Commercial real estate in France: overview
A Q&A guide to corporate real estate law in France.
The Q&A gives a high level overview of the corporate real estate market trends; real estate investment structures; title; tenure; sale of real estate; seller's liability; due diligence; warranties; taxes and mitigation, including VAT and stamp duty/transfer tax; climate change targets; restrictions on foreign ownership or occupation; finance; leases; and planning law.
To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool.
This Q&A is part of the global guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-mjg.
The corporate real estate market
Investment in French real estate is still regarded as a reliable and profitable fallback investment strategy by many investors; accordingly, French real estate investment has been very active over the past 12 months, with much competition on prime assets and core markets resulting in very challenging cap rates on trophy assets. French real estate investment trusts (REITs) and insurance companies are among the largest players on this market, together with foreign sovereign investment funds (from Qatar, Abu Dhabi, China, and so on) investing in joint ventures with reputable real estate players rather than directly and on their own.
The most significant deals in the French real estate market over the last 12 months have been the following:
Acquisition by Carmila, a French real estate investment trust sponsored by Carrefour, of a portfolio of six Carrefour shopping malls in France from Unibail.
Acquisition by a consortium of institutional investors of the Grand Hôtel-Dieu of Lyon, which represents a multiple use real estate project (office, shops, restaurants, hotels) involving a surface area of 51,500 square metres, located on the banks of the River Rhône in Lyon’s city center, and which is the largest private operation to date to redevelop a listed historical monument in France.
Acquisition by a consortium of private investors of the Beaugrenelle shopping centre in Paris for EUR700 million.
Real estate investment
Investment is usually made through:
Special purpose vehicles (SPVs), incorporated as French companies.
Organismes de placements collectifs immobiliers (OPCIs) and, in particular, professional OPCIs. These are real estate funds that are fully exempt from corporation tax but are subject to distribution obligations. Their main business purpose must consist in direct or indirect investments in real estate assets with a view to carrying out rental activities. Dividends paid by an OPCI may be subject to withholding tax in France depending on the identity of the recipient (subject to tax treaty relief or reduction).
A tax regime known as Sociétés d'Investissements Immobilières Cotées (SIIC) (largely inspired by US REIT legislation) is available for real estate investment companies that:
Have a minimum share capital of EUR15 million.
Are listed on a French regulated market.
Have a minimum floating shareholding of 15% on the date of election for the SIIC regime (floating shareholdings are those held directly or indirectly by legal entities or individuals with less than 2% of the total share capital and voting rights).
Do not have more than 60% of their share capital or voting rights held directly or indirectly by one shareholder (or by different shareholders in a joint control situation) unless the shareholders are also SIIC qualifying companies.
The SIIC regime also applies to a SIIC's subsidiaries that are subject to corporate income tax and that:
Are at least 95% held, directly or indirectly, by SIICs and/or OPCIs.
Have the same corporate purpose.
The SIIC regime gives full exemption from corporation tax on profits derived from real estate investments, provided distribution obligations are fulfilled. Taxation is passed on to investors, who are subject to either:
French personal or corporate income tax, if they are French residents.
French withholding tax if they reside abroad.
Distributions paid out of tax-exempt profits are subject to 20% tax if they are paid to corporate shareholders that hold, directly or indirectly, more than 10% of the dividend rights at the time of the distribution, and that are not subject to corporate income tax or to an equivalent tax on the dividends received.
In addition, dividends paid by a SIIC might be subject to withholding tax in France depending on the identity of the recipient (subject to tax treaty relief or reduction).
Companies opting for the SIIC regime are entitled to step up the tax basis of their eligible assets at a reduced cost (19% instead of 33.33%).
Institutional investors (mainly traditional property companies and insurance companies) play a key role in the French real estate market, either as direct investors or through OPCIs (see Question 2) or Sociétés civiles de placements immobiliers (SCPIs). SCPIs are regulated entities which must be authorised by the French Financial Market Authority (Autorité des marchés financiers) (AMF) to solicit investors through public offerings and must have the sole purpose of acquiring and managing real estate assets with a view to leasing them.
Private investors also play an important role. They frequently carry out their investments through SPVs.
Overseas investments are welcome in France but do not benefit from dedicated legislation.
Restrictions on foreign ownership or occupation
Foreign-registered or foreign-controlled entities are free to carry out real estate investments in France, but they must subsequently file a declaration with the French Ministry of Economy (Direction du Trésor), except in case of direct investments in French law companies having another real estate activity than construction for sale or rental purposes (Article R.152- 5 of the Monetary and Financial Code). The declaration is filed once the investment has been made, and must contain the following information:
Foreign investor (name, address and shareholders).
French company which was incorporated, or in which a stake was purchased (name, address, type of activity and financial statements).
Transaction, including its location, scope and use, and terms and conditions.
Real estate investments exceeding EUR15 million must also be subsequently notified to the central bank (Banque de France) for statistical purposes.
Foreign investors owning French real estate are entitled to grant the same guarantees and security interests as French owners.
