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Lefèvre Pelletier&associés Avocats

May 2012

INVESTING IN FRENCH REAL ESTATE

Lefèvre Pelletier&associés Avocats 3


LEFEVRE PELLETIER & Associés is happy to present the brochure “RealEstate in France” which is a guide to foreign investors in France.

Prepared by the real estate team with the help of the tax and corporateteams, this brochure points out the specificities of an investment operationin France.

These specificities, particularly in the field of taxation and town planning,will not surprise cross-border investors who are accustomed to preliminary investigations and adaptations required in all new operations.

Two issues should however call their attention because they are deeplyoriginal:

-Under French law, a sale is “perfect” as soon as the parties have agreedon the property and the price (“accord sur la chose et sur le prix”).Investors have therefore to be careful in their preliminary exchangesin order not to be bound before they have decided to be.

- French regulations on commercial leases are of a highly technical nature. Since a good investment is an investment which produces secured rents, a particular attention has to be given to the quality ofthe leases.

Bearing that in mind, and with “Real Estate in France” close at hand, wewish you successful operations in France.

The Real Estate, Tax and Corporate departments

May 2012

Lefèvre Pelletier&associés Avocats4

CONTENTS

1 Investment purchase overview --------------------------------- 5

2 Tax considerations ---------------------------------------------------------------- 5

2.1 Registration duties -------------------------------------------------------------- 5

2.1.1 Purchase of properties ----------------------------------------------------- 5

2.1.2 Purchase of shares in real estate companies ------------------------------------------------------------------------------------- 5

2.2 VAT ----------------------------------------------------------------------------------------------------- 6

2.3 Capital gains tax --------------------------------------------------------------------- 6

2.3.1 Sale of an asset --------------------------------------------------------------------- 6

2.3.2 Sale of shares --------------------------------------------------------------------------- 6

2.4 Taxation of wealth ---------------------------------------------------------------- 6

2.4.1 French wealth tax ---------------------------------------------------------------- 6

2.4.2 French 3% tax on real estate assets ------------------- 7

3 Investment vehicle choice ------------------------------------------- 7

3.1 Most commonly used structures -------------------------- 7

3.1.1 “Société Civile Immobilière” (“SCI”) ----------------- 7

3.1.2 “Société en Nom Collectif” (“SNC”) ---------------- 7

3.1.3 “Société Anonyme” (“SA”) ------------------------------------------ 7

3.1.4 “Société par actions simplifiée” (“SAS”) --------- 8

3.1.5 “Société à Responsabilité Limitée” (“SARL”) ---------------------------------------------------------------------------------------- 8

3.2 Foreign investors ----------------------------------------------------------------- 8

3.3 Real Estate Investment Trusts (REITS) -------------- 8

3.3.1 SIIC (Sociétés d’Investissements Immobiliers Cotées) ---------------------------------------------------------------- 8

3.3.2 OPCIs (Organismes de Placement Collectif Immobilier) ---------------------------------------------------------------- 9

3.3.3 SIIC 3 regime ---------------------------------------------------------------------------- 9

4 Financing an acquisition ------------------------------------------------ 10

4.1 Security package ----------------------------------------------------------------- 10

5 Managing the acquisition process ----------------------- 11

5.1 Introduction ----------------------------------------------------------------------------- 11

5.2 Letter of intent – right of exclusivity –

offer letter --------------------------------------------------------------------------------- 11

5.2.1 Letter of intent --------------------------------------------------------------------- 11

5.2.2 Right of exclusivity ------------------------------------------------------------- 11

5.2.3 Offer letter ------------------------------------------------------------------------------- 11

5.3 Preliminary contract -------------------------------------------------------- 11

5.4 Deed of sale ----------------------------------------------------------------------------- 12

5.5 Typical contract terms --------------------------------------------------- 12

5.6 Warranties -------------------------------------------------------------------------------- 13

6 Various forms of real estate ------------------------------------- 13

7 Land registration ---------------------------------------------------------------- 14

8 Commercial leases ------------------------------------------------------------ 14

8.1 Rent ------------------------------------------------------------------------------------------------- 14

8.2 Term ---------------------------------------------------------------------------------------------- 16

8.3 Termination ---------------------------------------------------------------------------- 16

8.4 Renewal --------------------------------------------------------------------------------------- 16

8.5 Subletting ---------------------------------------------------------------------------------- 16

8.6 Assignment of the leasehold right ---------------------- 17

8.7 Maintenance and repairs ---------------------------------------------- 17

8.8 Taxes ----------------------------------------------------------------------------------------------- 17


1 Investment purchase overview

French law does not impose restrictions in connectionwith the acquisition of real estate located in France byforeign persons. Individuals and legal persons, whetherFrench or foreign, are free to purchase real estate inFrance directly or through a special purpose vehicle.,Certain operations however may require filing formalitiesin the case of setting up of a company by non residentor the acquisition by non resident of a French company.

Basically, small-scale property acquisitions are oftenmade directly by the purchaser or through a French entity (as a Société civile immobilière – SCI).

With a view to mitigating tax, larger real estate investmentscan be structured through a non-French company whenthe applicable tax treaty precludes the levying of Frenchcapital gains tax or enables a tax optimized structurein this regard (e.g. tax treaty between France andLuxembourg). The non-French company will hold aFrench entity that in turn will own the property.

Another tax optimisation route commonly used for theacquisition of (substantial) real estate asset portfoliosconsists in using a real estate investment trust (‘REIT’)that is exempt from corporate income tax in France, inparticular an “OPCI” ‘Organisme de Placement CollectifImmobilier’ (see § 3.3 below).

2 Tax considerations

The acquisition of a property is, in principle, subject toregistration duties and, in certain cases, VAT applies.

2.1 Registration duties

2.1.1 Purchase of properties

The purchase of property located in France is subjectto registration duties at a rate of 5.09006% and to aland registration fee of 0.1%. In some cases such as thepurchase of a property achieved for less than 5 years orthe purchase of a plot of land to be built, the registrationduties amount to 0.71498% only (plus land registrationfee of 0.1%) or can even be avoided or significantly reduced, e.g. if the purchaser undertakes a commitmentto (re-) build or re-sell within a certain timeframe. The

conditions of application of the reduced registration

duties or of mere exemption are complex and should

be analyzed in detail.

