The financing of acquisition and development projects is generally secured by security created over the assets and shares of the borrower; lenders generally accept non-recourse financing for the acquisition of commercial real estate assets, whereas investor and/or bank guarantees will usually be required in addition to the standard security package for development projects.
Typically, the lenders will require security that allows them to directly or indirectly recover the financed asset.
The most common forms of security over real estate are:
Under French law, pursuant to article 2409 of the French Civil Code, a mortgage must be notarized (using a notarial deed) that is, executed in front of a French public notary. The debtor’s consent to the mortgage needs to be given in the notarial deed either directly by the debtor or by its attorney-in-fact on its behalf, pursuant to a power of attorney granted for the purpose of such deed. The beneficiary’s (ie the lender’s) consent to the mortgage may be expressed by an agent of the lender, under a power of attorney expressly granted by the lender to its attorney-in-fact. The mortgage deed must state the obligation secured and the amount of the secured debt.
In order to be completed, a mortgage requires:
Obtaining the mortgage extract for the relevant asset usually takes three weeks (sometimes more, depending on the location of the property).
A mortgage will guarantee the repayment of the principal amount secured, payment of the interest at the contractual rate and additional expenses, usually valued at up to a maximum 20% of the amount secured.
A mortgage must be registered with the land publicity registry. There is no time limit for registering a mortgage, but in the absence of registration the mortgage will not be enforceable against third parties. In addition, if the borrower is subject to bankruptcy proceedings prior to registration, it will then be impossible to implement the required formalities with full effect in the proceedings. Mortgages rank according to their date and time of registration. As a result, a mortgage created in February but registered in May will rank behind a mortgage created in March but registered in April.
A lender's legal mortgage can only secure liabilities incurred in connection with the financing of the acquisition price of a property (excluding any other costs relating thereto). This means that, if a loan agreement is entered into to finance the purchase of land and the carrying out of construction works, only the financing relating to the purchase of the land may be secured by the lender's legal mortgage. In such a case (purchase of property and construction works), a lender's legal mortgage will be granted for the amount of the loan corresponding to the purchase price and a contractual mortgage will be granted for that part of the loan relating to construction works.
A lender's legal mortgage, like a mortgage, must be made by a notarial deed, but, contrary to a contractual mortgage, the loan secured by lender's legal mortgage must also be made by a notarial deed whereas contractual mortgage may validly secure a loan made under a private deed (it being specified that in such case the lender would not benefit from enforceable title allowing it to enforce such mortgage within a prior court judgement declaring its receivable due and payable). The deed of sale, also made by a notarial instrument, will provide that payment of the price of the property was effected in whole or in part with the funds lent.
Like a contractual mortgage, this security must be registered with the land publicity registry for enforceability against third-parties purpose and it ranks according to its date and time of registration. However, article 2418 of the French Civil Code provides for specific ranking rules to govern the case where several mortgages of different kind (legal, judicial and/or contractual) are registered on the same date:
The registration of a lender's legal mortgage is less costly than a mortgage registration, since this security is exempt from the land publicity tax, which can represent a significant cost saving when the amount secured is significant.
Last modified 13 Mar 2025
Real estate includes land, buildings erected on it and fixtures which form part of those buildings.
It is also possible to take security over fittings, furniture and moveable objects (but these do not constitute real estate assets unless deemed, by law, part of the property).
A mortgage may also be taken over long-term leases (baux emphytéotiques).
Pursuant to article L. 313-23 of the French Monetary and Financial Code, any professional receivable held by a company against a third party can be assigned to the benefit of a credit institution or financial institution duly licensed in France or holding an EU passport or to the benefit of certain European long-term investment funds and certain alternative investment funds (as listed by the French Monetary and Financial Code) in their capacity as lender only to secure the company's liabilities as borrower only (such security cannot be used to secure liabilities incurred as guarantor).
The third party (the assigned debtor) can be either:
The assigned debtor cannot be a final consumer. The security is granted by:
The assigned receivables become the property of the assignee as from the date stated on the assignment form (bordereau). However, the standard practice on the French market is either (i) to allow the assignor to act as collection agent on behalf of the assignee and directly receive the assigned receivables from the assigned debtor or (ii) to organise the restitution of such receivables from the assignee to the assignor if following a notification to the assigned debtor the later pays directly to the assignee, in both cases, so long as an agreed event (default or event of default) has not occurred.
If, following the notification of the assignment to the debtor, receivables are paid directly by the assigned debtor to the assignee, the assignee will be under an obligation to return to the assignor amounts received in excess of the amount secured once all secured obligation irrevocably repaid in full.
