Real estate finance law in France

Yes, as a general principle there are no restrictions on the ownership of land by foreign parties and the taking of security over land or property by a foreign bank.

A mortgage (hypothèque conventionnelle) may be granted over land and over buildings on the land. This security notably gives the secured creditor a preference and a priority right over the sale proceeds following a disposal of the secured property. A mortgage may only be granted pursuant to a notarised deed.

A mortgage extends to all improvements on the mortgaged immovable. When a party has a right to build on another’s property, it may grant a mortgage on the buildings whose construction has started or is planned. In the case of the destruction of the buildings, the mortgage will apply to any new buildings constructed on the mortgaged land.

Please note that French law provides for other types of security interest over property such as the lender’s lien (hypothèque légale spéciale du prêteur de deniers) which is very similar to a regular mortgage (hypothèque conventionnelle) but may only be granted to secure a debt financing the acquisition of the real estate property.

2.1 The distinction between mortgages on land and buildings on the land?

There is no distinction between mortgages on land and buildings on the land, except in certain specific ground leases (bail à construction and bail emphytéotique), where the tenant only has real estate rights over the construction and may then only grant a mortgage over construction.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

No.

2.3 Can second ranking mortgage security be taken? If so, how is it registered?

Yes. Second ranking mortgages may be registered with the land charges registry (service de publicité foncière) and rank according to their respective registration dates.

2.4 Can real estate be transferred to a third party (being still subject to mortgage) without the lender’s consent?

As part of the preference and a priority right over the sale proceeds following a disposal of the mortgaged property, the mortgage will follow the mortgaged property even if it is no longer owned by the original mortgagor. That being said, please note that in most cases, the mortgage deed includes an undertaking not to sell the property without proceeding to the repayment of the secured obligations.

2.5 Are there any preferred creditors (other than a prior ranking mortgage holders)?

Specific legal privileges may encumber debtor's real estate assets and may then benefit from a higher priority ranking than mortgage holders such as the privilege related to the judicial costs in connection with the enforcement of the mortgage, the special privilege for employees, the new money privilege and the privilege of specific claims arising after the judgment opening the insolvency proceedings for specific purpose.

2.6 Can “all monies” mortgages be taken?

Yes but due to the specialty principle of the mortgage under French law, the maximum amount of the mortgage will be limited to the amount of the secured receivable duly registered.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Under French law, rents may be assigned by way of security or pledged. Assignment by way of a security includes a transfer of ownership which is more efficient for lenders but is only available for specific lender (i.e. credit institution and certain debt fund) and only for the purpose of securing the obligations of the assignor as borrower (and not as guarantor).

Mostly, the transfer of ownership of the rent receivables or the pledge over the same will remain silent and require the lender (or the security agent) to serve a notice to the tenant (as debtor) to trigger the payment of the rents in the hand of the lender.

2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Pledge over the bank account pledge of the borrower is very common.

It is usual to contractually prevent the borrower to use sums standing at the credit of is bank account upon the occurrence of the default or an event of default except to pay the debt service.

3.1 What are the consequences of failure to register?

The mortgage will not be enforceable against third parties and the mortgagor takes the risk of an interim mortgage (i.e. the mortgage will not rank as agreed).

3.2 What are the formalities and costs for execution of security?

A mortgage may only be granted pursuant to a notarised deed and shall be then registered with the land charges registry (service de publicité foncière):

Land registry duties (Taxe de publicité foncière)
0.71498 % of the secured obligations.

Property duties (Contribution de sécurité immobilière)
0.05% of the secured obligations.

Deed fees

25 €

Registration fees

125 €

Notary fees 
0.445 % of the principal amount.