The purchase of property requires the services of a

notary and gives rise to the payment of a negotiable fee

on the basis of 0.825% (plus VAT at 19.60%). The overall

rate of these tax and legal costs is circa 6.18%.

Registration duties are based on the purchase price or

fair market value of the property if higher.

Transfer duties are paid by the purchaser unless the

parties agree otherwise. If the purchaser defaults on

the payment of transfer duties, the seller is jointly liable.

2.1.2 Purchase of shares in real estate companies

Registration duties levied on the purchase of companies’

shares are as follows:

(i) Companies whose assets mainly consist of real estate

property:

These are defined as companies that own real estate

properties or rights to such properties or shares in

companies that hold such properties accounting for

more than 50% of their assets.

The sale of shares in such companies, whatever their legal

form (e.g. SCI, SNC, SARL, SA or SAS), are subject to

registration duties of 5% on the sale price or fair market

value of the shares if higher.

The disposal of the shares in a foreign company qualifying

as a real estate company for French registration duties

purposes is also subject to French registration duties.

If the deed of purchase is enacted outside of France a

French notary public must be appointed.

(ii) Companies other than those which mainly hold real

estate:

Sales of shares in companies other than SAs (i.e. joint-

stock companies) or SASs (i.e. simplified stock companies)

are subject to a 3% registration duty on the sale price

of the shares, or fair market value if higher.

Sales of shares in SAs or SASs are also subject to the

3% registration duty up to EUR 200,000 then 0.5% for

the amount between EUR 200,000 and EUR 500,000

and 0.25% for the amounts above.

Norway, the purchase price is reduced by 2% p.a. toreflect theoretical depreciation. In this case the sellingcompany must appoint a tax representative.

– Following the closure of the financial year, CIT is leviedand mitigated by the amount of capital gains tax already paid. The balance, if any, can be claimed backfrom the French tax authorities if the selling companyis tax resident in a jurisdiction that has signed a taxtreaty with France.

2.3.2 Sale of shares

– Company resident in France for tax purposes:The capital gain on the shares (i.e. disposal price lesshistorical cost) incurs CIT at the standard rate.

– Company not resident in France for tax purposesThe applicable tax treaty, if any, usually gives Francethe right to tax the gain according to the OECDModel tax treaty. The tax of 33.33% will apply to thegain. CIT will also be levied; however the tax of33.33% can be offset against CIT at the standardrate. Here also the selling company must appoint atax representative.

However, certain rare tax treaties make it possible totax the capital gain in the country of disposal only (e.g.tax treaties with Germany, Luxembourg, and the Netherlands if two layers of companies are inserted).In this case, no capital gains tax is due in France. Please note that the tax treaty France-Luxembourg iscurrently being re-negotiated in order to enable a taxationof capital gains in France.

2.4 Taxation of wealth

2.4.1 French wealth tax

Non-French tax resident individuals are liable for Frenchwealth tax on their wealth located in France except fortheir financial investments.

When there is no Tax Treaty on Wealth enforceable realestate assets located in France held directly or indirectlythrough a French or foreign entity to a level of morethan 50%, even if this entity does not mainly ownFrench real estate assets, are taxable in France.

French tax residents are liable for French wealth tax ontheir worldwide wealth, subject to exceptions (e.g. shareholdings of at least 25% in the company managedby the taxpayer, works of art).


2.2 VAT

Transfers of title of the following real estate assets aresubject to VAT:

– Plots of developable land;

– Buildings that are to be re-constructed or undergomajor works that substantially modify the structure;

– All successive transfers of title of new buildings withinfive years of the completion date;

– Forward sales, i.e. sales prior to completion of theconstruction works (‘Vente en l’Etat Futur d’Achèvement’).

VAT is levied at 19.6% and recoverable if the building isused for an activity that is subject to VAT, e.g.: businessactivity of the purchaser or letting of commercial andindustrial premises and offices, if certain conditions aremet. When VAT is levied registration duties are not due(see § 2.1.1 above), except for land registration tax of0.715% (can be avoided on plots of developable land).

2.3 Capital gains tax

Capital gains will be payable by the seller following thesale of a property or of the shares of a company. Thecapital gains tax regime applicable in France is as follows:

2.3.1 Sale of an asset

Capital gains on the disposal of properties located inFrance are subject to French capital gains tax. Two different rules apply depending on whether the companymaking the disposal is resident in France for tax purposes.

Company resident in France for tax purposes:

The taxable capital gain is made up of the differencebetween (i.) the disposal price and, (ii.) the net bookvalue of the property being disposed of.

The capital gain is subject to CIT at the standard rateof 34.44%.

Company not resident in France for tax purposesThe capital gain is taxed in two steps:

– On the day of the sale, a tax of 33.33% is levied on thecapital gain calculated on the basis of the differencebetween the disposal price and the historical cost ofthe property. If the selling company's tax residence isoutside the European Union or in Iceland or


The net value of the assets liable for French wealth taxis subject to this annual tax if the threshold of EUR1,300,000 is passed (for 2012). Progressive rates applyof 0.25% (for the share of net wealth between EUR1,300,000 and EUR 3,000,000) and 0.55% (for the shareof net above EUR 3,000,000).

2.4.2 French 3% tax on real estate assets

A yearly 3% tax is incurred if disclosure obligations arenot complied with. In theory, any French or foreign entitywith assets mainly consisting of French real estate notused for a professional activity may be subject to thistax, equal to 3% of the market value of its real estateassets.

However, all French entities and entities located in theEU or in countries that have concluded Tax Treatieswith France containing either administrative assistanceor non-discrimination clauses will be exempt from this taxprovided the entity discloses the identity of its partners.This obligation to disclose the identity of the partnersis implemented at each link in the shareholding chain,unless the shareholder whose identity is disclosed isexempted without any requirement to file a declaration(or pays the tax).

3 Investment vehicle choice

3.1 Most commonly used structures

An investor who desires to conduct business in Francethrough the establishment of a direct national presencecan choose from among a number of corporate entities.The main forms of these entities are summarized below,whereby the summary is intended only to provide a general overview.