Payment of receivables can also be directed to finance parties by means of a delegation (délégation imparfaite). Under a delegation, at the request of a debtor (délégant), a third party (délégué) undertakes to pay a creditor (délégataire) who accepts to be paid by the délégué, the latter usually being the debtor of the délégant. As a consequence, the délégataire has two debtors (the délégant and the délégué) and can request payment to the délégant if the délégué does not pay the délégataire.
Such mechanism is traditionally used when a borrower is an indemnified party under representations and warranties made in connection with an acquisition of shares. It may also be implemented in connection with insurance policies taken out by the borrower where the debtor under such policy may be “delegated” in payment to the lender.
There is no specific requirement as to form other than executing and delivering a written agreement signed by each of the délégant, the délégué and the délégataire.
As a delegation creates a direct obligation owed by the third-party debtor towards the beneficiary, insurers, for instance, may refuse to execute a delegation with respect to insurance policies such as a “decennial” insurance policy.
A French security interests law reform has recently been introduced pursuant to the ordinance n°2021-1192 dated 15 September 2021 which came into force on 1 January 2022 (the “Reform”). The Reform has an impact (mainly technical and from a drafting perspective) on the security package described above such as modifications regarding personal guarantees and mortgage security and creation of a new civil assignment of receivables by way of security as an alternative to the Dailly assignment by way of security.
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The concept of trust is not known in France, and it is not possible to create a trust under French law. However, French law provides for a concept which aims at being similar to a trust known as “fiducie”. The “fiducie” is applicable in the following two situations:
This mechanism is not widely used as there are still certain grey areas regarding its implementation.
Case law on the recognition of trusts established under foreign law is scarce and it is generally acknowledged that the concept of a trust is unknown under French law.
The Reform has an impact on the fiducie-sûreté such as admission of the guarantee of a future obligation and softening of the rules of creation and enforcement of the security.
Last modified 13 Mar 2025
Debt may be traded between lenders.
There are several ways of transferring debt:
Sub-participations are sometimes disclosed to the borrower without this creating a relationship between the borrower and the sub-participant. The sub-participant is entitled to receive the interest amount (and the principal paid by the borrower).
Last modified 13 Mar 2025
In principle, French banking monopoly rules prohibit institutions other than licensed credit institutions or licensed financial institutions from carrying out banking operations in France on a customary basis and for valuable consideration. However, there are certain exceptions to this general rule, particularly for European long-term investment funds and certain alternative investment funds. Therefore, unless qualifying for such exception, a foreign lender participating in a financing transaction considered to be located in France must be licensed in France or hold an EU passport so as not to violate the French banking monopoly rules.
There are no restrictions on granting security to foreign lenders (subject to lenders being duly licensed/qualified if they are to benefit from Dailly assignment of receivables, as Dailly assignment of receivables may only be granted to a lender that is a credit institution or financial institution duly licensed in France or holding an EU passport or an European long-term investment funds and certain alternative investment funds (as listed by the French Monetary and Financial Code), it being specified that, in the event of assignment or transfer of loan secured by a Dailly assignment, the existing Dailly assignment granted to a qualifying assignor/transferor will continue to secure the assigned or transferred portion of the loan independent of the quality of the assignee/transferee).
Some security interests are not available when the law of the underlying secured obligation does not recognize it.
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Mortgage-related fees are proportional to the amount of the secured debt at the time of creation of the mortgage.
Costs relating to the creation of securities interests include the public notary’s proportional fees, which are based on a sliding scale (subject to discounts that are regularly offered by the notarial offices).
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Mortgage (hypothèque) |
Money lender's legal mortgage |
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Land publicity tax |
0.715% of the secured amount |
EUR 25 |
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Notary’s emoluments |
Proportional to the loan amount (but the percentage differs) + VAT |
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Real estate security contribution |
0.05% of the secured amount |
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Disbursements |
Depends on the transaction |
Depends on the transaction |
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Lawyer's fees |
Depends on the transaction |
Depends on the transaction |
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Yes, there are both financial assistance rules and corporate interest rules which must be complied with:
Article L. 225-216 of the French Commercial Code prohibits a target company from advancing monies or granting loans or any security in connection with the subscription or purchase of its own shares by a third party. This prohibition applies to limited liability companies (e.g. Sociétés Anonymes, Sociétés par Actions Simplifiées) and does not apply to partnerships or civil real estate companies (e.g. Sociétés en Nom Collectif, Sociétés Civiles, Sociétés Civiles Immobilières). This prohibition is subject to criminal and civil sanctions, which could result in the rescission of the transaction and/or a fine amounting to EUR 150,000 on the grounds of article L. 242-24 of the French Commercial Code.