Any entities (but not individuals) that hold, directly or indirectly, real estate located in France, must pay an annual tax equal to 3% of its fair market value, regardless of any acquisition debt. However, the following entities are automatically exempt from this tax:
International organisations, sovereign states or their institutions, including the legal entities, bodies, trusts or equivalent institutions they control and in which they hold a majority stake.
Entities the French assets of which are not mainly composed of real estate.
Entities the shares of which are significantly and regularly exchanged on a regulated stock exchange, including any subsidiary entities of which they hold directly or indirectly all the shares.
Entities having their registered office located in France, in an EU member state or in a country or territory that has concluded a reciprocal tax or mutual assistance treaty with France and which either:
have a share in properties located in France representing less than EUR100,000 or 5% of the property's market value;
are established to manage pension funds (including partnerships between entities), or as charities with acknowledged public utility or a not-for-profit purpose, if their activity or financing justifies the ownership of real estate assets or rights; or
are incorporated as an OPCI (under certain conditions), or any corporate form regulated by similar rules in the country in which they are incorporated.
Title to real estate
Real property includes land and any buildings or fixtures attached to the land, and ownership interests in them.
Generally, if the same entity owns the land and the buildings on it, the related title is subject to a single registration, and the land and building(s) on it are registered together. If the property is divided into parts, the parts must be registered separately.
To be enforceable against third parties, transfers of real estate ownership must be evidenced by a written deed of transfer authenticated by a notary (acte notarié de vente) (transfer deed). All transfer deeds must be registered by notaries with the local land registry (Services de la publicité foncière which is managed by the French state) once they are executed. The notary must include evidence of a 30-year root of title in the transfer deed.
To date, no electronic access and electronic conveyancing is available in France.
Information available at the land registry includes:
The identity of current and past owners.
The acquisition date of the real estate.
Details of any:
easements and encumbrances;
long-term leases (lasting over 12 years);
real estate finance leases.
Since such information must be registered with the land registry, it is available to third parties. The other elements of the transaction are included in the section of the real estate transfer deed which is not registered with the land registry and is therefore not disclosed to third parties.
There is no state guarantee of title, and the land registry cannot be held liable for registering inaccurate information. Registration of title with the land registry by notaries (see Question 6) allows the title holder to exercise owners' rights against third parties. However, any interested third party can challenge the title in court.
Title insurance is not widely available. The notary and its liability insurer guarantee title validity.
Freehold and leasehold tenures do not exist in France. French law recognises:
Full ownership of real property (droit de propriété).
Long-term leases, granting the tenant the equivalent of a real property right or right in rem (droit réel immobilier). There are two main types of long-term leases available, both granted for a term of between 18 and 99 years:
construction lease (bail à construction), where the tenant must construct a predetermined building on the land which is leased;
long-term lease (bail emphytéotique), where the tenant must maintain and pay for the upkeep of the property.
Since tenants under both leases hold the legal equivalent of full property rights, they are entitled to grant mortgages over the property.
Sale of real estate
When an investor is interested in acquiring a specific asset, it usually sends a written and detailed offer to the seller, which is subject to completion of satisfactory due diligence review. If the seller accepts the offer, the seller grants an exclusivity period and allows the investor to conduct further due diligence review. Negotiations take place throughout the period starting as from delivery of the offer and ending on execution of the deed of sale.
The parties do not usually enter into a transfer deed without having first executed a preliminary contract (promesse), even though they are legally entitled to do so. Once due diligence is completed, the parties usually enter into a preliminary contract setting out the terms and conditions of the contemplated transaction and the conditions precedent to be fulfilled. The preliminary contract is generally a promise to sell, either:
Granting an option to the buyer (promesse unilatérale de vente), who remains free to decide whether or not to purchase. The buyer usually pays an indemnity (indemnité d'immobilisation), generally about 5% to 10% of the purchase price, which is payable to the seller if the buyer does not exercise its option after fulfilment of all conditions precedent, if any. The acquisition is binding on the parties when the buyer exercises its call option.
Committing the buyer and seller to buy and sell upon fulfilment of certain conditions precedent (promesse synallagmatique de vente). The buyer usually pays a deposit ranging between 5% to 10% of the purchase price. The acquisition is binding upon fulfilment of the relevant conditions precedent.
Preliminary contracts relating to asset deals usually provide that the sale is conditional upon the waiver by local public authorities of any statutory pre-emption rights (see Question 39).
A deed of sale contains the following typical main provisions:
Description of the real estate asset.
Conditions of the sale (notably warranties granted to the buyer).
Information regarding construction and administrative authorisations.
Information regarding the rental situation.
Information regarding environment.
Evidence of a root of title dating back 30 years.
Information regarding mortgages and charges.
Information regarding any pre-emption rights.
A share purchase agreement includes the same main provisions as in a deed of sale. However, in addition to the provisions outlined above, the share purchase agreement provides for representations and warranties as regards the target company owning the real estate asset.
