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A. ACQUISITION OF REAL ESTATE
Applicable legislation
Applicable legislation is set out in a wide range of laws, each dealing with a particular issue related to the sale and purchase of real estate.
Is the purchase of real estate assets by foreign investors subject to restrictions?
There are no restrictions on foreigners investing in property located in France, whether directly or indirectly through the purchase of a company holding real estate assets. However, if the real estate asset is used for business activities (as, for example, in the case of a hotel), there is a requirement to report the sale or purchase to the Ministry of Finance under the Foreign Exchange Regulations. The information submitted to the Ministry is kept strictly confidential.
Do different legal regimes apply to the transfer of title to different kinds of real estate (commercial, residential, manufacturing)?
Different legal regimes apply to transfers of title to different kinds of real estate, as well as a number of different tax regimes.
Do mandatory pre-emption rights apply to the sale of real estate assets?
Pre-emption rights exist for the benefit of French local government and administrative bodies. The most frequent pre-emption rights are as follows:
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The municipality in which the property is located has a right of pre-emption following the mandatory filing of a declaration of intent to sell (Declaration d'Intention d'Aliéner, DIA) with City Hall. This allows the municipality to purchase the property under the same terms and conditions described in the declaration. The time limit for exercising these pre-emption rights is two months from the date of filing of the declaration, although, in practice, municipalities often agree to waive their right before the end of two months, especially where employment issues are involved.
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Agricultural organisations (SAFER) have a right of pre-emption which applies to agricultural assets. This allows them to convert farmland into larger farms if it will benefit the local economy.
Is expropriation (compulsory purchase) possible?
If so, under what conditions?
Expropriation or condemnation proceedings are used to facilitate major public, or semi-public, development projects. Condemnation proceedings require the condemnation of the public use of the property. Proceedings can be lengthy but are generally considered to be fair, both in terms of the determination of public use, and of the amounts paid for condemned properties.
Is real estate registered?
If so, is this official information made available to the public?
Ownership of real estate, as well as important matters affecting it, such as mortgages, money lender's lien, easements and leases of over 12 years, must be registered with the registry held by the mortgage office (Conservation des Hypothèques). This is maintained at the level of the Départements of the French Republic. The information recorded is generally available to the public for a nominal cost.
Registration is carried out by notaries and is normally subject to a real estate publication fee (Taxe de Publicité Foncière) at a rate of 0.715% of the property price, or, for long-term leases, 0.715% of the total rent for the entire period of the lease (without adjustment for indexation and revision of rent).
Is transfer of title recorded?
Can other related deeds (for example preliminary sale agreements) be recorded?
See above.
Preliminary sale agreements, known in France as promises to sell (Promesses de Vente), are not normally recorded at the mortgage registry, but must be recorded with the tax authorities. The tax authorities keep this information confidential.
A Promesse de Vente can be a reciprocal agreement between the buyer and seller, or an undertaking by the seller only.
Do buyers usually carry out due diligence?
If so, what due diligence is typically conducted and what is its timing (i.e. before or after contract execution)? Is there any protection for the buyer during the due diligence period (for example, an exclusive right to negotiate or buy)?
With the assistance of their lawyers and notaries, buyers will normally conduct due diligence on significant transactions involving commercial properties, portfolios of assets, hotels, etc. Lawyers and notaries share responsibility for conducting the investigations, with the former being responsible for tax, social, leasing and insurance matters, while the latter are more usually responsible for title, zoning, construction and commercial status.
Due diligence is normally much more limited on smaller residential and commercial transactions.
Due diligence is typically conducted between the acceptance of an offer and the execution of a preliminary sale agreement.
Is title insurance available?
Under the French legal system, the notary is responsible for ensuring the buyer receives a valid title to the property. This is one of the mandatory duties of notaries, for which they receive fees proportionate to the value of the property.
The risk of malpractice by a notary is covered by a system of indemnification provided by all notaries within a given Département of the French Republic. Title insurance is, therefore, not generally available in France.
How are deals typically structured?