The most important types of commercial companies inFrance are the Société Anonyme (SA), the Société par Actions Simplifiée (SAS) the Société à Responsabilité Limitée(SARL) and the Société en Nom Collectif (SNC). In thereal estate business and since properties are consideredcivil activities, the structuring of an investment usuallyinclude a Société Civile (SC). Whereas the shareholdersof the SA, SAS and SARL enjoy limited liability, membersof SNC and SC do not.

French SARLs, SAs and SASs are subject to French CITon their profits at the standard rate of 34.44%. The deduction of interest is subject to limitations for inter-

company loans and shareholder loans (“thin capitalizationrules”). These limitations do not apply when the loan isgranted directly by a bank except if the loan is guaranteedby a company related to the purchasing company. Furthermore interest deduction is allowed for foreigncompanies purchasing a French property only if the loanis contractually allocated to the property purchase. Areduced CIT rate of 15% is available to small and medium-sized businesses for the portion of taxable profitsthat is less than EUR 38,120 p.a.

French SCs and SNCs are pass-through entities whoseprofits are taxed in the hands of their shareholders according to their respective financial rights. This systemallows the profits or losses of the company to be set offagainst the profits or losses of the shareholders. Suchcompanies may waive this pass-through regime and optfor CIT.

3.1.1 “Société Civile Immobilière” (“SCI”)

An SCI is a civil (as opposed to commercial activity) property company organised to own, manage and lease realestate. It is frequently used for real estate investments.

An SCI must have at least two shareholders, and no minimum share capital is required. The SCI is managed byone or more managers who need not be shareholders.

3.1.2 “Société en Nom Collectif” (“SNC”)

The SNC consists of at least two partners (associés)who have the capacity of "merchants" (commerçants)under French company law. Partners need not be individuals and may be citizens or residents of a foreigncountry1.

A partner of a SNC is jointly and severally liable for alldebts and obligations incurred during his or her tenureby any of the partners on behalf of the partnership. In essence, this means that creditors of the SNC may seizethe personal assets of a partner where partnershipfunds are insufficient to satisfy obligations of the SNC.The SNC is managed by one or more managers (gérants).

3.1.3 “Société Anonyme” (“SA”)

This company form is seldom used for real estate transactions as it is more suitable to more complextransactions or where a joint venture is contemplated.

1) Individual partners, unless they are EU, EEA or OECD nationals, musthold a commercial card or a long term residence permit.

Save for the Société en Commandite par Actions, it is theonly kind of company which may offer its shares to thepublic and obtain a quotation on the Stock Exchange.Two types of société anonyme exist under French companylaw: the publicly-held société anonyme, whose shares arelisted on a French stock exchange and which must havea minimum share capital of EUR 225,000, and the non-publicly held société anonyme which has a minimumshare capital of EUR 37,000.

An SA must have at least seven shareholders,

The SA is managed either by a sole Board of Directors,or by a two tier structure involving a Supervisory Board(Conseil de Surveillance)2 and an executive managementcommittee (Directoire) depending on which structure isprovided for in the by-laws. The SA must appoint atleast one statutory auditor whose duty is to examineand certify the accounts of the company.

3.1.4 “Société par actions simplifiée” (“SAS”)

An SAS is a fairly recent form of joint-stock limited liability company.

The principal purpose for creating this new form ofcorporation has been to bring some flexibility to therather formalistic French corporate law in general, andto the law of sociétés anonymes in particular, the statu-tory requirements of which regarding management andadministration are especially cumbersome. Overall, it isa very flexible form of company and, for that reason,it is often used to create joint-ventures.

No minimum share capital is required. No minimumnumber of shareholders is imposed by law. Therefore,an SAS may have a single shareholder. The by-laws mayfreely organize the conditions under which a SAS is managed. It can thus be managed by one or several officers who can be individuals or legal entities. Theremay be a board of directors or any other body createdby the by-laws. However, to protect third parties intheir dealings with the SAS, the law provides that theby-laws must appoint a President (who can be an individual or a legal entity) who has power to representthe SAS vis-à-vis third parties and has full power andauthority to act on behalf of the SAS, notwithstandingany internal limitation of powers.

3.1.5 “Société à Responsabilité Limitée” (“SARL”)

Like an SA, an SARL is a limited liability company. It isalso seldom used for real estate investments.

2) Between 3 and 18 directors appointed by and amongst the shareholders.

Compared to the SA, the SARL has fewer requirementswith respect to minimum number of shareholders (twoor even a single shareholder3). There is no minimumshare capital requirement. A SARL is managed by oneor more managers (gérants), who must be individualsbut need not be shareholders, and who may be eitherFrench or foreign citizens or residents 4. The number ofmanagers is fixed by the by-laws of the company.

Transfer of shares to third parties (except amongstmembers and to certain family members) is subject toprior majority approval of the other shareholders andis binding on third parties only after completion of certain formalities of notification of such transfer to thecompany and filing with the Registry of Commerce andCompanies.

SARLs, SAs and SASs are subject to CIT. They can beconsolidated for tax purposes with their shareholder ifthe latter holds at least 95% of the share capital and iseither a French company liable to CIT or a French permanent establishment of a foreign company liable to CIT.

3.2 Foreign investors

According to the Decree dated 7 March 2003, real estateinvestments in France made by foreign (i.e.: non-resident) investors that exceed:

(i) EUR 15,000,000 must be declared to the Banque deFrance,

(ii) EUR 1,500,000 or in relation with purchase of rurallands used in connection with wine growing/producingwithout any threshold, to the Finance Ministry,

for statistical purposes, failing which, heavy sanctionsprovided in the Customs French Code may apply.

Foreign entities with an establishment in France aredeemed residents.

3.3 Real Estate Investment Trusts (REITS)

3.3.1 SIIC (Sociétés d’Investissements Immobiliers Cotées)

In essence, the SIIC regime offers tax exemption for listed property companies provided that they comply

3) In such case it is called a EURL, an entreprise unipersonnelle à responsabilité limitée.4) A foreign businessman's card is required for managers who are not EU,EEA or OECD nationals or do not hold a long term residence permit.



with an obligation to distribute 85% of their net rentalincome and 50% of their net capital gains to shareholders.The SIIC regime is available for companies which: – are stock companies;

– are quoted on a French Stock Exchange;

– have a share capital amounting to EUR 15 Millionsat least;

– whose corporate main purpose is the acquisition orconstruction of buildings with a view to letting andor the direct or indirect holding of participations incompanies having the same object.