Real estate due diligences are usually conducted by the following advisers:
Notaries, dealing with notarial aspects of the real estate assets, including title, easements, mortgage status, zoning, legal organisation, administrative authorisations, construction operations and related insurance covers, use (usage or destination) and surfaces areas of the real estate assets.
Real estate and corporate lawyers, dealing with all legal issues relating to the purchased companies, the rental situation of the real estate assets, the asset and property management and any contracts entered into by the purchased companies.
Tax advisers, dealing with all tax issues relating to the real estate assets and the purchased companies.
Technical advisers and/or surveyors, dealing with all technical and environmental aspects of the real estate assets, including construction specifications, works, classified facilities, safety regulations and technical reports.
Property managers, dealing with the service charges and charges reconciliations.
Valuers, dealing with the valuation of the real estate assets.
In asset deals, in addition to legal warranties which are automatically granted by the seller (see Question 14), the seller can be required to grant additional warranties depending on the type of real estate asset sold and on the outcome of the due diligence performed by the buyer.
The warranties granted by the seller in case of sale of corporate real estate also depend on the due diligence performed by the buyer. They usually cover the:
Company which is sold (registration and existence of the company, share capital and ownership of the shares, subsidiaries, accuracy of the accounts, off-balance sheet commitments, indebtedness, taxes, contracts entered into by the company, employees and litigation).
Real estate assets owned by the company (title, charges, mortgages, insurance, rental situation).
Indemnification in case of breach of the representations and warranties is usually limited as to its:
Amount (de minimis, threshold, and cap provisions).
Duration (which depends on the representation and warranty concerned).
The indemnification is usually excluded if the claim of the buyer relates to any information or fact which has been disclosed in the context of the due diligence review, or in the contractual documentation.
A seller automatically warrants that:
The property complies with the agreed definition and characteristics (obligation of compliant delivery) (Article 1605, Civil Code).
The buyer will have quiet enjoyment (jouissance paisible) of the property (Article 1626, Civil Code).
The seller must also provide the buyer with several documents addressing environmental issues, including:
Documents concerning specific issues such as:
termites (for buildings located in contaminated or likely to be contaminated zones, as identified in a prefectoral order);
lead (for housing premises only);
indoor gas installation (for housing premises);
indoor electricity installation;
private sewer system (installations d'assainissement non collectif) (for housing premises only);
A statement on natural, mine and technological risks (état des risques naturels, miniers et technologiques) (ERNMT).
An energy performance diagnosis (diagnostic de performance énergétique) (DPE).
In addition to these statutory warranties, the seller frequently grants additional warranties to the buyer covering, for example, town planning and tenancy issues.
Environmental surveys and searches are conducted when contemplating the acquisition of land where facilities classified for the protection of the environment were/are operated, or where pollution has already been detected to assess the level of pollution.
The person liable for environmental damage resulting from the operation of a classified facility is the operator of the classified facility, and it is specified that the operator is not always the owner of the land where the classified facility was/is operated. However, the current owner of the land who is not the operator of the classified facility can, under very limited circumstances (particularly when the cause of pollution cannot be identified and if it has been proved negligent or complacent in respect of waste deposit on its land), be liable to indemnify third parties having suffered from the environmental damage. This applies even if the damage dates back before the acquisition, and irrespective of whether the previous owner can be identified. The current owner may subsequently have a claim against the previous owner(s).
Depending on the intended use of the land, the sale contract may contain provisions to allocate the costs and conditions of implementation of clean-up measures between the parties.
In principle, the owner of a real estate asset is liable for matters relating to the real estate for the period as from the acquisition. As regards leases, the rights and obligations of the landlord under the leases are transferred to the new owner as from the acquisition, it being specified that the seller can transfer to the buyer all or part of its personal obligations towards the tenants through a subrogation provision in the sale contract. However, since tenants are third parties with respect to the sale contract, the provisions of the sale contract are not binding on them and the seller may remain liable towards them after the sale.
A seller can have post-disposal liabilities towards the new owner, but only with respect to:
Breach of the representations and warranties in the purchase agreement.
Fraud. If the seller intentionally fails to disclose material information, the buyer can apply to court to have the sale declared void or to claim for damages.
Hidden defects (vices cachés). The buyer can obtain a price reduction or annulment of the sale for defects that would prevent the buyer from using the property as intended (Article 1641, Civil Code).
Environmental damage (particularly if environmental information available to the seller has not been disclosed to the buyer) (see Question 14).
In asset deals, the parties and the notary execute a transfer deed. The notary authenticates and stamps the deed, and must register it with the local land registry within two months of signature to make the title transfer enforceable against third parties.
In principle, title transfers as soon as the terms and conditions of the sale have been agreed upon between the parties, even if the asset has not been delivered or the purchase price has not been paid.
However, the parties usually agree that title only transfers upon payment in full to the seller of the purchase price.
Notarisation is required. The buyer generally pays notary's fees which tend to be about 1% of the purchase price.
In corporate real estate transactions, the parties execute a share purchase agreement and the related warranty agreement (if the warranties have been granted by the seller in a separate agreement), as well as ancillary documents (such as the transfer order and escrow agreements), if any. The parties usually agree that the shares are transferred to the buyer on payment to the seller of the provisional purchase price, it being specified that such price is usually adjusted after completion on the basis of the final accounts of the purchased company as of the transfer date. Notarisation is not required.