The purchase of real estate is traditionally structured as a two-tier process:
- First, the execution of a promise to sell, whether this is a reciprocal agreement between the buyer and seller or an undertaking by the seller only. A deposit is normally paid by the buyer, through an escrow agent, of 10% of the purchase price (less for larger transactions). The deposit is offset against the purchase price when the sale is completed; returned to the buyer if the seller is found to be unable to transfer clean title to the buyer within the stated period; or forfeited by the buyer if he no longer wishes to proceed with the purchase.
There is no legal requirement for any specific deposit to be paid or for this to be done through an escrow arrangement.
The time limit specified in a promise to sell is normally set for a few weeks after the expiry of the public authorities' pre-emptive rights. During this time, the notary is responsible for securing official copies of entries from the mortgage registry relating to any recorded mortgages on the property so that title can pass to the buyer without any interference from creditors.
- Secondly, the parties will then proceed with the execution of a deed, passed before the notary. Title passes to the buyer upon the execution of the deed, unless this is otherwise stated in the deed.
B. STRUCTURE OF THE CONTRACT
Are there formal requirements regarding the content and structure of the sale and purchase contract?
There are no formal requirements regarding the content or structure of a deed transferring title, except an indication that both buyer and seller are willing to carry out the transaction and can legally do so.
What is a typical contract like?
A typical real estate transfer contract consists of two parts and generally contains the following information:
Part one:
- the identity of the parties, status, capacity, addresses, presence, representation;
- main contract relating to the sale and purchase of the property;
- a description of the land and buildings;
- real estate registration references;
- fees, charges and conditions;
- ownership and use;
- price;
- real estate registration;
- tax declarations.
Part two:
- the rental situation;
- general charges and conditions;
- the administrative status of the building;
- the construction of the building;
- intended use;
- details of works undertaken within the 10-year period preceding the transfer;
- zoning and planning information;
- declarations and agreements relating to asbestos, lead, legionella, termites;
- the environmental status;
- laws relating to buildings open to the public;
- the history of ownership (30 years);
- the mortgage situation.
Are special consents required for certain transactions (for example consent by a spouse)?
In addition to specific consents linked to the legal capacity of the seller (for example in the case of minors, the mentally disabled, etc.), the consent of a spouse is required for the sale of a residential property when this is the marital home. No other specific consents are required.
What seller's warranties are provided under statute (for example the state of the building, asbestos, etc.)?
Can they be excluded or varied by contractual agreement? Is there a deadline for claims to be made?
French law imposes the following obligations and warranties on the seller:
- an obligation to transfer the property in accordance with the agreement by both parties, as set out in the deed of sale: this includes the size, status and use of the building;
- a guarantee of eviction: the seller must ensure the buyer does not suffer any nuisance from the seller or a third party in relation to rights such as easements or leases relating to the property;
- a guarantee against hidden defects (vices cachés) which would affect the normal use of the property;
- an obligation to deliver technical information on the property in relation to asbestos, lead, legionella, termites and certain equipment containing dangerous, or potentially dangerous, substances.
The obligations are stricter when the buyer is not a real estate professional.
What are the buyer's remedies against misrepresentation by the seller?
The buyer's remedies in relation to misrepresentations by the seller in the promise to sell or in the deed of sale are limited to financial damages or, in some cases, an annulment of the sale.
However, an annulment of the sale does not allow the buyer (or the seller) to obtain a refund of the transfer taxes (transfer taxes amount to 5.09% of the price paid for the property and are payable upon the execution of the notarial deed of transfer).
If there is a promise to sell and the seller refuses to complete the sale, a buyer can petition the court for a forced sale of the property.
Are there any interests in real estate other than exclusive ownership?
If so, what are they?
In addition to exclusive ownership, the French system recognises a right of usufruct and also timeshare arrangements.
C. PUBLIC LAW ASPECTS RELATED TO THE ACQUISITION OF REAL ESTATE
What are the most important areas of public law for an investor to consider when purchasing a real estate?
Private ownership of real estate is subject to land use rules and other limitations, such as the protection of archaeological sites, or mandatory expropriation for reasons of public interest (expropriation d'utilité publique). Ownership rights can also be restricted by easements for public use (servitude d'utilité publique), which are incorporated into planning documents such as the local land use plan.
Public authorities also have pre-emption rights, allowing municipalities to purchase property to facilitate projects which are in the public interest (for example, the creation of communal facilities).
