This country-specific Q&A provides an overview to real estate laws and regulations that may occur in France.
It will cover the most pertinent issues including ownership structures, restrictions, transfers, taxes and environmental contamination.
This Q&A is part of the global guide to Real Estate. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/real-estate
Commercial real estate transfer and renting are both strongly regulated in France in order to ensure proper protection of the ownership of both the property and the business operated within.
How is ownership of real estate proved?
France has a system of registration for all real estate transactions led by a fiscal and administrative body known as the Land Registry (Services de la Publicité Foncière), which conditions the effectiveness of real estate transfers (and more generally of any liens and encumbrances pertaining to a real estate property) against third parties.
Ownership is proved without a doubt by a thirty-year uninterrupted, peaceful and publicly known possession of a property.
This ‘thirty-year root of title’ is generally proved by the registered title deeds of the property setting out the previous owners of the property over the past thirty years.
Are there any restrictions on who can own real estate?
There are no restrictions on who can own real estate per se unless public order, public security, national defence or public health are directly concerned and command a French administration’s control.
What types of proprietary interests in real estate can be created?
In rem interests are most frequently freeholds but long leasehold tenure with in rem interest are also well known and used when of particular interest, notably for ground leases that will promote a third-party’s financing of the development of a plot of land (e.g ‘construction lease’ (bail à construction) and ‘emphytheusis’ (bail emphythéotique)). Such leasehold tenures are long-term lease agreements between 18 and 99 years.
Freeholds can be owned by one or several owners. The property is then considered an indivisible or a co-owned property. Co-ownership exists where parts of property are for the collective use of the co-owners. It is ruled by the legal co-ownership regime which governs the rights and financial obligations of the co-owners and the operating conditions of the co-ownership.
Ownership of freeholds can also be extended to volumes (similar to ‘flying freehold’ under English law) which enable a property to be ‘sliced’ into different volumes each held by a different owner independently of the others. When ‘sliced’ into different volumes, no part of the property will be for collective use and the relationship between the parties will be governed by the laws of contract as described in the ‘volume division deed’.
Is ownership of real estate and the buildings on it separate?
Ownership is considered global and is extended in theory to everything on the land, above and under the property unless expressly structured otherwise.
Ownership of the real estate and the building may be separated in the context of a volume division as described above. When consisting of a mere division between the ground and the surface of the property this is known as a ‘surface right’ (droit de superficie) where the ground and the surface are owned separately in freehold.
Note also that under a ground lease as mentioned above, the leasehold tenure will include an in rem interest on the building to the benefit of the tenant which will temporary divide the ownership of the land and the buildings erected on it.
What are common ownership structures for ownership of commercial real estate?
Individuals usually use transparent entities known as ‘non-trading real estate companies’ (sociétés civiles immobilières or SCI) to hold and rent commercial real estates on an unfurnished basis. The tax result of French SCI is subject to income tax at the level of the individuals directly. Capital gain realised through French SCI held by individuals upon the sale of the commercial real estate can be tax totally exempted from capital gain tax and social contributions if the real estate has been held for at least thirty years.
What is the usual legal due diligence process that is undertaken when acquiring commercial real estate?
Real estate due diligence will be commonly performed by the French notary appointed by the purchaser for the purchase of the property, who is considered the legal guarantor of the transfer deed efficiency to the benefit of the purchaser and the certainty of its ownership.
Searches will be made at the Land Registry to know the conditions of the previous transfer deeds and the easements and encumbrances registered on the property. These will take between a few days and a few weeks, to obtain (depending on the location of the property) but are usually already ordered by the vendor’s notary when the data room process is initiated and will be updated between signing and closing.
Several other searches are legally prescribed on behalf of the vendor on the condition and history of the property (e.g. asbestos diagnosis for buildings erected before 1997, termites’ survey, statement describing the technological and natural risks relating to the property, if any, energy efficiency audit, etc.), which shall be provided by the vendor as part of the data room.