As a consequence, a French limited liability company will not be able to provide a valid guarantee or security over its assets to secure the repayment of a loan (in whole or in part) granted to finance a third party’s subscription or acquisition of the guarantor’s shares or the related transaction costs.
Any decision or act taken by a French entity that is not consistent with its corporate interest, a concept which is quite narrowly defined, exposes management to criminal and civil sanctions.
In financing transactions, this principle limits the ability of French limited liability companies (such as Sociétés Anonymes, Sociétés par Actions Simplifiées or Sociétés à Responsabilité Limitée) to give upstream guarantees or guarantees to affiliated companies. An upstream guarantee (or guarantee to affiliated entity) may give rise to management liability if such guarantee is considered to be a misappropriation or misuse of the subsidiary guarantor’s corporate assets or misuse of credit (abus de biens sociaux), i.e. "an act of using the powers which they [managers, chairman, directors, managing directors] possess or the votes which they have in this capacity, in bad faith, in a way which they know is contrary to the interests of the company, for personal purposes or to encourage another company or undertaking in which they are directly or indirectly involved” (Articles L. 241-3 and L. 242-6 of the French Commercial Code).
Such an act may be punished by a five-year jail time and/or a fine of EUR 375,000.
More specifically, the French Supreme Court (Cour de Cassation) has set out the following criteria for meeting the test:
Accordingly, loan documentation will usually contain limitation clauses such as:
It is market practice in France to reduce the liability to the amount outstanding at the time the guarantee is called.
The only tax issue that could be relevant with respect to the granting of securities in France relates to the withholding tax on interest payments.
Payments of interest will not be subject to the withholding tax set out under article 125 A III of the French General Tax Code unless such payments are made outside France in a "non-cooperative State", as defined in article 238-0 A of the French General Tax Code (Non-Cooperative Jurisdiction). If such interest payments are made on a bank account located in a Non-Cooperative Jurisdiction or paid or accrued to persons established or domiciled in such a Non-Cooperative Jurisdiction, a 75% withholding tax will be applicable as defined in article 125 A of the French General Tax Code.
Such payments of interest are not deductible from the borrower’s taxable income, as from the fiscal year starting on 1 January 2011, if they are paid on a bank account located in a Non-Treaty Country or paid or accrued to persons established or domiciled in such a Non-Treaty Country.
Neither the 75% withholding tax nor the non-deductibility will apply if the borrower proves that the principal purpose and effect of such issue was not to allow the payments of interest or other revenue to be made in a Non-Cooperative Jurisdiction.
Corporate authorizations may be required when a French company contemplates granting security over its assets. Pursuant to article L. 225-35 of the French Commercial Code, any guarantee granted by a Société Anonyme to secure the liabilities of a third party must first be authorized by its board of directors. In addition, by-laws of the company (whatever type of entity it is) may require prior approval by the board of directors and/or the shareholders’ general meeting before the facilities agreement is entered into and the security is created.
A specific corporate authorization may also be required in the event of a pledge of shares in Sociétés Anonymes, Sociétés par Actions Simplifiées or Sociétés en Commandite, the by-laws of which may contain an approval clause (clause d’agrément). In such cases, the beneficiary of the pledge, which will become a shareholder of the company if the pledge is enforced, must be approved (by the board of directors or the shareholders of the company, as the case may be) as potential new shareholder of the company. While the approval may be given at any time, in practice it should be obtained before the constitution of the pledge.
In the event of a pledge of shares in Sociétés à Responsabilité Limitée, Sociétés en Nom Collectif, or Sociétés Civiles, the shareholders must also approve the beneficiary of the pledge as a new potential shareholder.
Pursuant to article L. 2311-2 and the following articles of the French Labour Code, the Works Council – the existence of which is mandatory in companies with at least 11 employees – must be informed of and/or consulted on the decisions which may have significant consequences for the company’s future. Consequently, parties to financing transactions or reorganizations including the grant of security over the assets of the company shall ensure that the works council is duly informed and consulted about such transactions when the criterium referred to in article L. 2311-2 et seq. of the French Labour Code is met.
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There are no restrictions on payments made to foreign lenders under a security document or loan agreement.
A borrower may be required to deduct withholding tax in respect of interest, which is payable to a foreign lender, if the conditions which relate to withholding tax on interest payments are met.