Article 2328-1 of the French Civil code provides for the appointment of a security agent which may be granted with the right to create, register, manage and enforce any security interest on behalf of one or several creditors.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

As a general principle of French law and subject to the lenders being duly registered as beneficiary of the security interest, article 1321 of the French Civil code provides that the assignment of claim includes the accessories of that claim, such as security interests which secured it. As a consequence, the assignment of a loan (change of lender) will trigger the transfer of the security interests, except otherwise provided in the security documentation. No need for a new security interest agreement to be entered into. In case of transfer by way of novation however, the transfer of the benefit of the security needs to be assessed on a case by case basis as it is not automatic.

The tenant may assign the lease, unless otherwise provided in the lease agreement. Lease agreements usually prohibit lease assignment alone without the prior express consent of the landlord.

It should be noted that the tenant has the right, by law, to assign its lease to the buyer or successor of its business as a going concern (“fonds de commerce”). Any contractual prohibition of this right is considered void. The lease may only set forth formalities to be carried out for a valid assignment (such as for instance the obligation for the tenant to be up to date with the payment of rents and services charges or the obligation for the assignment to be in the form of a notarial deed).

Lease agreements usually provide for a joint and several liability between the original tenant and the new tenant. Note that as per Article L. 145-16-2 of the French commercial code, this joint and several liability cannot exceed three years as from the date of the assignment.

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Disputes relating to French law governed security interests and the enforcement of that security interests may only be settled by the competent French court. Foreign courts may settle disputes concerning the loan for instance but may not decide upon the validity or rank or enforcement of French law governed security interests.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgments without review?

Basically, judgement from non-EU Member States will require prior exequatur procedure to be enforced in France. Subject to specific circumstances, a judgement from EU Member States is enforceable without prior review by the French judge (Brussels I^bis Regulation - 2015). Arbitral award will systematically be reviewed by the French court.

6.3 How can that security be enforced?

There are three ways to enforce a mortgage under French law. The creditor may either (i) ask for the property to be sold by way of public auction (and to be repaid using the sale price), (ii) ask before court to become the legal owner of the property or (iii) if contractually agreed, ask to become the owner of the property using the pacte commissoire, it being specified that in (ii) and (iii) the value of the property has to be determined by a third party expert. No receivers/liquidators will be appointed as part of the enforcement process. 

However, as part of the implementation of the security package securing the financing, the parties may appoint a trustee (fiduciaire) to which the ownership of the property will be transferred and kept separated from its own assets. This trustee (fiduciaire) may act as agreed under the trust agreement and basically will comply with instructions received from the borrower as long as no default as occurs.

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

As long as the lender is not the owner of the property, the borrower will remain responsible for maintenance and insurance of the real estate even if finance documentation often provides that lender may step in the chose of the borrower in that respect and rebill it.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

See 6.3.

Yes.

Creditors may contractually agree to organise the ranking of security over shares. In the absence of any agreement between the creditors to share the benefit of the security and with respect to their respective ranks, a security interest over shares is ranking at the date it is made enforceable against third parties.

For a société civile immobilière and société en nom collectif, the shares may be pledged pursuant to a written agreement. It is perfected by a registration of the pledge agreement with the commercial court (tribunal de commerce) where the company is registered. Such formalities require the prior registration of the pledge agreement with the French tax authorities (which, in practice, necessitates a French language executed version of the pledge agreement).

For a société anonyme or société par actions simplifiée, the pledge over the shares (held in a dematerialised financial securities account) is created by pledging a dedicated financial securities account (nantissement de compte-titres). The shares are credited to such dedicated financial securities account, opened in the name of the pledgor. The pledge extends to all shares credited on the financial securities account on or after the date of creation of the security. When such a financial securities account is held by the issuing company itself (and not by a licensed intermediary or depository), moneys received under the shares shall be credited on a separate bank account which be part of the pledge, except as otherwise agreed between the pledgor and the beneficiary.

The pledge over a financial securities account (nantissement de compte-titres) is perfected by the execution by the pledgor of a statement of pledge (déclaration de nantissement de compte-titres).