Notary’s due diligence will cover all real estate matters (e.g. ownership, planning permissions, easements, etc.), including, when applicable, construction guarantees and insurance coverage but will usually exclude the rental and operating situation, which will be reviewed by the purchaser’s legal team and/or advising lawyers.
Technical and environment surveys will also be ordered, separately, by the purchaser.
The market practice and clients’ common expectations tends to normalise the contents of the reports without imposing any formal standard.
What legal issues (if any) cannot be covered by usual legal due diligence?
The legal due diligence usually covers all legal risks in relation with the transaction.
What is the usual process for transfer of commercial real estate?
The first step in a commercial property transaction is often to sign a letter of intent to set out key terms of the transaction and, to secure exclusivity, when possible, in order to allow for particular investigations to be made by the purchaser.
The terms and conditions of the letter of intent shall be drafted with appropriate care since (i) in theory a sale is ‘perfect’ (i.e. ‘binding’ between the vendor and the purchaser), under French law, as soon as there is agreement on the subject matter and on the price, and (ii) either prospect may claim damages in case of a ‘breaking off’ of the precontractual negotiations in an unlawful manner.
When an asset deal, the purchasing procedure is usually set in two phases, with first (i) the signing of a promissory deed subject to conditions precedent, which will give the vendor the time to obtain a waiver of the town's pre-emption right, when applicable, and then (ii) the closing of the transaction with the signing of a proper final conveyance deed that shall be registered with the Land Registry.
For that purpose, the deeds must be drafted by a French notary (‘notaire’), which is vested with prerogatives of official authority received from the State and is therefore empowered to authenticate deeds by affixing his seal and signature. Only transfers of property consigned in a “authenticated deed” (i.e. drafted by a notary or approved by the court) will be registered with the Land Registry. In practice two notaries are almost always involved in the transaction, appointed by each party.
The purchaser will normally pay a deposit (although this is not compulsory) to the vendor or, preferably, to a stakeholder in the region of 5 to 10% of the purchase price when signing the promissory deed.
The promissory deed may take the form of a call option (in which case the deposit will be considered a ‘reservation indemnity’) or of an already binding agreement for both parties (in which case either party will keep the right to ask for a judicial enforcement of the transfer of the property if the other party refuses to sign the final conveyance deeds necessary for the registration of the sale once the conditions precedent are all fulfilled).
When a share deal, the sale and purchase agreement will not be registered with the Land Registry and is therefore usually drafted by a French lawyer.
Although no pro-forma documents are prescribed, all deeds and agreements follow roughly the same pattern designed by the market practice and the legally prescribed information of the purchaser on the condition and history of the property. They will include at least, the basic vendor’s guarantee of the ownership of the property and of the genuineness of the information disclosed in the data room.
· Preparation of draft sale and purchase agreement(s)
· Negotiation of sale and purchase agreement(s) with buyer
· Provision of legally prescribed information and diagnosis (asbestos, termites, etc.)
· Due diligence
· Technical survey
· Environmental survey when applicable.
· No prescribed form of agreement but industry standard terms
· Deeds are drafted by a French notary when transfer is by way of an asset deal
Signing to Closing
· Satisfaction of any conditions to closing
· Includes the obtaining of a waiver of the Town’s pre-emption right when applicable.
· Arrangement of purchase price funding (including any third-party debt)
· Satisfaction of any conditions to closing
· A deposit of up to 5/10% of the purchase price is typically paid on signing which will be forfeited if the buyer fails to complete sale
· Repayment of any existing debt and discharge of mortgage (if any)
· Execution of transfer agreement
· Execution of transfer agreement
· Payment of purchase price
· For asset deals, transfer taxes and fees are collected and paid directly by the notary.
· For asset deals, registration of transfer at Land Registry and payment of the registration fees.
· For share deals, registration of the transfer at the tax administration and payment of transfer taxes and notification to the company.
· For asset deals registration is ensured by the notary.
Is it common for commercial real estate transfers to be effected by way of share transfer as well as asset transfer?