Real estate tax
Acquisition of real estate
Acquisitions of real estate generally trigger transfer tax at 5.09% or 5.81% depending on the location. Transfer tax is levied on the sale of the real estate asset. The buyer usually pays this tax, although the parties can decide otherwise.
In addition, specific transfer tax regimes apply in the following situations:
Sales of development land (see Question 20) are subject to a reduced transfer tax of 0.715% if the transfer is subject to VAT on the transfer price.
Sales of new buildings (see Question 20) are subject to a reduced transfer tax of 0.715%.
An exemption from registration duties applies if the buyer commits to construct and complete new buildings within four years following completion of the sale.
Acquisitions of real estate are subject to a reduced transfer tax of 0.715%, if the buyer undertakes to resell the asset within five years from the acquisition (or two years, if the buyer intends to split the property into several plots to be sold separately).
The acquisition deed must be registered with the mortgage registry office (the registration is subject to land registrar fees at the rate of 0.1% of the purchase price).
Sales of shares in real estate companies
Sales of shares in real estate companies (with assets consisting mainly of French real estate) are subject to a 5% transfer tax, assessed on the share price or on their fair market value if higher.
The share purchase agreement must be registered within one month with the local tax collection office (recette des impôts).
Generally, sales of real estate are subject to transfer tax (see Question 18).
However, transfers of real estate conducted by a VAT payer may be subject to VAT in the following circumstances:
Sales of development land (that is, land on which the buyer is allowed to erect new buildings under urban planning) are always subject to VAT.
Sales of land which is not development land are generally exempt from VAT, but the seller can elect for payment of VAT.
Sales of new buildings (that is, a sale within five years following completion of a new building or heavy restructuring of a pre-existing building) are always subject to VAT.
Sales of old buildings (that is, sale after five years following completion) are generally exempt from VAT, but the seller may elect for the payment of VAT.
In these cases, the seller pays the VAT which is charged at the standard rate of 20%. The taxable basis depends on the seller's situation when it acquired the land or the building:
If it was in a position to deduct VAT when it acquired the asset, VAT is assessed on the transfer price.
If it was not in a position to deduct VAT when it acquired the asset, VAT can be assessed on the margin made in the context of the transaction.
The seller can charge back adjustments for VAT to the buyer with respect to the sales of real estate under the transfer tax regime. When the seller has a 100% deduction right, the amount of VAT charged back to the buyer is the same as the portion of VAT that the seller previously deducted.
The buyer can deduct VAT paid upon the acquisition of real estate from VAT incurred on rents (if the rents are subject to VAT).
If the acquisition is subject to VAT, a VAT return must be filed, subject to standard conditions. When VAT or VAT adjustments are due, an exemption applies under certain conditions (which are met in practice when the building sold is dedicated to a rental activity subject to VAT).
The main local tax paid on the occupation of business premises is the business licence tax (contribution économique territoriale), which takes into account the type of real estate used by taxpayers. Exemptions can be granted for investments made in specific urban areas, such as an urban free zone (Zone Franche Urbaine) or urban regeneration zone (Zone de Redynamisation Urbaine).
Climate change issues
Two significant laws were respectively passed on 3 August 2009 (Law No. 2009-967 of 3 August 2009 (Grenelle 1)) and on 12 July 2010 (Law No. 2010-788 of 12 July 2010 (Grenelle 2)). Grenelle 1 aims to standardise low consumption in new housing and in public buildings and set-up incentives for the renovation of housing and building heating. Grenelle 2 intends to implement Grenelle 1's measures.
In relation to construction, Grenelle 2 aims to enhance the energy performance of new and existing buildings as follows:
Rating the energy and environmental performance of new and existing buildings, particularly in relation to:
greenhouse gas emissions;
water consumption and waste management linked to the construction;
maintenance, rehabilitation and destruction of buildings.
Landlords or sellers must provide their tenants or buyers with an energy performance rating certificate with immediate effect.
In existing office and retail buildings, energy performance-related renovation works must be completed by 1 January 2020.
An energy-efficiency diagnosis (diagnostic de performance énergétique) less than ten years' old must be attached to the contract for the sale of real estate. This diagnosis is issued for information purposes only, thereby implying that the buyer cannot take advantage of the information in it against the seller.
Upon execution of a lease or its renewal, the landlord must also hand over to the tenant an energy-efficiency diagnosis that is less than ten years' old, issued for information purposes. It is also compulsory to attach to a lease agreement for office or retail premises with a surface area of more than 2,000 square metres an "environmental schedule" setting out:
A list, description and energy characteristics of the equipment in the building in which the leased premises are located, and of the equipment installed by the tenant in the leased premises, relating to waste treatment, heating, cooling, ventilation and lighting.
An undertaking from the landlord and the tenant to assess the progress of the energy and environmental efficiency of the building and of the leased premises at agreed intervals, and to agree objectives to improve the energy and environmental efficiency of the building and the rented premises.