3.1 What are the consequences of failure to register?

For a société civile immobilière and société en nom collectif, the failure to register prevent the pledge to be enforceable vis a vis third parties and the beneficiary of such a pledge takes the risk of an interim pledge over the shares (i.e. the pledge will not rank as agreed).

In respect of a société anonyme or société par actions simplifiée, the pledge over financial securities account has not to be registered in any public register but in in the company share register (see 3.2. below).

3.2 What are the formalities and costs for execution of security?

For a société civile immobilière and société en nom collectif, see B.2.

In respect of a société anonyme or société par actions simplifiée, the pledge over financial securities account has to be registered in the company share register.

No particular fees or taxes incurred for registration (except legal fees).

Transfer of the shares to the lender or its nominee is not required to create or perfect a pledge over shares.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

There are three ways to enforce a pledge over the shares under French law. The creditor may either (i) ask for the shares to be sold by way of public auction (and to be repaid using the sale price), (ii) ask before court to become the legal owner of the shares or (iii) if contractually agreed, ask to become the owner of the shares using the pacte commissoire, it being specified that in (ii) and (iii) the value of the property has to be determined by a third party expert.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge should a default occur?

Shareholder loans are systematically subordinated pursuant to a subordination agreement. They are not subordinated by operation of law. Mostly, the receivables arising from those shareholder loans are pledged to the benefit of the lenders which will enforce it along with the pledge over the shares.

Our answers apply to standard commercial leases. 

1.1 What is a typical lease length?

The typical lease agreement duration is nine years.

1.2 Maximum/minimum lease length if any?

The duration of the lease agreement may not be less than nine years. The parties may not deviate from this rule but may agree on a longer term. Only perpetual leases agreements are forbidden.
Please note that lease agreements with a duration of more than twelve years must be notarized and registered with the land charges registry (service de publicité foncière).

1.3 What are the statutory controls and obligations regarding renewal/termination of leases, e.g. does a tenant have automatic right to renewal or can they apply to the courts for a new lease? Does some form of notice have to be served to terminate a lease to avoid renewal?

Commercial lease agreements shall terminate only by virtue of a notice served at least six months in advance. In the absence of notice, the lease agreement shall continue for an indefinite period of time by tacit renewal beyond the term stated in the contract.

Provided that certain conditions are meet (such as that the tenant is duly registered at the trade and companies registry for the exact address of the rented premises), the tenant has a statutory right to renew the lease agreement when the previous contract expires. The landlord may refuse the renewal of a lease agreement, but in that case, must pay the evicted tenant a compensation for eviction (“indémnité d’éviction”) equal to the prejudice caused by the absence of renewal, unless (a) there is a serious and legitimate cause not to renew (i.e. a serious breach by the tenant during the term of the lease) or (b) the premises must be demolished for health and safety reasons.

1.4 Are there any overriding statutes concerning the ability of the tenant to break a fixed-term lease (whether or not included as a term of the lease)?

In principle, the tenant is entitled to terminate the lease agreement at the end of each three-year period. The tenant must serve a prior written notice at least six months before the end of the three-year period by bailiff’s notification or registered letter with acknowledgment of receipt.

Note that under Article L. 145-4§3 of the French commercial code, it is possible to waive the tenant break option rights’, if:

• the lease agreement is entered for a duration exceeding nine years;
• the lease relates to premises with an exclusive office use;
• the lease relates to warehouse premises; or
• the premises are built for a single use (locaux monovalents)

By way of derogation to the above, under Article L. 145-7- of the French commercial lease agreement for tourist residences cannot provide for any tenant break option right.

1.5 Are there any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

In case the landlord refuses to renew the lease with the payment of an eviction indemnity: the tenant is entitled to remain in the premises until the eviction indemnity (“indemnité d’éviction") has been fully paid by the landlord.

2.1 Rental income receivable quarterly/monthly in-advance / in-arrears?

No statutory rule imposes particular terms governing the method of payment of rent nor its frequency. The parties can then provide for monthly or quarterly payments in advance or in arrears. Rental income is usually paid quarterly in advance.