Subject to the provisions of any applicable double taxtreaty, distributions of dividends to non-resident share-holders are subject to a 25% withholding tax.

Capital holdings in an SIIC by one shareholder or agroup of persons acting jointly (de concert) are limitedto a total of 60% 5. The breach of the 60% test wouldresult in the SIIC being subject to corporate incometax at the ordinary rate for the year during which thetest is not met. As a consequence, this type of vehicleis used less frequently than “OPCIs” (see paragraphbelow) for the creation of real estate investment funds.

3.3.2 OPCIs (Organismes de Placement Collectif Immobilier)

OPCIs are collective investment bodies whose securitiesare not listed on the stock exchange and whose purpose is the investment in real estate. The setting-upof an OPCI is subject to prior agreement of the AMF(Autorité des Marchés Financiers – the Financial MarketsAuthority). The OPCI are represented by a Frenchportfolio management company (société de gestion) approved by the AMF.

In legal terms, these entities are subject to three specificrestrictions:

– Division of the investment according to certain quotasbetween the direct ownership of the real estateasset, by companies owning the building, listed realestate companies and liquidity (the assets taken intoaccount for these ratios differ according to the legalform elected);

– A liquidity obligation to shareholders, who must beable to sell their shares at any time;

5) This limitation does not apply to shareholders that are SIIC themselves.

– An indebtedness limit of 40% of the asset value.

These obligations are generally waived if the OPCI electsthe reduced operating rules regime (‘RFA’) available toqualified investors only.

There are two legal forms of OPCIs: (i.) the FPI, whichhas no legal personality and constitutes a kind of undividedco-ownership of the real estate assets and, (ii.) the SPPICAV which is a limited company with a legal personality and is a taxable person but exempt from tax.

The SPPICAV RFA is a vehicle that is being more oftenused to structure French real estate funds. The SPPICAV is fully exempt from CIT on rental income andon any capital gains on disposals of real estate assets.

On the other hand, the SPPICAV is obliged to distribute:

– 85% of its rental income;

– 50% of the capital gains on disposal.

French tax resident shareholders liable for CIT are subjectto CIT on the income distributed by the SPPICAV. Therefore, the OPCI’s exemption from CIT is not anadvantage, but rather a transfer of taxation to the shareholders for the income and gains subject to thedistribution obligation.

Non-French tax resident shareholders are liable for awithholding tax of 25% subject to treaty provisions.

Exemption from CIT has one material advantage. Income and gains that are not distributed by the SPPICAVbut reinvested in real estate assets or used to repaydebt will not be taxed at the level of the SPPICAV orat the level of the shareholders.

Sales of shares in OPCIs are subject to registration duties at a rate of 5% if the purchaser is a legal entitythat holds or will hold 20% or more of the rights in theOPCI upon acquisition. Conversely, if this threshold isnot exceeded, no registration duties are due on the disposal of shares in the OPCI.

3.3.3 SIIC 3 regime

Until 31 December 2011, SPPICAVs (like SIICs) allowedcompanies subject to CIT that sold buildings or securitiesin real estate companies to benefit from the SIIC 3 regime. The capital gain was subject to CIT at the reduced rate of 19.63% (“exit tax”) subject to certainholding conditions. However this regime has not beenextended and is therefore no longer applicable since January 1st, 2012.

4 Financing an acquisition

In view of the scale of the operation, real-estate acqui-sitions often have to be financed by borrowing. Loanagreements may be either be executed under a privatedeed or a notarized deed if mortgages or lender’s privilege are required. French law containes mandatoryrules providing that the global effective interest rate (tauxeffectif global) shall be set out in all written agreement.Failure to comply so or miscalculation of such rate willresult in the French legal rate applied to the loan agreement.

4.1 Security package

Lenders will usually request a form of security that offers the highest protection. Lender's pledges andmortgages are therefore commonly used. A real estatelender may also require security over the debtor’sother assets and/or a personal or in rem guarantee froma third party. Under French law there are certain restrictions on a company providing financial assistanceand a specific prohibition on providing loans or grantingsecurity for the purpose of financing the acquisition ofits own shares for commercial companies. Unlike in theUnited Kingdom, there is no “white wash procedure”in France and upstream or cross stream guarantees arevery difficult to structure.

The French consumer code contains mandatory rulesfor lenders where the borrowers or the guarantors areindividual persons in particular those qualifying asconsumers.

Lender's pledge (privilège de prêteur de deniers)

A lender's pledge is an in rem security interest that canonly be contracted to secure the reimbursement of theloan taken out to finance the acquisition of the property.The lender has a right to the sale proceeds over othernon-secured creditors or any other mortgagee whosemortgage was registered after his privilege. The loanagreement will have to be executed by notarial deedand the funds borrowed will have to be used to pay theprice of the property. This security has the advantageto be cheaper than the contractual mortgage.

Mortgage (hypothèque conventionnelle)

Mortgages can be granted on a property at any stage

and not just for the financing of the acquisition.

To be binding on third parties, the mortgage has to beregistered with the Land Registry.

In principle, a mortgage will secure the entire debt aswell as the interest accruing on the debt over a periodof three years.

The mortgagee cannot automatically take possessionof the property and sell it. He must follow a specific enforcement procedure. However, the parties have theoption to agree to insert an automatic enforcementclause (pacte commissoire) which under certain conditionsmay allow the lender to take possession of the propertywithout any judicial procedure.

Assignment of receivables: the Dailly schedule

This type of security, which allows existing, forward andeven future receivables to be assigned by registeringthem in a schedule, is one the most often used securityinterest to assign to the benefit of the Lender the rentsgenerated by the building financed, any insurance pay-outsresulting from non-compulsory insurance (such as insurance against loss of rents), etc. To date, the Daillyassignment remains the most effective security interestas it is not affected by the opening of bankruptcy proceedings.