Commercial real estates are transferred either through sales of assets as well as sales of shares. However, the sale of shares generally enables the parties to save transfer taxes since the tax basis for the registration duties is equal to the sale price of the shares which takes into account the indebtedness of the company. In addition, for sale of share, the rate of the transfer tax is equal to 5% instead of a maximum rate of 6.41% (increased by notary fees at a rate of circa 0.85%) for assets transfers.
On the sale of interests in land does the benefit of any occupational leases and income automatically transfer?
Upon acquisition of the property, all occupational leases granted on the property are legally transferred to the purchaser so that the purchaser will automatically substitute the seller acting as landlord under the leases and will become sole owner of their benefit.
What common rights, interests and burdens can be created or attach over real estate and how are these protected?
Various easements (servitudes) may be legally imposed by the situation of the asset either as a result of (i) the common rules applicable to all real estate properties in order to protect the owner of the contiguous land (e.g. right of way for landlocked properties), (ii) public orders endorsed to the benefit of the collectivity (servitudes d’utilité publique) (e.g. passage of the electricity), as a matter of zooning regulation (construction constraints), or (iii) due to the risks applicable to the specific area where the property is located (e.g. material constraints for buildings located within the danger zone of an industrial facility).
Property owners may also agree to create and attach specific burdens to their property to the benefit of the contiguous plots of land or ‘volumes’ by way of a contractual agreement -e.g. right of view), in which case a specific deed shall be drafted by a notary and recorded to the Land Registry in order to become binding upon any future purchaser of the property. Same will apply to any interest or lien (e.g. mortgages) pertaining to a real estate property so that it can become binding upon third parties.
Are split of legal and beneficial ownership of real estate (ie Trust structures) recognised?
Split of legal and beneficial (i.e. French fiducie) has been recognised under French law since February 2007 and allows, in theory, real estate assets to be registered in the name of a trustee (fiduciaire). It is, however, rarely the case, in practice, since the activity of a trustee is extremely regulated and reserved to banks, insurance companies, investment companies and lawyers. The French fiducie is mainly used within the framework of restructuring/insolvency proceedings. It is not a usual instrument/tool to manage real estate assets.
What are the main taxes associated with commercial real estate ownership and transfer of commercial real estate?
Besides individual or corporate income tax on the rents received from commercial real estate or capital gain realised upon the sale of the asset, the main taxes associated with the ownership and the transfer of commercial real estate are the following:
- Individuals owning real estate assets which are not allocated to the taxpayer’s professional activity can be subject to wealth tax if the taxable assets exceed the threshold of 1.300.000 EUR. The maximum rate is 1.50% for the portion of assets exceeding 10.000.000 EUR;
- Entities owning directly or indirectly real estate in France are subject to an annual tax of 3% assessed on the fair market value as at 1 January (‘French 3% tax’) if such entities cannot rely on an available exemption. Are exempted from French 3% tax in particular: (i) entities whose French assets are not predominantly composed of real estate assets, (ii) international organisations, sovereign States and public institutions, (iii) listed entity, and French entities or entities established in the EU or in a country with which France has concluded an income tax treaty containing either a mutual assistance clause or a non-discrimination clause, or a tax information exchange agreement provided certain filing and disclosure requirements;
- A real estate tax (‘taxe foncière’) is due each year by the owner of real estate, assessed on a ‘rental cadastral value’;
- An annual tax on offices, commercial premises and warehouses areas located in Ile-de-France (‘taxe annuelle sur les bureaux et locaux assimilés en Ile-de-France’) applies to buildings or part of a building that are intended to be used as offices, or for the exercise of a professional, commercial or warehousing activity located in Ile-de-France.
Sale of commercial real estates are subject to transfer duties (i) at a rate of 5.81% (6.41% if located in Ile-de-France) if the real estates are completed for more than five years, (ii) 0.71498 % if the real estates are completed for less than five years or if a commitment to sale the real estates within five years as from the acquisition date is taken, (iii) 125 EUR if a commitment to perform certain refurbishment works yielding to a new building within four years as from the acquisition date is taken. Land registrar fee (0.1%) and notary fees (circa 0.85%) are also applicable in every case.
