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, including REITs; legislation; title and public registers of title; confidential information; state guarantee of title; tenure; sale of real estate; seller's liability; due diligence; warranties; cost; taxes and mitigation, including VAT and stamp duty/transfer tax; climate change targets; third party outsourcing; restrictions on foreign ownership or occupation; finance; leases; planning law and consents; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Corporate Real Estate Country Q&A tool

This Q&A is part of the multi-jurisdictional guide to corporate real estate law. For a full list of jurisdictional Q&As visit www.practicallaw.com/realestate-mjg.

Jacques Henrot and Emmanuel Fatôme, De Pardieu Brocas Maffei
Contents

The corporate real estate market

1. What have been the main trends in the real estate market in your jurisdiction over the last 12 months? What have been the most significant deals?

Over the last 12 months, the French real estate market has maintained the strong interest of investors in core assets. However investors remain overcautious on non-prime segments of the market.

The most active French investors are mainly institutional, insurance companies and societés civiles de placements immobiliers (SCPIs).

  • Partnership between Unibail-Rodamco and the Socri Group for the development of the Polygone Riviera center in the Côte d’Azur with a surface area of about 75,000 square metres.

  • Partnership between Altarea Cogedim and Allianz Real Estate Group in relation to five shopping centres in France operated by Altarea Cogedim.

  • Partnership between GE Capital and BNP Paribas for the restructuration of the Pont de Sèvres Citylights towers in Boulogne Billancourt, developing a surface area of about 80,000 square metres.

  • Acquisition by the Constellation Group of the hostels Concorde Lafayette and Hôtel du Louvre in Paris, Palais de la Méditerranée in Nice and Hotel Martinez in Cannes.

 

Real estate investment

2. How is real estate investment carried out in your jurisdiction and what structures do investors use?

Common structures

Investment is usually made through:

  • Special purpose vehicles (SPVs), incorporated as French companies.

  • Organismes de placements collectifs immobiliers (OPCIs) and in particular OPCIs with simplified rules (OPCI à règles de fonctionnement allégées). These are real estate funds that are fully exempt from corporation tax but are subject to distribution obligations. Their main business purpose must be direct or indirect investment 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).

REITs

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% at the date of election for the SIIC regime (floating shareholdings are those held directly or indirectly by legal or natural persons 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 SIIC's subsidiaries that are subject to corporate income tax and that:

  • Are at least 95% held, directly or indirectly, by the SIIC 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

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 above, Common structures) 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

Private investors also play an important role. Their investments are frequently made through SPVs (see above, Common structures).

 

Real estate legislation

3. What is the main real estate legislation that applies in your jurisdiction?

French real estate law is mainly codified in the:

  • Civil Code (Code civil) for transfers of title and non-commercial leases.

  • Commercial Code (Code de Commerce) for commercial leases and shopping centre authorisations.

  • Construction and Housing Code (Code de la Construction et de l'Habitation) for construction and development.

  • Urban Planning Code (Code de l'Urbanisme) for planning and development.

There are other rules that are not codified, for example, rules applicable to real estate agents (agents immobiliers).

 

Title to real estate

Title and registers

4. What constitutes real estate in your jurisdiction? Is land and any buildings on it (owned by the same entity) registered together in the same title, or do they have separate titles set out in different registers?

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 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.

Evidencing title

5. How is title to real estate evidenced?

To be effective 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 at the local land registry (Services de la publicité foncière) after they are executed. The notary must include evidence of a root of title dating back 30 years in the transfer deed.

Information in the public register

6. What are the main information and documents registered in the public register of title?

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;

    • registered mortgages;

    • long-term leases (lasting over 12 years);

    • real estate finance leases.

Protection from disclosure

7. Can confidential information or documents be protected from disclosure in the public register of title?

If the parties deem information or documents confidential, the buyer usually executes a non-disclosure agreement, the breach of which can lead to payment of damages. Documents that require registration at the mortgage registry are available to third parties. This registration mainly applies to real estate transfer deeds.