Pledge over accounts covering financial instruments

For shares of SA and SAS, investment certificates, sharesin UCITS (OPCVM) etc. the collateral is created whenthe account holder signs a pledge declaration. The financial instruments account holder issues a pledgecertificate to the other party, the “pledgee”, who retainspossession of the account until the debt is paid off.

Pledge over company shares

Shares in a civil-law partnership or a commercial company (SNC, SARL) are used as collateral by way ofa notarial deed or a private agreement.

Pledge over bank accounts

The lending bank will often ask for this type of securitywhere the balance on a bank account belonging to theborrower will be secured in its favour.

The amount of the receivables pledged does not haveto be specified (this would in any case be impossibledue to variations in the account balance).



Cash collateral

Under a cash collateral agreement, the borrower grantshis creditor full ownership of certain monies as a securityfor the fulfilment of certain obligations. These monies arethen registered in an account opened in the creditor’sname.

5 Managing the acquisition process

5.1 Introduction

In France, the process for acquiring real estate assets isrelatively standardised. This section describes the termswhich would apply to the purchase of a single real estate asset.

Different terms would apply in case of purchase of acorporate vehicle owning the property. A share dealmay be carried out according to a private sale andtransfer agreement, without the participation of a publicnotary. In addition to real estate issues, in share deals,other important aspects have to be considered (mana-gement of past liabilities, calculation of purchase price),which are not described in this document.

5.2 Letter of intent – right of exclusivity – offer letter

5.2.1 Letter of intent

Frequently, the first step will be for the purchaser tosend a letter of intent to the seller. If this letter is carefully drafted so that it may not be deemed to be anoffer, the parties will only be bound once a call optionor a bilateral undertaking to sell and purchase has beensigned by both parties to the same contract or by theexchange of an offer and an acceptance.

5.2.2 Right of exclusivity

During the short interval (from 4 weeks to 3 monthsdepending on the size and complexity of the investment)between the time when a purchaser informs the sellerof his intention to buy a property and the date on whichthe purchaser is required to enter into a preliminarycontract, the purchaser may obtain from the seller aright of exclusivity in order to carry out a survey of thereal estate project.

This right of exclusivity is generally granted freely and,during its period of validity, the seller undertakes notto negotiate with a third party.

5.2.3 Offer letter

Under French Law, the binding offer letter, once acceptedby the seller constitutes a binding sale and purchaseagreement since there is no equivalent of the concept“subject to contract”.

Accordingly, the letter must be drafted with great careespecially if, at that time, no searches or title investigationshave been carried out.

5.3 Preliminary contract

If the parties have agreed to the main conditions of thesale, the next step is to secure an option over the property in order to enable a certain number of duediligence to be carried out or authorisations (such asbuilding permit for example) to be obtained. The termof the option will depend of the conditions precedentto be fulfilled but usually it varies between two to sixmonths.

There are two types of preliminary contract:

Call option (“promesse unilatérale de vente”)

With a call option, the seller irrevocably undertakes tosell the property, whereas the purchaser has the optionof purchasing the property during the allotted time. Inconsideration of the option, the purchaser pays a deposit which is usually 10% of the sale price. This deposit is not refundable if the purchaser does notexercise the option, but if he does exercise it, the deposit is deducted from the purchase price. However,the 10% deposit is refunded to the purchaser if any ofthe conditions precedent stipulated in his favour arenot fulfilled.

If not notarised, a call option must be filed with the registration authorities within ten days of its signature.Failing which, the agreement is deemed null and void.

Bilateral undertaking to sell and purchase (“promessesynallagmatique de vente”)

Under the bilateral undertaking to sell and purchase,both parties are committed, the seller to sell and thepurchaser to buy, but most often the transfer of titlewill be subject to conditions precedent.

It is normal practice for the purchaser to pay a deposit(usually 10% of the price) which will be refunded if theconditions precedent are not satisfied.

A bilateral agreement subject to conditions precedentmust also be filed with the tax authorities. Once theconditions precedent are met, the sale is final and theregistration duties or taxes must be paid within onemonth, or the notarial deed of sale must be executedwithin such a period.

5.4 Deed of sale

Notaries are necessarily involved in the conveyancingprocedure relating to direct real estate investments (i.e.purchase of the property as opposed to purchase ofthe shares of the company owning the property).Thisis because the direct purchase of a property must occurby means of a notarial deed of transfer (“acte authentiquede vente”) in order to be published at the Land Registry(“Conservation des Hypothèques”) so as to be enforceableagainst third parties and notaries have a monopoly inthis respect.

The notary will draw up the contract (but a lawyer maybe involved as well), witnesses the signature, collect andpays out the purchase price and publishes the transfer.The choice of notary is usually in the hands of the seller(or the lender for a loan).

The notary's fees are payable by the purchaser unlessthe parties agree otherwise. Fees amount to a maximumof 0.825% of the price including taxes plus VAT at19.60%. However, the portion of the notary’s fees thatexceeds EUR 80,000 before VAT is negotiable, and a reduction may be freely agreed upon. Where howevertwo notaries are involved (one for each party) the feeis split between them so that in case of a negotiateddiscount, the agreement of the two notaries is required.

In addition to notarial fees, a fee is payable to the LandRegistrar at a rate of 0.1% (“salaire du conservateur”)calculated on the higher of either the purchase priceor the market value of the property.

Furthermore, when a mortgage is taken on the property(which will almost always be the case when the purchaseis financed through a bank loan), notary’s fees are payableat the rate of 0.45375% (plus VAT at the rate of 19.60%assessed on the fee) of the amount of the mortgage,together with a Land Registrar's fee of 0.715% (“Taxe

de publicité foncière”) of such amount. However no LandRegistrar’s fee is due in case of a Lender’s privilege.

5.5 Typical contract terms

Both types of preliminary contract are generally subjectto conditions precedent such as the waiver by the localauthorities of their pre-emption right, the obtaining bythe purchaser of a loan to finance the acquisition, theissuance of a building permit, etc.