An undertaking from the landlord and the tenant to inform each other of the annual consumption of water in the building and in the rented premises, and the quantity of waste generated from the building and the rented premises.
Consent from the tenant to allow the landlord to have access to the rented premises for the completion of works intended to improve the energy efficiency of the building.
Real estate finance
Secured lending involving real estate
Mortgages over real estate and assignments of receivables (such as rents and insurance indemnities) are the most common types of security interests granted to raise real estate financings.
Mortgages must be granted under a notarial deed, which must be subsequently registered with the local land registry, to allow the title holder to exercise owners' rights against third parties. 0.05% of the amount to be registered is due to the French state for each mortgage registration and renewal of it.
For the assignment of receivables, the borrower/assignor must execute Dailly Law assignment forms (bordereau Dailly), so that the assignment will be effective between the parties and enforceable against third parties. There are no specific registration requirements.
In addition, pledges over the borrower's shares and pledges over the borrower's bank accounts are often granted.
Lenders typically require from any borrower, as conditions precedent, a valuation report relating to the value of the financed assets and the financial statements of the borrower and/or its shareholders.
In addition and until the reimbursement of the facilities to the lenders, the borrower must comply with:
Pre-defined levels of financial ratios (for example, interest cover ratio, debt service ratio, and loan to value).
Specific covenants relating to the real estate assets (including the provision of updated information) and the maintenance of them to preserve their value.
Lenders sometimes require an additional guarantee from an additional guarantor, in the form of a joint and several guarantee, an autonomous guarantee, or a letter of intent and/or the creation from the borrower of a cash reserve.
A lender can only incur environmental liability in its capacity as an owner, if it becomes the owner of the real estate assets following foreclosure on the asset (see Question 15).
The lenders usually require, as a condition precedent to the execution of the loan documentation, environmental due diligence reviews conducted by external experts with respect to the real estate asset to be financed (see Question 10).
If the debtor defaults on the loan, a mortgage entitles the lender to:
Require the sale of the property at a public auction and to be repaid out of the proceeds.
Obtain a court order transferring title to the secured property as payment of its claims.
The mortgage agreement can also provide that the lender, in case of default, will be automatically vested with title to property for a consideration determined by an expert's appraisal (the expert is appointed by the parties or by the court).
If a borrower defaults and files for insolvency, there is an automatic stay on all enforcement actions (including enforcement of a mortgage), subject to a few exceptions such as:
Claims assigned by way of Dailly assignment of receivables. The lender to which the debtor's receivables have been assigned by way of Dailly assignment can directly seek payment of these assigned receivables, despite any filing for insolvency. This position was held by the Paris Commercial Court in the Coeur Défense matter, and confirmed by the Versailles Appeal Court on 28 February 2013.
Claims secured by a fiducie agreement. The creditor can enforce its rights over the assets transferred to the trust, except where the creditor initially agreed, at the time the fiducie agreement was executed, that those assets would remain in the debtor's possession (convention de mise à disposition).
The stay also benefits individuals acting as guarantors and joint debtors.
The lender must file proof of claim within two months from the publication of the opening judgment in the legal gazette (Bulletin Officiel des Annonces Civiles et Commerciales). The period is four months for lenders located outside France.
In safeguard and in rehabilitation proceedings, creditors are invited to vote either collectively through creditor classes or individually on the debt-restructuring proposals. For companies of a certain size, three classes of creditors must be convened:
Financial institutions (in particular, lenders).
Major trade creditors (that is, trade creditors holding more than 3% of the total trade claims).
Bondholders (gathered into one single class, regardless of the currency or applicable law of the various bond indentures).
The classes of creditors are invited to vote on the restructuring plan at a two-thirds majority in value for each class. A restructuring plan can combine all the following:
Recapitalisation of the company.
Partial sale of the business.
If the classes of creditors or creditors consulted on an individual basis refuse to approve the draft plan prepared by the debtor, the court can impose a ten-year maximum term-out on dissenting creditors. However, this term-out is without prejudice to any longer maturity date that was initially agreed in loan agreements. Consenting creditors benefit from the shorter maturity date (if any) that they would have negotiated. The court cannot impose any debt write-off of principal or interest in a term-out scenario. The yearly installments under the term-out plan must not, after year three following court approval of the plan, be less than 5% of the total admitted pre-filing liabilities.
If the rescue of the company appears obviously impossible, the court can order the conversion of the procedure into liquidation proceedings (the liquidator's duty being to implement the sale of the business, as a whole or line by line). In this case, a sale plan, or alternatively asset sales, is/are implemented and mortgage creditors have no say on the choice of the bidder; they are not consulted on the sale process (except if they were appointed as supervising creditors assisting the creditors' representative and which, as such, attend all court hearings). Mortgage creditors are repaid out of the sale proceeds according to their rank and privilege.
The borrower should provide the lenders with additional information relating to the construction and development projects, such as the:
Updated budget during the construction and as a condition precedent to any additional drawdown of the facilities, to limit the lenders' exposure.