State guarantee of title

8. Is there a state guarantee of title? Is title insurance available? If so, is it commonly used?

There is no state guarantee of title, and the land registry cannot be liable for registering inaccurate information. Registration of title with the land registry by notaries (see Question 5) allows the title holder to exercise owners' rights against third parties. However, an interested third party can challenge the title in court.

Title insurance is not widely available. The notary and its liability insurer guarantee title validity.

Tenure

9. How can real estate be held (that is, what types of tenure exist)?

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). The two main types of long-term leases, both granted for a term of between 18 and 99 years, are the following:

    • 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 of both of these leases hold the legal equivalent of full property rights, they can grant mortgages over the property.

 

Sale of real estate

Main stages and documents

10. What are the main stages and documents in the sale of real estate?

Marketing

Real estate marketing is usually handled by real estate brokers (for simple transactions) or by investment banking institutions.

Commercial negotiation

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. If the seller accepts the offer, the seller grants an exclusivity period and allows the investor to conduct further due diligence. Negotiations occur throughout the period from when the offer is proposed until execution of the deed of sale.

Pre-contractual arrangements

Once due diligence is completed, the parties usually enter into a preliminary contract (promesse) 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 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 completion of all conditions precedent, if any.

  • Committing the buyer and seller to buy and sell on completion of certain conditions precedent (promesse synallagmatique de vente). The buyer usually pays a deposit of between 5% to 10% of the purchase price.

Preliminary contracts relating to asset deals normally make the sale conditional on local public authorities waiving any statutory pre-emption rights (see Question 24).

Sale contract

The parties do not usually enter into a transfer deed without having first executed a preliminary contract, even though they can legally do so (see above, Pre-contractual arrangements). The transfer deed is executed by the parties and by the notary (see Question 5).

When legally binding

The transaction becomes binding on the parties on the execution date of the transfer deed. However, if:

  • A promesse unilatérale de vente is signed, the acquisition is binding on the parties when the buyer exercises its call option (see above, Pre-contractual arrangements).

  • A promesse synallagmatique de vente is signed, the acquisition is binding on fulfilment of the conditions precedent (see above, Pre-contractual arrangements).

Registration

The parties and the notary execute the transfer deed. The notary authenticates and stamps the deed, and must register it at the local land registry within two months of signature to make the title transfer enforceable against third parties (see Question 5).

When title transfers

Generally, title technically transfers as soon as the asset and its sale price have been agreed 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 on payment in full to the seller of the purchase price.

Notarisation is required (see Question 5). The buyer generally pays any notary's fees which tend to be about 1% of the purchase price (see Question 16, Buyer's costs).

Seller's liability to the buyer

11. Does a seller have any statutory or other liability to the buyer in a disposal of real estate?

A seller automatically warrants that the:

  • Property complies with the agreed definition and characteristics (obligation of compliant delivery) (Article 1605, Civil Code).

  • Buyer will enjoy all benefits resulting from full ownership 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:

    • asbestos;

    • termites (for buildings located in contaminated or likely to be contaminated zones as identified in a prefectoral order);

    • lead (for housing premises only);

    • land pollution;

    • 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 and technological risks (état des risques naturels et technologiques) (ERNT).

  • 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.

Case law generally places extensive liability on the seller for environmental matters.

Due diligence

12. What real estate due diligence is typically carried out before an acquisition?

Standard due diligence covers:

  • Investigation of title.

  • Investigation of mortgages affecting the real estate.

  • Town planning and environmental due diligence.

  • Review of lease agreements.

Sellers' warranties

13. What real estate warranties are typically given by a seller to a buyer in the sale of corporate real estate and what areas do they cover?

In share deals, where the buyer does not automatically benefit from the statutory warranties applicable to asset deals (see Question 11), equivalent contractual warranties are usually agreed.

In addition, limited corporate warranties (for example, covering the accuracy of the accounts) are usually granted.

