a change in hotel operators after the initial lease term if a majority of owners vote for such a change ?

Regards,

Bob Engelberg

Dear Mr Engelberg,

Your question is excellent. The value of HMC renouncing its renewal right is you can stop the lease whenever you want after the 11th year instead of having a new 11-year lease start.

If HMC was to refuse a change in hotel operators, each owner would have to "stop" the lease with HMC and to decide together to sign new leases with a new operator.

I hope this makes things clearer.

Many thanks and best wishes,

Laurent