Although the notarial deed is fundamental to theconveyancing procedure in France, the preliminaryagreement is of great importance because it containsthe conditions that are repeated in the notarial deed.Great care must therefore be taken in the drafting ofthe preliminary agreement. It is important to note thatunder French law there are no standard conditions ofsale and therefore sale contracts tend to be long as theymust expressly contain all the conditions.

Before entering into a preliminary contract, the purchasershall commission various due diligence reports on thelegal, tax, technical and environmental aspects of theproperty. During this due diligence phase, the purchaser'slegal counsels will a.o. need to obtain the following information on the property:

– Copy of the title deeds,

– Copy of the plans and technical documents relatingto the property which contain the exact descriptionof the property,

– “Certificat d’urbanisme”, a planning document whichshows the administrative easements burdening theproperty,

– Copy of the original leases to determine the rentalincome of the property,

– The administrative classification as to the use of theproperty: office, residential, etc.,

– All documents and information concerning refurbish-ment works such as building permits, certificates ofcompliance, insurance etc.,

– Confirmation from the Land Registry as to whetherthe property is mortgaged or burdened by any easements,

– All documents pertaining to the tax situation of the

property.



5.6 Warranties

Under French law, the seller of a property must providethe purchaser with two warranties, different in scope,covering the risks of eviction and hidden defects in thebuilding sold.

In practice, clauses are often inserted into contractswhich limit the seller’s warranty or even exclude it altogether. Such clauses are invalid if they emanate froma seller who is a professional, unless the purchaser toois a professional, specialising in the same field as the seller.

Recent laws have imposed a requirement to append various schedules either to the pre-contract or to thenotarised deed of sale which relate to the risks attachedto the property, such as termites, lead or asbestos.

a/ The warranty against eviction

The warranty against eviction is a guaranty granted bylaw and which covers the risk of eviction (i.e. by thirdparties or by the seller himself).

Warranty covering the seller’s personal action

The seller firstly guarantees the purchaser against anydirect claims to his property, such as seeking to evicthim on the grounds of adverse possession or claimingrights in rem to the building, such as usufruct or buildinglease.

The seller also guarantees the purchaser against any indirect actions against his property, such as selling the property to a third party before the first sale is registered.

This warranty is transferable to subsequent purchasers,and its effects cannot be reduced in scope or removedby a clause in the contract.

Warranty against actions of a third party

This warranty differs from the preceding warranty inthat it seeks to protect the purchaser against actionsfrom third parties claiming rights to his property ratherthan material infringements of his rights.

In the event of a total eviction, the seller must refund the original price paid, plus an additional sum if the building has increased in value, as well as any profits it hasproduced.

In the event of a partial eviction, the purchaser is entitled

to a partial refund or to opt for annulment if the rightor the part of the building of which he has been deprivedwere essential.

b/ Warranty covering hidden defects

After the sale, the purchaser may discover that the buildingsold contains a hidden defect: this is defined by the CivilCode as a defect that makes the building sold unfit forthe purpose intended by the purchaser, or impairs thisto such an extent that the purchaser would not haveacquired it, or would have offered a lower price for it,had he known this.

The purchaser is then entitled to apply for annulmentof the sale accompanied by a refund of the price paid,or to receive a reduction in this price.

The seller is not required to issue warranties coveringany apparent defects. The extent to which a defect isdeemed not to be apparent depends primarily on theextent of the purchaser’s experience in detecting suchdefects.

The purchaser may first seek the annulment of the sale.However, he may also apply to the courts for a reductionin the price of the property. Whichever course of actionhe chooses, the purchaser must act no later than 2 yearsas from the date on which he discovered the defect.

6 Various forms of real estate

Freehold ownership (pleine propriété)

In almost all cases, the interest to be acquired in landand buildings will be that of freehold ownership. Thefreehold ownership of land extends to anything aboveand below it, including buildings.

An investor having an interest in a property in freeholdownership is entitled to mortgage it, grant easementsover it, grant leases of any type and sell it at any time.

There is no limitation under French law on the numberof persons who may together own the freehold ownershipof a real estate asset. In such a case, they are said toown the property in joint ownership ("indivision") butthis mechanism is not often used in the investment sectoras day to day management is cumbersome.

In complex operations, French operators often dividea plot of land vertically, i.e. distinct and separate rightsof ownership exist on superposed layers or “volumes”

(which is similar to “Flying freehold” under English law)with reciprocal easement rights enabling one owner toerect a building based on the building below. For example,one volume could include particular levels of subsoil(such as car parks) whereas another could include thefirst basement or another from 2 to 5 floors.

Building lease (bail à construction)

The owner of a plot of land may grant a building leasefor a minimum period of 18 years and a maximum of99 years. The lessee benefits from a real property rightover the property (similar to a “leasehold estate”) andmay therefore assign it, mortgage it and create easementsover it. The main characteristic of such a lease is thelessee's obligation to build constructions on the landthus rented at his own cost, to maintain and repair themand to pay all taxes and duties relating to such property.The ownership of the constructions is transferredto the lessor upon expiry or termination of the leasewithout any compensation for the lessee unless otherwiseprovided.

Long-term lease (bail emphytéotique)

The owner of a property may also grant a “bail emphy-théotique” which is also a “leasehold estate” whose minimum duration is 18 years and maximum durationis 99 years. Under such a lease, the lessee benefits froma real property right over the property and may there-fore assign it, mortgage it and grant easements as wellas sub-leases for the duration of the lease. The lesseemust maintain the property and increase its value at hisown cost and must pay a fee (“redevance”) to the lessor.At the end of the lease, all improvements made to theproperty by the lessee are transferred to the lessor without compensation unless expressly provided for.

The main differences between this lease and a “buildinglease” is that (i) there can be no obligation for the lesseeto build a building and (ii) the landlord has only a verylimited capacity to restrict the lessee’s rights over theproperty.

Forward Sale (vente en l'état futur d'achèvement)

Under such a contract, the seller of a plot of land undertakes to build premises within a defined periodand on the basis of plans and specifications duly agreedby the purchaser.

Upon execution of the deed of sale, the ownership ofthe land is transferred to the purchaser whereas the

premises are transferred as their construction advances,with the price being paid as the works progress.

The seller is liable towards the purchaser for the visibleand latent defects that may affect the premises aftertheir completion.