Inheriting liability

14. Can an owner or occupier inherit liability for matters relating to the real estate even if they occurred before it bought or occupied it?

If environmental damage to real estate affects third parties, the current owner can, under very limited circumstances (particularly when the cause of pollution cannot be identified), be liable to indemnify these third parties. This applies even if the damage dates back to 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).

Retention of liability after disposal

15. Does a seller or occupier retain any liabilities relating to the real estate after it has disposed of it?

A seller can have post-disposal liabilities, but only for:

  • 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).

Seller and buyer costs

16. What costs are usually paid by the buyer? What costs are usually paid by the seller?

Buyer's costs

In addition to transfer tax or value added tax (VAT) (see Questions 17 and 18), the fees and costs usually paid by the buyer are:

  • Notary's fees, at about 1% of the purchase price (these are negotiable above EUR80,000).

  • Legal fees (usually on an hourly basis).

  • Real estate agent's fees.

  • Experts' fees (for example, environmental experts, surveyors and valuers).

Seller's costs

The seller may also be subject to capital gains tax.

 

Real estate taxes and mitigation

17. Is value added tax (VAT) (or equivalent) payable on the sale or purchase of real estate?

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 19.6% (20% as from 1 January, 2014). 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 on the operation.

The seller can recharge adjustments for VAT to the buyer on sales of real estate under the transfer tax regime. The amount of VAT recharged to the buyer is the same as the part of the VAT that the seller previously deducted.

The buyer can deduct VAT paid on 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).

 
18. Is stamp duty/transfer tax (or equivalent) payable on the sale or purchase and who pays?

Acquisition of real estate

Acquisitions of real estate generally trigger transfer tax at 5.09% ( the Government plans to increase this tax by 0.7%). Transfer tax is levied on the sale of the real estate asset. The buyer usually pays this, although the parties can decide otherwise. In addition, specific transfer tax regimes apply in the following situations:

  • Sales of development land (see Question 17) 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 17) are subject to a reduced transfer tax of 0.715%.

  • An exemption of 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 within five years from 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 at 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

Since 1 January 2012, 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 fair market value of the underlying real estate assets after deduction of the sole debts contracted for the purpose of acquiring such real estate assets.

The share purchase agreement must be registered within one month at the local tax office (recette des impôts).

 
19. Are any methods commonly used to mitigate real estate tax liability on acquisitions of large real estate portfolios?

Acquiring a company holding real estate, instead of directly acquiring real estate portfolios, can mitigate real estate tax liability, as this can lead to a reduction of registration duties. This tax is then calculated on the shares' net value (after deduction of the company's debt related to the acquisition of real estate assets) instead of the total value of the real estate portfolio.

 

Holding business premises

Climate change targets

20. Are there targets to reduce greenhouse gas emissions from buildings in your jurisdiction? Is there legislation requiring buildings to meet certain minimum energy efficiency criteria?

Two significant laws were 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)) respectively. 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 in the following ways:

  • 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 work must be completed by 1 January 2020.

Third party outsourcing

21. Is it common for companies to manage their real estate portfolios and their accommodation needs by using third parties through outsourcing transactions?

It is increasingly common for real estate companies to entrust third parties (that is, specialised suppliers of services) with the asset management and/or property management of their real estate assets. The consideration paid to managers is usually calculated as a percentage of the collected rents.

Restrictions on foreign ownership or occupation

22. Are there restrictions on foreign ownership or occupation of real estate, or on foreign guarantees or security for ownership or occupation?

Legal aspects

Foreign-registered or foreign-controlled entities are free to make real estate investments in France, but they must subsequently file a declaration with the Tax Administration (Direction du Trésor) if building for resale to the public or for rental purposes (Article L.151-1 et seq, Monetary Code). The declaration is filed after the investment has been made, and must contain information on the:

  • 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 subsequently be notified to the central bank (Banque de France) for statistical purposes.