2.2 Periodicity of reviews?

Initial rents are freely determined but rent reviews are however governed by public policy provisions. There are three types of reviews: (i) the three-year review, if a party formally ask for such review and (ii) the yearly review according to an indexation clause based on the variation of an index chose by the parties and the (iii) statutory rent review (see 2.3 below).

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

The initial rent is not governed by any legal provisions. It is freely negotiated by the parties and normally reflects market conditions.

During the duration of the lease, the rent may be revised as follows:

1. under the statutory so-called three-year review (révision triennale): This mechanism enables the parties to request the rent to be reviewed every three year, provided that at least three years have passed after the entry into possession of the rented premises or after the renewed lease start date or since the last negotiated or judicial determination of the rent.
   
   The revised rent will be capped and may not exceed, either upwards or downwards, the variation in the applicable index unless there is an agreement between the parties or a material change in the local commercial factors which has caused itself a variation in the rental value of more than 10% and which has to be evidenced by one of the parties, in which case, the rent should amount to the market value ("valeur locative”).
   
   Please note that the variation in rent resulting from this review may not lead to increases of more than 10% of the rent paid during the previous year.
   
   The three-year rent review differs from the indexation clause (as detailed below) in that it must be requested and is carried out under legal conditions, under the control of the judge, whereas the indexation clause operates automatically according to the periodicity determined by the parties.
    
2. under the indexation clause (“clause d’échelle mobile”):: based on this contractual mechanism, the rent will automatically be updated, usually each year on the anniversary date of the effective date of the lease according to the variation of index chose by the parties.
3. under the statutory rent review: should, as a result of the indexation clause, if there is one in the lease agreement, the rent be increased or decreased by more than a 25% in relation to the rent previously fixed contractually or by court decision, each party my claim for the revision of the rent in order to set the rent amount to the market value (valeur locative).
   Please note that the variation in rent resulting from this review may not lead to increases of more than 10% of the rent paid during the previous year.

Upon renewal, the renewed lease rent must correspond to the market value (valeur locative); as for the three-year rent review, the rent for the renewed lease is to be capped and may not exceed, either upwards or downwards, the variation in the applicable index unless:

• there is an agreement between the parties; or
• a material change: in the features of the rented premises or the intended use of the rented premises or the respective obligations of the parties or in the local commercial factors that have an impact on the business operated by the tenant or prices commonly applied within the neighbourhood of the rented premises;
• the lease was entered into for a term exceeding nine years;
• the lease was entered into for nine years but its effective term exceeded twelve years as a result of the tacit renewal;
• the lease pertains to premises that are used exclusively as offices;
• the lease pertains to a bare land; or
• the lease pertains to premises that are single-use (i.e. premises which according to their characteristics can only have one use, such as a cinema or a hotel).

Please note that the variation of the renewed rent when it is set at rental value due to a significant change in the features of the rented premises or the intended use of the rented premises or the respective obligations of the parties or in the local commercial factors or if the lease was entered into for a term exceeding nine years, it will not be immediately set at rental value, but will be incrementally increased on an annual basis by 10% per year until the rental value is attained.

3.1 Internal maintenance, decoration and repair?

See 3.8. To be agreed between parties to the lease agreement but mostly, these could be either directly paid by the tenant or borne by the landlord and rebilled to the tenant as part of the service charges agreed in the lease agreement.

3.2 External maintenance, decoration and repair?

See 3.8. To be agreed between parties to the lease agreement but mostly, these could be either directly paid by the tenant or borne by the landlord and rebilled to the tenant as part of the service charges agreed in the lease agreement.

3.3 Structural repairs?

The landlord must bear the cost of major repairs as defined by article 606 of the Civil Code (including works required to comply with applicable regulation provided it forms part of items listed in said article 606).