In construction and development projects, bank guarantees granted to constructors and buyers pursuant to sale in future state of completion contracts (VEFA) are often required, and must be taken into account in the financings.
Other real estate financing techniques
Real estate leases
Negotiation and execution of leases
The general principle of freedom to negotiate contracts (liberté contractuelle) applies to the lease of commercial premises. However, certain leases of commercial premises are subject to public policy and mandatory rules under Article L.145-1 to Article 145-60 of the Commercial Code, particularly leases relating to:
Shops and commercial premises accessible to the general public.
Commercial offices, that is, those used by registered commercial companies or individual tradesmen.
Teaching institutions and administration centres.
There are no formal legal requirements to execute a lease except for leases with a duration exceeding 12 years and long-term leases. In this case, regardless of whether the parties are legal entities or individuals, the lease must be drawn up in the form of a notarised deed and published at the local land registry, thereby triggering transfer tax based on the aggregate amount of rents due throughout the lease period.
Rents can be reviewed at the request of either party after three years, unless the parties have agreed upon an annual adjustment (indexation). Until recently, indexed rents were usually adjusted in proportion to the variation of the national construction cost index, published quarterly by the National Institute for Statistics and Economic Studies (INSEE). Due to a substantial increase in the national construction cost index over the past few years, new indexes have been set up by the French Parliament: the commercial rents index (Indice des Loyers Commerciaux) for commercial premises and the service rents index for office and warehouses premises (Indice des Loyers d'Activités Tertiaires).
Indexed rents can also be reviewed at any time if the rent has increased or decreased as a result of the indexation by more than 25% since the last date the rent was set (Article L.145-39, Commercial Code).
If the initial contractual term of the lease is up to and including nine years, the rent of the renewed lease is capped at the initial rent (subject to indexation) (plafonnement) unless there has been a substantial change in the factors generally used to set rental values in the area. If so, the rent of the renewed lease can be set by reference to market value, which is usually substantially higher than the indexed rent. The plafonnement provisions do not apply to office space and single-use premises (locaux monovalents) (for example, theatres, clinics and hotels), or where rents are based on the tenant's turnover (clause recettes).
Rents (except for furnished premises) are not automatically subject to VAT. However, a landlord can elect to charge VAT on rents when the buildings are of professional use so as to:
Offset collected VAT against input VAT it has incurred.
Avoid the 2.5% tax on certain rental income from real estate buildings completed more than 15 years ago. Rents subject to VAT or received from the state are exempt from this tax. This tax is paid by the landlord, and is generally passed on to the tenant. In contrast to VAT, the tenant cannot recover this tax.
If the tenant is subject to VAT, it can deduct VAT paid on rent from the input VAT it has incurred.
The payment of rents, service charges and other amounts due by the tenant under the lease are usually secured either by a rental deposit or the handover of a bank guarantee. In the event of a rental deposit, the amount usually corresponds to one rental term (for example, if the rent is payable quarterly in advance, the rental deposit will correspond to three months' rent).
The rental deposit may be replaced or completed by a bank guarantee, which can be either a joint and several guarantee or a first demand guarantee. The parties can freely agree the maximum amount guaranteed by such a guarantee.
Length of term and security of occupation
Commercial leases must be for at least nine years, subject to certain exceptions for short-term leases. A longer term is possible, but leases exceeding 12 years must be registered with the local land registry (see Question 31).
The tenant can terminate the lease at the expiry of each three-year period by serving the landlord with a termination notice at least six months in advance. In the following leases, tenants can contractually waive their triennial termination right and agree to occupy the premises for a fixed-term:
Leases entered into for a term exceeding nine years.
Leases granted with respect to single-use premises, office premises, or storage premises.
A tenant that has complied with its obligations is entitled to renew its lease. If the landlord refuses to renew the lease at its expiry, compensation (indemnité d'éviction) must be paid to the tenant to indemnify it for the loss of goodwill suffered. However, the tenant can be evicted without compensation if the premises are to be totally or partially demolished for health and safety reasons.
Subletting whole or part of the premises and assignment by the tenant of its rights under the lease are usually prohibited by the lease agreement. However, the tenant is legally entitled 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 contained in the lease agreement is null.
Tenants can share their business premises with group companies and third parties, provided the landlord has expressly authorised the tenant to enter into subletting agreements.
The lease usually provides for an authorisation to sublet the premises to companies belonging to the tenant's corporate group, provided the (main) tenant remains liable to pay the full rent.
Despite any provision in the lease, upon a merger, demerger, winding up without liquidation (transmission universelle de patrimoine), or some cases of contribution of part of a tenant's assets, the successor will replace the original tenant in respect of all rights and obligations resulting from the lease.
The lease usually provides that, upon any assignment, the tenant which has assigned the lease will remain jointly and severally liable with the assignee for the tenant's obligations under the lease, in particular for the payment of rent and service charges. This liability remains in force for three years from the assignment date.