In addition, a foreign individual who is resident outside the European Economic Area (EEA) but doing business in France must:

  • File a declaration with the regional administration and obtain a receipt (récepissé de déclaration préalable), if he is living abroad.

  • Have a valid residence permit allowing his business activity if he is living in France.

Foreign investors owning French real estate can grant the same guarantees and security interests as French owners.

Tax aspects

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 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 have a majority interest in.

  • Entities whose French assets are not mainly composed of real estate.

  • Entities whose shares are significantly and regularly exchanged on a regulated stock exchange, including any subsidiary entities whose total shares they hold directly or indirectly.

  • Entities with 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 (with certain conditions), or a form regulated by similar rules in the country in which they are incorporated.

Issues on change of control

23. Does change of control of a company affect its holdings of real estate?

The change of control of a company does not affect its holdings of real estate as such. However, change of control provisions are often found in financing documentation.

Compulsory purchases

24. In what circumstances can local or state authorities purchase business premises compulsorily? Is the purchase price market value?

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.

A seller (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).

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. If the local public authority fails to reply within the two-month 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 reform of pre-emption rights is considered by the bill aiming to promote access to housing and a renewed urbanism (pour l'Accès au Logement et un Urbanisme Rénové) (ALUR) that will soon be debated in Parliament (see Question 43). It should mainly secure the rights of the parties to the pre-emption process and make it more transparent.

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 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 businessman/craftsman within two years from the date on which pre-emption becomes effective. This handover is intended to preserve the diversity of local businesses and craft.

An expropriation procedure also entitles local or national public authorities to acquire property subject to a contemplated operation being declared of public interest and the evicted owner being indemnified. This procedure is very formal and may involve the civil courts ruling on the indemnity amount.

Municipal taxes

25. Are municipal taxes paid on the occupation of business premises? Are there any exemptions?

The main local tax paid on the occupation of business premises is the business licence tax (contribution économique territoriale), which takes account of the 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).

 

Real estate finance

26. How are acquisitions of large real estate portfolios or companies holding real estate generally financed?

Acquisitions of large real estate portfolios

Acquisitions of real estate are generally financed by a combination of equity and bank debt. A lender will usually require both:

  • A first ranking mortgage over the real estate.

  • Assignments of rents and of insurance indemnities (if any).

Apart from anti-thin-capitalisation rules, interest paid in relation to a debt is generally deductible by up to 85% of its total amount (75% as from 1 January, 2014).

Real estate investors can also finance their real estate acquisitions through a finance lease (crédit-bail immobilier), which allows the tenant (crédit preneur) to exercise an option to purchase after a minimum tenancy period.

Acquisitions of companies holding real estate

Acquisitions of companies holding real estate are generally financed by a combination of equity and bank debt (acquisition loan and mortgage loan at the level of the target company). Acquisition financings are mainly secured by share pledges, given the difficulty of putting upstream guarantees in place under French law.

 
27. How is real estate commonly used to raise finance?

Real estate is used to raise finance mainly through subscription of bank debt, secured by mortgages and other real estate related security interests (assignment of rents and of insurance indemnity, if any).

Large real estate owners also use sale and leaseback transactions to get cash from their property assets, while retaining the right to occupy assets as a tenant and sometimes a right to repurchase after a given period of time.

 
28. What are the most common forms of security granted over real estate to raise finance? How are they created and perfected (that is, made valid and enforceable)?

Mortgages over real estate and assignments of receivables (such as rents and insurance indemnities) are often granted to raise finance.

Mortgages must be granted by a notarial deed, which must be subsequently registered at the local land registry, to allow the title holder to exercise owners' rights against third parties.

The assignor must execute assignment of receivables forms (bordereau Dailly) for an assignment of receivables to be effective between the parties and against third parties. There are no specific registration requirements.

 
29. Is real estate securitisation common in your jurisdiction?

Real estate securitisation is not widespread in France due to constraints and costs. The current market difficulties make further development in this area unlikely in the near future.