3.4 Insurance?

In any case, the landlords will insure its property. The lease agreement often provides that the insurance premium is rebilled to the tenant up to the part of the premises leased.

The tenant must subscribe operational liability insurance and occupiers’ liability risks insurance.

3.5 VAT?

It is at the landlord’s discretion to decide whether he elects to apply VAT on the rents.

3.6 Rates?

20% if applicable.

3.7 Other typical outgoings?

In general, the landlord requires a cash security deposit equal to 3-months rent. Article L. 145-40 of the French commercial code provides that if the sum of the cash security deposit exceeds the total of two terms of rent, the amount by which said sum exceeds two terms of rent shall accrue interest for the account of the tenant. To avoid paying interests to tenants, landlords also often require to be provided with an additional bank guarantee.

3.8 The ability to recoup any land lord outgoings (including management costs) by way of service charges?

Since the Pinel law dated 18 June 2014 came into force, the common practice is to execute “double net” leases agreements under which the tenant, in addition to the rent, is obliged to pay the costs of maintenance and repair, insurance as well as taxes.

Landlords tend to include as many items as possible in the service charges especially since Article L. 145-40-2 of the French commercial code provides that any lease agreement must contain an exhaustive and precise list of the categories of services charges and taxes borne by the tenant.

Note that in lease agreements entered or renewed as of 5 November 2014, the tenant cannot be charged notably for:

• major repairs in the sense of Article 606 of the French Civil code and the fees associated to those repairs;
• wear and tear repairs and compliance works when such works and repairs consist in major repairs as defined above;
• management fees of the landlord linked to the management of rents;
• service charges, taxes and costs of works relating to vacant premises or attributable to other tenants; or
• certain taxes where the landlord is personally liable such as the CET (“contribution économique territoriale”)

4.1 Are terms of leases agreements / contracts recognized and supported by case law in the jurisdiction?

Yes. However, the legal statute on commercial lease agreements is mainly codified in Articles L. 145-1 to L. 145-60 of the French commercial code.

5.1 To be recognized in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors) qualified appraisal report accepted and recognized in each jurisdiction?

A specific valuation may be ordered by the court in which case it will appoint a domestically regulated / qualified valuer to do so.

Except in that case, valuer commonly referred to in loan agreement are RICS (Royal Institution of Chartered Surveyors) qualified, and a court may rely on the valuation so provided even the valuer is not appointed by the court.

5.2 Are banks able to take security by way of an assignment over rental income?

It is indeed possible to obtain environmental reports (e.g. environmental studies phases 1 and 2) from a qualified and insured environmental professionals. Such reports are not mandatory but are commonly required in case of a sale of a property and as condition precedent to the implementation of a financing (i.e. the lender will require to have right to rely on such reports).

Furthermore, dedicated public databases collect information on pollution of soil and on certain activities likely to pollute. It is recommended to carry out searches in these databases prior to the acquisition of a property. However, the information provided is not necessarily exhaustive and does not cover all the industrial facilities. Furthermore, it does not give access to the environmental reports themselves. In addition, sellers need to fulfil numerous obligations to provide information on the environmental situation of each site (e.g. site registered in specific public databases, past presence of a classified facility on the site, etc).

5.3 Can a separate entity awn land and the rental income derived from the land?

Lenders, as beneficiaries of a mortgage, are not the owners of the mortgaged property and therefore may not be held liable in respect of past or present breaches of environmental laws.

However, if as part as the enforcement procedure of the mortgage, a lender becomes the owner of a property which does not comply with environmental laws, that lender may bear, in certain particular circumstances, related costs. Notably if no past operator who caused the pollution still exists. Or, in case of presence of waste on site.

This update has been prepared in close collaboration with our Real Estate team: Aline Divo, Partner and Arnaud Valverde, Senior Associate and our Environmental team: Céline Cloché-Dubois, Partner and Anne Plisson, Senior Associate.