Last modified 13 Mar 2025
A creditor can agree to subordinate its security interest to that of another creditor in a priority agreement or an intercreditor agreement. The agreement will regulate the subordination of the debt as well as the security and will cover matters such as rights of enforcement. Such agreements, however, are not necessarily recognised by a court in bankruptcy proceedings.
Last modified 13 Mar 2025
Security interests over real estate located in France must be governed by French law in order to be enforceable in France.
Last modified 13 Mar 2025
A security interest created by a company over property must be registered at the Land Registry within the time period imposed by law or prior to the start of proceedings. If left unregistered, it will not be enforceable against a liquidator or administrator in the framework of insolvency proceedings.
Last modified 13 Mar 2025
A holder of security over land is not liable for environmental damage provided it does not take possession of the land and does not itself cause, or knowingly permit, damage to the environment.
Great care must be taken if the security is enforced because in some circumstances owners of land can be liable for environmental damage on that land or emanating from it, even if they did not cause the damage. A mortgagee should not go into possession of land without careful consideration of the implications of potential environmental liability.
Last modified 13 Mar 2025
The secured creditor can enforce the mortgage following three different ways:
Note that in the event that (i) the loan agreement has not been contracted in the form of a notarial deed executed in front of a French notary or (ii) the notary mortgage deed does not reiterate the existence of the obligation to pay, the mortgage is not enforceable immediately and the beneficiary of the mortgage will have to go to court to have the existence of its claim recognized. The court order will be notified by bailiff to the borrower. Such procedure:
Last modified 13 Mar 2025
The principal rescue procedure is the administration of the company. The administrator takes control over the whole of the company's assets with a view to producing a better result for creditors than if the company were to go into liquidation. Administration creates a moratorium which prevents creditors from enforcing their security without the consent of the administrator or an order of the court.
A corporate voluntary arrangement is an agreement between the creditors of a company which typically involves arrangements for reduced payments to creditors. This has to be approved by a majority of creditors holding together more than three quarters of the total debt, although this is not binding on secured creditors.
Last modified 13 Mar 2025
Under French law, any new security granted during the "suspect period" (ie the date determined by the court as being the date of "cessation des paiements" and which may be set at up to 18 months before the beginning of the proceedings) to secure pre-existing debts can be nullified. Pursuant to article L. 632-1 of the French Commercial Code, any mortgage or pledge granted by a debtor after the date of suspension of payments (date de cessation des paiements) shall be automatically deemed null and void.
In addition, pursuant to article L. 650-1 of the French Commercial Code, creditors may be held liable for damages suffered by debtors on the following grounds (and may only be held liable on those grounds):
In the event that a creditor is found liable on any of these grounds, the security or guarantee may be nullified or reduced by the judge.
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The answer is quite complex, as the solutions may vary depending on whether the court (i) adopts a restructuring plan, (ii) adopts a sale plan or (iii) pronounces the liquidation of the company, as detailed hereunder.
Where the debtor's business is continued, the creditor may have to grant the debtor extended terms of payment and/or agree to a write-off of the debts. Assets will remain frozen, and enforcement prohibited. As a result, creditors will not be able to enforce their security interests while the plan is in effect, provided that the debtor complies with its terms.
Where the entire business of the debtor or a substantial part of it is sold, all creditors are discharged by a distribution of the proceeds of the sale price in accordance with the secured/unsecured nature of their debts. This distribution clears all charges and security over the assets, except the security taken to secure financing of the secured assets. For the purposes of payment, post-bankruptcy creditors have priority over pre-bankruptcy creditors, whether secured or unsecured, except with respect to court fees, expenses linked to the proceedings and employees' wages which carry preferential rights. Mortgagees will be paid amongst themselves according to their rank (which depends on the timing of registration of the mortgage).
The purpose of the liquidation of the company is to realize the assets at the best price and distribute the proceeds to the creditors in accordance with their priority ranking. In a liquidation of the debtor, all debts become due (but individual actions remain stayed in most cases). Security interests are enforced by the liquidator and proceeds are distributed to the creditors in accordance with the priority order provided by law.
Preferential creditors may supersede secured creditors, except for certain pledges which feature a right to retain possession of the asset (droit de rétention) and for creditors benefiting from a transfer of ownership of assets as security (such as a Dailly assignment of receivables).
Last modified 13 Mar 2025
Is secured debt traded between lenders? If so, how is a transfer of the debt to another lender effected?
Debt may be traded between lenders.
There are several ways of transferring debt:
Sub-participations are sometimes disclosed to the borrower without this creating a relationship between the borrower and the sub-participant. The sub-participant is entitled to receive the interest amount (and the principal paid by the borrower).
Last modified 13 Mar 2025