 

Real estate leases

Negotiation and execution of leases

30. Are contractual lease provisions regulated or freely negotiable?

The general principle of freedom to negotiate contracts (liberté contractuelle) applies to leasing commercial premises. However, certain leases of commercial premises can be subject to public policy and mandatory rules under Article L.145-1 to Article 145-60 of the Commercial Code, particularly leases of:

  • Shops and commercial premises accessible to the general public.

  • Commercial offices, that is, those used by registered commercial companies or individual tradesmen and not professional services.

  • Teaching institutions, administration centres and so on.

However the rent of residential premises is regulated to limit their increase in certain parts of France (décret n° 2013-689, 30 July 2013).

 
31. What are the formal legal requirements to execute a lease?

There are no formal legal requirements to execute a lease except for commercial leases (with a duration exceeding 12 years) and long-term leases. In this case, the lease must be published at the local land registry, which triggers transfer tax based on the total aggregate amount of rents due throughout the lease period.

Rent levels and reviews

32. How are rent levels usually reviewed and are there restrictions on this? Is VAT (or equivalent) payable on rent?

Rents can be reviewed at the request of either party after three years, unless the parties have agreed an annual adjustment (indexation). Indexed rents are usually adjusted in proportion to the variation of the national cost of construction index, published quarterly by the National Institute for Statistics and Economic Studies (INSEE). Due to a substantial increase in the national cost of construction index over the past few years, new indexes have been set up by the French Parliament. The parties can now choose to use the commercial rents index (Indice des Loyers Commerciaux) for commercial premises. The parties are also entitled to choose 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 agreed (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 that 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.

If the tenant is subject to VAT, it can deduct VAT paid on rent from the input VAT that it has incurred.

Length of term and security of occupation

33. Is there a typical length of lease term and are there restrictions on it? Do tenants of business premises have security of occupation or rights to renew the lease at the end of the contractual lease term?

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 for a substantial fee (based on the total rent).

Unless otherwise agreed, the tenant can terminate the lease at the expiry of each three-year period by serving the landlord (through a bailiff) with a termination notice at least six months in advance. In practice, tenants often contractually waive their termination right, at least for the first three-year period, and agree to occupy the premises for at least six years. 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.

Restrictions on disposal

34. What restrictions typically apply to the disposal of the lease by the tenant?

Subletting the whole or part of the premises and assignment by the tenant of its rights under the lease are usually prohibited by the lease agreement. The tenant has, by law, the right 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 is null.

Use of premises within a corporate group

35. Can tenants usually share their business premises with companies in the same corporate group?

Named 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 in the tenant's corporate group, provided the (main) tenant remains liable to pay the full rent.

Repair and insurance responsibilities

36. Who is usually responsible for keeping the leased premises in good repair?

Unless otherwise agreed, the tenant bears the cost of repairs, except for major structural repairs (grosses réparations, as defined under Article 606 of the Civil Code). However, if the lease states that the rent is net of all charges, costs and expenses, the tenant bears all repair costs, including all major structural repairs.

 
37. Who is usually responsible for insuring the leased premises?

The landlord is legally responsible for insuring the property, but the cost is often passed on to the tenant. The tenant must pay to insure all risks specific to the running of its own activities, and cannot claim against the landlord's insurer for these.

Grounds for termination

38. On what grounds can the landlord usually terminate the lease? Can the tenant terminate the lease in certain circumstances?

Landlord

The main principle is that the tenant has a statutory right to renew the lease at the end of the term (see Question 33). However, the landlord can terminate a commercial lease if the tenant fails to:

  • Pay 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 automatic termination in these 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 termination of the lease.

The landlord can also terminate in the specific situation where it intends to build or re-build 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.

Tenant

The tenant can terminate the lease if the landlord cannot ensure peaceful enjoyment (jouissance paisible) of the premises. Unless the parties agree otherwise, commercial tenants are entitled to terminate the lease at the expiry of each three-year period (see Question 33).