A performance guarantee is usually delivered by a bankto the purchaser.

7 Land registration

All sales and transfer of properties must be registeredwith the Land Registry depending on the location ofthe property to be binding against third parties. Anymortgages, charges, easements created by contract,leases granted for a term of over 12 years and any procedure for the forced sale of a property or litigationon a right in rem over real estate shall also be registeredwith the Land Registry.

However, the registration does not in itself create anabsolute and unchallenged right. The Land Registrar thatcarries out the “registration” and “public notices formalities” at the Land Registry keeps in its recordsauthenticated copies of all notarial deeds relating to aproperty and issues copies and extracts of such deedsupon request. Information includes all transfer of ownership, identity of current and past owners, date ofacquisition and price paid (subject to confidentiality as setforth in Section) easements and encumbrances, chargesand any long term leases registered over the property.

8 Commercial leases

The property purchased could be leased to individualsif it is a residential building but usually, investment inproperty tends to be for commercial or offices use. A lease agreement for this use will fall into the scope ofthe commercial leases (“baux commerciaux”) regulations.Commercial leases are governed by the French Commercial Code. The main purpose of this regulationis to grant the lessee the right to renew its lease inorder to ensure the continuation of his business and tosecure his clients.

8.1 Rent

The rent is freely agreed upon between the parties,most often according to the rental value of the premises



which, is generally the same as the market value. It mayinclude a variable portion calculated according to thelessee’s turnover and a fixed portion that correspondsto a guaranteed minimum rent. The rent is generallypaid quarterly in advance or in arrears.

Rent may be reviewed during the term of the lease by either of the parties, subject to the provisions of Articles L. 145-38 and L. 145-39 of the French Code decommerce. There are two systems of rent review: Statutory rent review and Rent indexation clause.

Statutory rent review

Pursuant to article L. 145-38 of the French Code decommerce, rent can be reviewed on request of eitherparty every three years as from the date on whichthe lease came into force. Subsequent rent revisionbeing applied three years after the date of the lastfixing of the rent.

The revised rent must correspond to the rental valueof the premises, which is unless agreed by the partiesdetermined by Courts, taking into account the charac-teristics of the leased premises (their use; respectiveobligations of parties; current prices charged locally…).

However, the rent increase (or decrease) upon suchtriennial revision cannot exceed the variation in theNational Construction Cost Index or the NationalIndex on Tertiary Rents since the last fixing of therent (either by agreement between the parties or asa result of a court decision) except in the case where,during that period of time, there has been an effectivemodification of the local commercial factors (“facteurslocaux de commercialité”) resulting in a variation of morethan 10% of the rental value of the rented premises.

The provisions of Article L. 145-38 are applicable eventhough the lease provides for an annual indexation ofthe rent. However, according to case law, these provisions will not apply where the rent is determinedon the basis of a certain percentage of the tenant'sturnover.

Rent indexation clause

The parties generally agree on an annual indexation ofthe rent in accordance with an economic index. In the caseof a commercial lease, the index which had usually beenchosen until 1st January 2012 is the National ConstructionCost Index published by INSEE (the French State StatisticalInstitute). From 1st January 2012, the Parties may alsochoose the National Index on Tertiary Rents. As a difference

to the National Construction Cost, the National Index onTertiary Rents is deemed to evolve smoothly. The Frenchpractice anticipates a large use of this new index.

If the lease provides for a rent indexation, a rent reviewcan be applied for each time that, by reason of such indexation, the rent is increased or decreased by morethan 25% of that amount previously agreed by the partiesor determined by the court.

Rent on renewal

The variation of the rent under an initial lease andthe renewed lease cannot exceed the variation in theNational Construction Cost Index or the NationalIndex on Tertiary Rents, or if applicable, of the Com-mercial Rent Index (“Indice des Loyers Commerciaux“)published by INSEE over the period of the lease unlessone of the parties can provide the evidence of a significant change in one of the elements that servedas basis for the initial setting of the rent.

No rent capping is applicable:

– to a lease entered into for more than 9 years;

– to land which has not been built on (“terrains nus”);

– to a lease with a term of more than 12 years;

– to premises which can only be used for a specific activity (“locaux monovalents”) such as premises usedfor hotels or cinemas;

– to premises used exclusively as offices;

– where one or more criteria which have been takeninto consideration to determine the rental value of thepremises, with the exception of current levels of rentin the area, have changed significantly. The judge willassess whether the changes to the parties' respective obligations were significant before decidingwhether or not to exclude the rent cap.

In these cases, the rent for the renewed lease must correspond to the rental value of the premises, as determined in accordance with the criteria outlinedabove.

VAT on rental income

The Rent is no subject to VAT, however for commercial leasesa VAT option is possible and often required in order to enablethe recovery of the input VAT paid on the purchase price ofthe VAT. This option should be drafted in the lease agreementand notified to the tax authorities.

8.2 Term

The minimum term of a commercial lease agreementis 9 years. However the parties can provide for a longerterm. Unless otherwise agreed, the tenant may terminatethe lease at the end of each three-year period by givingat least a six months’ prior notice. The notice is givenby notification served by a court bailiff.

A special dispensation from the 9 year term is providedunder article L.145-5 of the French Code de commercein respect of short term lease which shall not exceed2 years.

However, please note that should the tenant is authorisedto remain in the premises at the expiry of the shortterm lease agreement, the initial two-year lease wouldautomatically be followed by a new 9 year lease governedby the French Code de commerce.

The parties can provide for a longer term (such as alease with a 12-year term). The lease agreement shall beprepared as a notarial deed if its term exceeds 12 years.In such a case, the lease shall be registered with the “Conservation des hypothèques” and is subject to thepayment of registration duties.

8.3 Termination

From the Tenant's perspective:

The tenant has an absolute right to complete the entireterm of the lease and benefit from a statutory right toreceive a renewal offer for a further 9 year period.

From the Landlord's perspective:

In order to terminate the lease, the landlord shall givenotice at least 6 months before the termination date.