What are common terms of commercial leases and are there regulatory controls on the terms of leases?
There is a specific, and partially mandatory, legislation for commercial leases, which is codified in the French commercial code and is known as the ‘commercial leases statute’. It imposes notably a minimum duration for the lease to the landlord of nine years, the tenant remaining in contrast entitled to terminate the lease at the end of each triennial period unless the parties agree, under certain conditions, for the contrary.
The parties can freely negotiate the initial rent. It is generally a fixed rent, with a turnover-based complementary part for retail premises, notably in commercial centres.
The parties often provide that the rent (or as the case may the fixed part of the rent) will be indexed on an annual basis. However, under French law, an index is only valid if it is directly related to the object of the contract or the activity of one of the parties. The French Statistical Institute (INSEE) has created specific indexes which are deemed to be in relation with rental contracts for commercial and office premises (namely the commercial lease index (ILC) and the tertiary activities rent index (ILAT)).
Clauses which prevent indexation to go both ways are prohibited and may render null and void the whole indexation mechanism. Considering a recent bunch of strict court decisions in that respect, it tends to become common advice to avoid, more generally, any clauses which tend to control and frame the indexation of the rent when negotiating the leases.
In addition, if the lease provides that the rent is subject to indexation, the commercial leases statute allows each party to apply for a rent review for each time that, by reason of such indexation, the rent is increased or decreased by more than 25%.
Sub-letting and assignment of the lease:
Sub-letting is not allowed unless the parties have agreed otherwise, which is really a matter of negotiation depending on the commercial situation of the asset.
As regards the assignment of the lease, a tenant can always assign its lease to the purchaser of its business, under the commercial lease statute.
Renewal and termination rights:
A commercial lease may only be terminated or renewed by way of a formal notice of termination/renewal sent for or after the expiry date of the lease. In the event that no notice is served by either party for the expiry date of the lease, the lease is tacitly pursued until such notice is delivered.
If the landlord does not want to renew the lease when expired, it must pay the tenant compensation for the cost involved by the lease’s termination. This compensation may go as far as the price of the tenant’s business, notably for retail premises, if it is considered that the tenant shall lose its clientele in the process and has often the effect of forcing the landlord to allow the renewal.
The lease is renewed on the same terms and conditions as the previous lease for a term of nine years. The new rent is agreed between the parties or determined by the court on the basis of the rules provided in the commercial leases statute and/or the contract, depending on various conditions. It is commonly known that the rent amounts fixed by the court do not reflect the true market value of the premises and may even prove a lot lower. For retail premises, various rent-capping mechanisms based on the variation of the ILC may also apply and lower over again the rent amount upon renewal.
Costs, repairs and services charges:
Since a recent reform of the commercial lease statute enacted in 2014, the distribution of the charges and taxes under the lease may no longer result in the repayment, by the tenant, to the landlord of (i) the repairs and works pertaining to the structure of the building, (ii) taxes that are not involved by the specific use of the building or a service that is directly or indirectly beneficial to the tenant, (iv) management fees linked to the management of the rents and (v) for premises located in a real estate complex: service charges, taxes and other related fees that should be borne by other tenants or that are linked to vacant premises.
All other costs under the lease can be borne by the tenant. For sake of clarity, the landlord is under the statutory obligation to draw up a precise and exhaustive inventory of all expenses and taxes related to the lease.
It is commonly provided that tenants are responsible for all costs of the leased property except for those previously mentioned with exceptions depending on the quality of the asset and the negotiation power of the tenant.
How are use, planning and zoning restrictions on real estate regulated?
The planning status of a property is determined by various documents, including (i) the local planning documents (Plans Locaux d’Urbanisme) applicable to the city and the area where the property is located and (ii) the various plans developed in parallel, when appropriate, for the prevention of specific risks and hazards or environment protection such as the plans for prevention of technological or foreseeable natural risks, noise zones, earthquake zones or public easements for the protection of natural or cultural heritage or for the use of energy resources.