Repair and insurance
Unless otherwise agreed, the tenant bears the cost of maintenance and repairs, except for major structural repairs (grosses réparations, as defined under Article 606 of the Civil Code).
The landlord is legally responsible for insuring the property, but the cost is often passed on to the tenant. The tenant must take out appropriate insurance policies to cover all risks specific to the running of its own activities, and cannot claim against the landlord's insurer in this respect.
If the parties have not agreed otherwise, the landlord is entitled to keep the lease improvements, subject to the payment of an indemnity to the tenant, or to request the tenant to reinstate the premises to their initial state, at the tenant's cost. Most leases granted by institutional landlords provide for an accession clause to the lease improvements to the benefit of the landlord, without any indemnity being due to the tenant.
Landlord's remedies and termination
Under a commercial lease, the tenant has a statutory right to renew the lease at the end of the term (see Question 33). The landlord can however terminate a commercial lease if the tenant fails to:
Pay the rent or service charges or both.
Comply with any other substantial provision of the lease.
Commercial leases usually contain a termination clause (clause résolutoire) allowing for automatic termination in the above circumstances. However, a bailiff must serve formal notice on the tenant, giving at least one month to remedy the breach before termination. Without a termination clause, the landlord can initiate a full action on the merits, to obtain judicial termination of the lease.
The landlord can also terminate the lease in the specific situation where it intends to build or rebuild the existing building. In these circumstances, the landlord can terminate the lease at the end of each three-year period.
Under certain circumstances, a court can grant the tenant grace periods (Article 1244-1, Civil Code) and suspend the effect of the termination clause, provided the tenant complies with its rescheduled rent payment obligations.
Further, the opening of an insolvency proceeding (whether safeguard, rehabilitation or liquidation proceedings) triggers an automatic stay of all actions against the insolvent tenant. Creditors whose claims arose before the filing of insolvency proceedings are barred from enforcing their rights against the debtor tenant.
If the tenant is subject to safeguard, accelerated safeguard, or rehabilitation proceedings, the lease can be terminated:
At the administrator's request, even if the term of the lease has not ended. In this case, termination is effective as of the date on which the tenant has knowledge of the administrator's decision not to continue the lease.
At the landlord's request, as a result of payment default, for rent and service charges owed after the opening of the proceedings. The landlord can only ask for the termination of the lease upon expiry of a three-month period following the opening judgment. If payment of sums owed occurs before the expiration of this three-month period, the lease cannot be terminated.
The opening of liquidation proceedings against the tenant (liquidation judiciaire) does not lead to automatic termination of the lease. The liquidator can opt to continue the lease or to transfer it according to the terms and conditions of the lease. If the lease is transferred, any clause of the lease providing that the transferor is jointly and severally liable with the transferee is void. If the liquidator decides not to continue the lease, the lease will terminate on the date on which the tenant has knowledge of the liquidator's decision not to pursue the lease.
The landlord can also claim judicial termination of the lease or invoke the termination clause (if any) provided the termination is based on a default which occurred before the opening of liquidation proceedings (except payment defaults).
The tenant can withhold rent payments if the landlord has not fulfilled its contractual obligations and such failure to fulfil its obligations has entailed the impossibility for the tenant to use the rented premises.
The tenant can terminate the lease if the landlord cannot ensure peaceful enjoyment (jouissance paisible) of the premises.
Except for certain leases in which tenants may contractually waive their triennial termination right (see Question 33), the tenant can terminate the lease at the expiry of each three-year period by serving the landlord with a termination notice at least six months in advance.
Planning and development controls
To assist with town planning, a statutory pre-emption right (droit de préemption urbain) allows local public authorities to become priority acquirers of property for sale in certain pre-defined zones. This was reformed by Law 2014-366 of 24 March 2014 aiming to promote access to housing and a renewed urban planning (pour l'Accès au Logement et un Urbanisme Rénové) (ALUR Law). This extended the scope of the pre-emption right (now including, under certain circumstances, free transfers and the sale of majority shares in civil real estate companies).
A seller (acting in practice through its notary) must notify the local public authority of the contemplated sale's terms and conditions by filing a declaration of intent to alienate (déclaration d'intention d'aliéner) (DIA), which must now include information as to whether classified facilities were operated on site.
If the local public authority wants to buy the property, it then has two months to give notice of its intention to acquire the property, stating whether it intends to purchase it at the price mentioned in the DIA or at a lower price. Such time-limit may be extended if the local public authority requires additional documents or asks to visit the premises concerned. If the local public authority fails to reply within the applicable time-limit, it is deemed to have waived its pre-emption right.
If the local public authority notifies the seller of its intent to acquire the property at a lower price, the seller must, within two months, notify the local public authority of one of the following:
It no longer intends to sell the property.
It accepts the public authority's proposal.
It intends to proceed with the sale but does not accept the lower price offered by the local public authority. In this case, the civil court (Tribunal de Grande Instance) sets the price based on the market value.