Please also be reminded that, in the absence of any notice to quit both from the tenant and the landlord, 6 months before the end of the term:

– the lease shall not be terminated and shall automati-cally be continued at the end of the term, for an indefinite period (called “période de tacite prolongation”)running as long as no notice to quit has been servedby bailiff either by the landlord or by the tenant, atleast 6 months in advance and for the last day of thequarter (for instance, a notice to quit served duringthe “période de tacite prolongation” by bailiff on 4 April2011 would enter into force and terminate the leaseonly on 31 December 2011).

– the tenant may ask for the renewal of the lease withinthis 6-month period before the end of the term or atany time during the “période de tacite prolongation” -the landlord having then to accept or refuse the renewal within 3 months.

8.4 Renewal

Right of renewal

An essential feature of the French commercial leaseslegal status is the right for the tenant to obtain renewalof the lease upon its expiry.

Renewal occurs when the landlord serves notice of renewal on the tenant or when the tenant serves anapplication for renewal on the landlord.

Within a three-month period following service by thetenant of its application for renewal, the landlord informs the tenant by court bailiff service whether ornot it accepts the renewal. If no response is receivedfrom the landlord within the prescribed period, thelandlord is deemed to have accepted the renewal.

If the landlord refuses to renew the lease, the tenantmust refer the matter to the relevant court within 2 years either to challenge the landlord’s refusal torenew; or to seek the payment of an eviction indemnity

Refusal to renew the lease

The landlord cannot refuse to renew the lease withoutpaying to the tenant an eviction indemnity. This evictionindemnity shall compensate for the losses and expensesincurred by the tenant (value of the business of the leas(except for offices), moving costs, higher rent, etc).

The tenant is entitled to stay in the premises under theterms and conditions of the expired lease until it hasbeen paid an eviction indemnity. In the meantime, thetenant will be liable for occupation compensation.

8.5 Subletting

Subletting is prohibited unless the parties agree to thecontrary in the lease agreement or if the landlord expressly authorises it. In practice, the tenant usuallyrequest having the right to sub-let to companies belongingto its corporate group.

Where sub-letting is permitted by the landlord, the sub-tenant shall benefit from the rules set out in the



French Code de commerce, in its relationship with themain tenant.

However, the sub-lease does not usually grant to thesub-tenant security of tenure on the premises in its relationship with the landlord, as is commonly stipulatedin the head lease that premises are an “undivided set ofpremises”.

Thus, upon expiry of the principal lease, the landlordshall renew the sublease, to the sub-tenant’s benefit,

– if it has authorised or approved the sub-lease; and

– if the sublet premises represent only a part of thepremises leased under the principal lease and do notconstitute a single indivisible whole with the non subletpremises.

It should be noted that, if the rent by square metreunder the sublease exceeds the principal rent by squaremetre, the landlord is entitled to request a correspondingincrease of the principal rent (unless he has waived thisright).

8.6 Assignment of the leasehold right

The transfer of the leasehold right is permitted unlessotherwise provided.

However, the owner cannot prohibit the assignment ofa lease when it is made in favour of a purchaser of thetenant’s business concern (“fonds de commerce”).

In addition it is common practice to expressly providein the lease, that the transferor may be jointly liable with

the transferee for the performance of the assignee obligations under the lease (payment of rent and charges).This liability will commonly be maintained throughoutthe duration of the lease and will end at its renewal orupon delivery of a notice to quit.

8.7 Maintenance and repairs

The term, renewal, termination of the lease, revision ofthe rent, use of the premises, authorised activities, subletting and transfer of the lease are governed, inwhole or in part, by the provisions of the French Commercial Code, whereas the general conditions ofthe lease such as maintenance and repairs of the premises are governed by the French Civil Code.

Maintenance and repair can either be shared by theparties, the tenant having to bear the ordinary mainte-nance works and the landlord covering the structuralrepair works, or the lease can provide that the tenantshall bear the cost of all the works, whether ordinaryor structural.

In any case, the lease must expressly and precisely indicatewhich repairs will be the tenant’s responsibility (e.g. security works, works required by the administration),failing which, according to the Civil Code and to theCourt’s decisions, these works shall be borne by thelandlord.

8.8 Taxes

Most real estate taxes can be re-invoiced to the tenant ifthe commercial lease agreement enables it expressis verbis.


Contacts

Contact

Tel.: +33 (0)1 53 93 30 [email protected]

Head of the Real Estate departmentMarie-Odile Vaissié

Tel.: +33 (0)1 53 93 30 [email protected]


Founded more than 25 years ago, Lefèvre Pelletier & associés (LPA) is one ofthe leading independent law firms in France.

With more than 100 lawyers (including 26 partners) with diverse backgroundsand expertise, LPA provides advisory and litigation services to its French andinternational clients.

Real estate is the firm’s traditional field of activity and one of its core businesses.Nevertheless, LPA has been implementing a diversification strategy for somefifteen years. Its service offer now encompasses several essential areas of business life: Real Estate, Banking Law, Litigation and Arbitration, Corporate /Mergers and Acquisitions, Taxation, Employment, Insurance, Wealth & Asset Management and Sustainable Development.

LPA has also expanded internationally with the opening of six internationaloffices, Hong Kong (1998), Guangzhou (2005), Algiers (2007), Casablanca(2008), Shanghai (2008) and Frankfurt (2011), and the development of privilegedrelationships with partner firms located in key business centers across theworld.

LPA was awarded the ISO 9001 certification in 2001 (constantly renewed sincethat date), the recognition of reliable and efficient quality management systemswhich are applied across our organization in order to ensure the quality of ourwork and the satisfaction of our clients.

Lefèvre Pelletier & associés (LPA), an extensive experience in real estate sector

The real estate department is widely recognised as one of the leader in the realestate sector in France with expertises of high level in all segments of the market(investment, financing, town planning, development, leases, public real estateprojects, environment and sustainable development...).

With 10 partners and more than 20 associates, the team advises French andinternational banks, insurance companies, listed property companies and investment funds on the drafting of their contracts and the acquisition of property.

The real estate department has also extensive experience of all real estate sectors: commercial property, offices, industrial premises, hotels, leisureor residential property.

It regularly advises government authorities and public bodies on legislative andregulatory reform. In addition, it has formed privileged relations with trade federations and plays an active role at major meetings of market players.



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