If the property consists of land on which a building is to be built or on which a building is to be demolished and rebuilt or extended or renovated, a demolition permit and/or a building permit will have to be obtained. If the property consists of land to be divided into several plots with a view to erecting constructions on these plots, a lay-out permit will have to be obtained, it being specified that all those can be treated in one overall process.
Who can be liable for environmental contamination on real estate?
The principle is that ‘the polluter pays’. Should the environmental contamination arise from an operated regulated facility (installation classée), the operator of the latter will be held liable.
In the event of successive operators, the last operator is required to restore the land from pollution caused by its own operations. The last operator can only be required to remediate pollution it has caused, not the pollution caused by others. Should the last operator be insolvent or has disappeared, the land owner may be held liable by the local authority only if (i) proved negligent or (ii) played a part in causing the pollution.
In any event, the financial burden of the remediation cannot be borne by the operator more than thirty years after the local authority has been informed that the activity has ceased, unless the operator concealed the dangers and inconveniences caused by the pollution.
Should the pollution arise from waste, the former operator of the registered facility could be held liable if the waste was produced from operating the facility.
If the producer no longer exists or cannot be identified, the owner of the land on which it was deposited may be held liable as being ‘holder’ of the said waste should it be negligent or has committed a specific fault.
If, as a result of the operators’ insolvency or disappearance, the rehabilitation of the land cannot be carried out, the State may entrust such rehabilitation to a specific agency: (Agence de l’environnement et de la maîtrise de l’énergie or ADEME).
Is expropriation of real estate possible?
Expropriation of real estate is possible for public purpose only (e.g. expropriation of land for the construction of a motorway) and is thus led, decided and compensated by the State.
Proceedings start with preliminary enquiries of the project and overall public purpose justifying the expropriation, its impact on the local community and benefits and is followed by a State’s declaration confirming public utility. Some public utilities are legally provided for (e.g. the removal of substandard housing or lands subject to technological risks). Others are controlled by the courts based on a cost-benefit analysis of the situation (e.g. construction of parking lot for public servants, construction of low income housing).
Is it possible to create mortgages over real estate and how are these protected and enforced?
Mortgages (hypothèques) – and other real estate liens (e.g. lender’s lien) - can be created over real estate by way of a notarial deed that will then published at the Land Registry to become binding upon third parties. Mortgages rank from the date of their publication at the Land Registry.
When the debtor fails to carry out its obligation of payment, the creditor can initiate a procedure to seize the mortgaged property (saisie immobilière) which is a cumbersome judicial procedure leading to a sale by auction of the property. What is more, in case the debtor and owner of the mortgaged property is a company; the forced sale of the property will be included in the bankruptcy procedure along with all of the company’s assets.
As an alternative, the creditor can request before a judge that the mortgaged property be ‘allocated’ directly so that it should become the owner of the mortgaged property. However, if the property is subject to other securities, the creditor will have to obtain the release of said securities. To facilitate that allocation the debtor can agree to ‘commissoria lex’ (pacte commissoire): in which case the valuation of the property is established beforehand and the transfer of the property can be executed without the intervention of a judge.
Are there material costs associated with the creation of mortgages over real estate?
Creation of mortgages over real estate involves the registration of a notarial deed, which implies notary’s fees for the drafting of the mortgage deed equal to approximately 0.33% of the amount guaranteed and the Land Registry fees and taxes equal to 0.720% of the amount guaranteed.
Is it possible to create a trust structure for mortgage security over real estate?
A recent change in French legislation has allowed the registration of a mortgage over a real estate asset in favour of a security agent acting on its own behalf to the benefit of the creditors of the secured obligations since May 2017. However, practitioners seem still distrustful of the proposed mechanism and its efficiency and the French notaries appear unwilling for now to register mortgages in the name of security agents.
What is the main legislation relating to commercial real estate ownership?
Commercial ownership is merely regulated by the common rules of real estate ownership enacted by the civil code and the Land Registry specific regulations.