A buyer should also verify that the property is not located on the public domain (domaine public). Public authorities hold both public domain (including property and fixtures that are either identified as belonging to the public domain or used for the performance of a public service) and private domain assets. Authorisations to occupy a public domain property normally take the form of a temporary occupancy agreement between the public authority and a private contractor. These authorisations are subject to the French Code of Public Property (Code du domaine public de l'Etat).
An authorisation for temporary occupation of the public domain usually grants the private developer some of the privileges typically associated with legal ownership, such as the right to dispose of (subject to prior approval by the public authority), or create a security interest over, a building or structure on the public domain, even though the legal ownership of the land remains with the public authority.
The public body granting a temporary occupancy authorisation is not obliged to renew it upon expiry. If an authorisation is not renewed, the French Code of Public Property does not provide for any right to compensation.
Is the buyer of a real estate asset responsible for soil pollution or contamination of the building even if it is not caused by him?
In accordance with the "polluter pays" principle, a landowner cannot be held responsible for historic contamination of the soil/groundwater. The French Supreme Court holds that owning title to a property is not enough to render the owner liable to carry out the remediation required by the environmental authorities (the prefect and the environmental authorities, DRIRE).
French regulations do, however, state that environmental liability is transferred in the case of an asset purchase, when the buyer has the status of an "operator" under the Seveso regulations, i.e. when the buyer has a new operating permit to carry out "classified activities for the protection of environment".
Consequently, where "classified activities" are carried out on a site, the operator (the entity holding the permit issued by the environmental authorities to carry out the activities) will be held liable for pollution (historical or present) unless it can prove that it is not responsible for the pollution and the previous operator, who caused the pollution, can be traced.
The French Environmental Code provides that the seller of a site where a "classified installation" has been operated must inform a prospective buyer of any related dangers or inconveniences, and disclose a list of any chemical or radioactive substances which have been stored on the site.
How can a buyer ascertain the possible uses of an area under the applicable zoning or planning laws?
Can uses be changed?
The zoning and planning laws and regulations for each local region are available to the public, and copies of the regulations and local decisions can be obtained for a nominal cost.
Zoning and planning regulations must be checked before planning a construction project and applying for a building permit.
Is it possible to enter into specific development agreements with relevant public authorities in order to facilitate a project?
Can public authorities make a charge for this?
Development projects are either private, public or both, in the latter case under the auspices of the Société d'Economie Mixte (company grouping private and public interests) and, more recently, in the form of PPPs.
The allocation of responsibilities, charges and profits relating to a project with a mix of private and public interests is a matter for negotiation.
D. TAXES RELATED TO ACQUISITION OF REAL ESTATE
Are there transfer taxes or sales taxes?
Generally, the sale of property is subject to transfer taxes or value added tax.
Transfer taxes apply to transfers of property built more than five years ago at the rate of 5.09% of the price paid for the property.
Properties built less than five years ago are subject to VAT at the rate of 19.6%.
Special rules apply to renovation works completed during the last five years on properties built more than five years ago.
Special regimes, driven by tax incentive legislation, apply to some newly built properties intended for use as primary residences or rental properties.
Professionals in the real estate industry who buy and sell properties as their normal business are also exempt from transfer taxes, provided that the properties are resold within four years of acquisition.
What are the normal transaction costs?
See above for applicable taxes.
Indirect transfers of real estate, through the transfer of a company holding real estate assets, are subject to transfer tax at the rate of 4.89% of the price paid for the shares. Transfer tax applies to all companies, irrespective of their legal form, where the market value of the real estate accounts for more than 50% of the total value of the company's assets.
The basis for the assessment of transfer tax is the price of the shares, after deduction of the company's debt.
How are transaction costs shared by the buyer and seller?
Transaction costs include:
- broker fees, which are typically paid by the seller and are normally assessed at a rate of 5% of the price paid;
- transfer taxes, which are typically paid by the buyer.
Alternative arrangements for meeting the costs of the transaction can be agreed between the buyer and seller.
The agent and broker may sometimes be flexible in relation to fees in order to facilitate a specific transaction since there is no specific requirement for their fees to be set at 5%.
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