A specific pre-emption right also entitles the local public authority to become the priority acquirer in the event of a transfer of the business as a going concern (fonds de commerce) or a transfer of a commercial lease, when the operation occurs within a pre-defined area established for the protection of local shops and crafts. In these cases, the local public authority assigns the business or the commercial lease to a local company/craftsman registered with the Commercial and Companies Registry within two years from the date on which pre-emption becomes effective. This handover is intended to preserve the diversity of local businesses and crafts.
An expropriation procedure also entitles local or national public authorities to acquire property for a contemplated operation which is declared of public interest, and an evicted owner is indemnified in this respect. This procedure is very formal and may involve civil courts ruling on the indemnity amount.
The Urban Planning Code (which applies nationwide) and local land use plans (Plan Local d'Urbanisme (PLU)/Plan d'Occupation des Sols (POS)) regulate zoning and urban planning. Local government largely regulates planning. Each municipality prepares local land use plans, which divide the area into zones of different uses and attribute building density ratios to each zone. Over the past decade, several reforms (including most recently the ALUR Law) have urged municipalities to co-operate in the preparation of local land use plans at an inter-communal level.
Historic buildings benefit from specific legislation which applies nationwide and is set out in the heritage code (Code du Patrimoine).
A building permit is generally required to either:
Construct new buildings.
Carry out works on existing buildings, if those works result in change of use or creation of additional surface areas.
A development permit is also required when the project involves a division of the plot of land intended to create one or more plots to be built.
Specific authorisations (autorisation d'exploitation commerciale) may also be required to operate a commercial activity (such as retail premises and cinemas) beyond specific legal thresholds. Under Law 2014-626 of 18 June 2014 relating to crafts, trade and very small businesses (known as the Pinel Law), for retail premises, such authorisation is merged with the planning permission, when required.
In the Ile-de-France region, a specific authorisation (Agrément) is also required from the state's local representative if the contemplated building is to be used for certain activity purposes (that is, for office, industrial, commercial, professional, administrative, technical, scientific or educational use).
Authorisations to operate classified facilities for environmental protection (installations classées) may also be required.
Applications for building permits are made to the local planning authority, even when the granting authority (which, in principle, is the mayor) is the state's local representative. The project must comply with the local land use plan, and with any relevant legislation (for example, restricting construction in protected coastal or mountain areas). The time taken to issue a decision on a planning application ranges from one to three months. However, this period can be extended in specific cases, if the granting of the building permits is subject to other specific authorisations (for example, historic buildings, public access buildings, projects requiring the authorisation of the ministry of defence or civil aviation). Pursuant to a Decree dated 9 July 2015, time-limits for planning permissions to be granted have been shortened so that most projects may be instructed within five months.
Building permits lapse if works are not started within two years following delivery of the permit to the applicant. After this initial two-year period, the permit also lapses if the construction works are interrupted for more than a year, although this period can be extended by one year. A Decree dated 29 December 2014 temporarily extended to three years the period of validity of building permits; it applies to building permits valid on the date when the Decree entered into force and to building permits to be granted until 31 December 2015.
Third party rights and appeals
If a building permit is granted, a notice must be posted on site. During the two-month period from the posting of the notice on site, interested third parties can appeal against the permit. Even if the notice is not posted, appeals are time barred after one year starting from the completion of construction works. Appeals are filed with the local authority that issued the permit or with the local administrative courts.
A public inquiry (enquête publique) must be conducted for major projects. For example, projects creating a surface area of over 40,000 square metres, or projects leading to the creation of cultural, sports and recreation facilities that can accommodate more than 5,000 people.
If a request for a building permit is denied, the applicant can file an appeal with the local authority or with the local administrative courts within two months of notification of the decision.
An important set of reforms was adopted in 2014, in particular with the ALUR Law (which impacted urban planning law) and the Pinel Law (which reformed the commercial leases regime, as well as the legislation applying to the operation of commercial premises). The Law aiming at promoting growth, activity and equal economic chances (pour la croissance, l’activité et l’égalité des chances économiques) which was adopted in July 2015 amends urban planning law and legislation applying to commercial facilities in several aspects. It also paves the way for a new set of reforms, to be adopted mainly by ordinances, which aims at:
Enlarging the scope of application of single administrative authorisations (comprehensive authorisations which encompass urban planning and environmental aspects, among others).
Widening recourse to the project certificate (a certificate which is a kind of pre-authorisation for a project).
Reforming public inquiry procedures.
Shortening the time-limit for the settlement of disputes in relation to a real estate project.
Corresponding ordinances will be adopted between mid-2016 and the end of 2016 at the latest.
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De Pardieu Brocas Maffei
Professional qualifications. Paris, France, 1992
Areas of practice. Real estate and real estate finance.
- Advising Carrefour in connection with the setting-up of Carmila, a new property company sponsored by Carrefour, and with the acquisition by Carmila of a portfolio of Carrefour shopping malls in France from Klépierre.
- Advising Gecina in connection with the sale of the Beaugrenelle shopping centre to a group of private French investors.
- Advising Apsys in connection with the setting-up and financing of the Muse project in Metz with respect to the development of a shopping centre of approximately 47,000 sq m, and office and residential buildings.