Tenant's insolvency

39. What is the effect of the tenant's insolvency under general contract terms and insolvency legislation?

The opening of insolvency proceedings (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 proceedings (procédure de sauvegarde) or rehabilitation proceedings (redressement judiciaire), 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 on 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 is terminated 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).

 

Planning law

40. What authorities regulate planning control and which legislation applies?

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. The state's regional representative (Préfet) controls the legality of local plans and influences their preparation through specialised departments of the regional administration. Each municipality prepares local land use plans, which divide the area into zones of different uses and attribute building density ratios to each zone.

Since the enactment of Grenelle 2 and the adoption of its implementing Ordinances and Decrees, municipalities are encouraged to cooperate in the preparation of local land use plans at an inter-communal level.

 
41. What planning consents are required and for which types of development?

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;

    • creation of additional surfaces.

A development permit is also required when the project involves a division of the plot of land intended to create one or more lots to be built.

Specific authorisations (autorisation d'exploitation commerciale) are also required to operate a commercial activity (such as retail premises and cinemas) beyond specific legal thresholds.

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.

 
42. What are the main authorisation and consultation procedures in relation to planning consents?

Initial consents

Applications for building permits are made to the local planning authority, normally the mayor, or in exceptional cases, the state's local representative. The project must comply with the local land use plan, and with any relevant legislation (for example, restricting building in protected coastal or mountain areas). Building permits lapse if works are not started within two years of delivery of the permit to the applicant. After this initial two-year period, the permit also lapses if construction works are interrupted for more than a year, although this period can be extended by one year.

Third party rights

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.

Public inquiries

A public inquiry (enquête publique) must be conducted for major projects, for example, for 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 5000 people.

Initial decision

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, administration and ministry of health authorisations).

Appeals

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.

 

Reform

43. Are there any proposals to reform real estate law in your jurisdiction?

A set of reforms that will impact urban planning law is currently under way:

  • An ordinance was adopted on 18 July 2013 and completed by a Decree dated 1 October 2013, aiming for better management of litigation in connection with urban planning authorisations and documents.

  • Two ordinances were adopted on 3 October 2013 respectively relating to:

    • the creation of a new integrated procedure that would allow the grouping of administrative authorisations to be granted for housing projects and to accelerate the process of having the relevant urban planning documents made compatible with such projects (where not already the case);

    • the possibility for housing projects not to comply with prescriptions of the applicable land use plan related to construction gauge, maximum floor area ratio or creation of parking spaces; and

    • an ordinance is expected at the end of 2013 related to an improved access to urban planning documents, through the creation of a national website.

  • A bill aimed at promoting access to housing and a renewed urbanism (pour l’Accès au Logement et un Urbanisme Rénové (ALUR)) is currently being debated in Parliament.

A bill relating to commercial leases will be submitted to Parliament at the start of January 2014. It aims to:

  • Limit the type of charges to be borne by the tenant.

  • Grant the tenant a statutory pre-emption right in the case of a sale of the rented premises.

  • Regulate rent increases (up to a maximum of 10% per year).

Lastly, the Government has announced its intention to increase the registration duties applied when transferring real estate assets (see Question 18).

 

Real estate organisations

Ministry for Ecology, Sustainable Development and energy (Ministère de l'écologie, du développement durable et de l'énergie)

Main activities. This website provides useful information on French regulations applicable in the real estate and construction sector as well as on environmental law.

W www.developpement-durable.gouv.fr

Association of Paris notaries (Chambre des Notaires de Paris)

Main activities. This is the regulatory body for notaries in the Paris area.

W www.paris.notaires.fr

Invest in France Agency (AFII)

Main activities. This is a major publication in the construction and real estate sector.

W www.invest-in-france.org/fr

Opérations Immobilières

Main activities. This is a publication in the construction and real estate sector.

W www.operationsimmobilieres.com

DTZ

Main activities. This is a major real estate consultancy firm.

W www.dtz-immo.fr

Conseil en immobilier d'entreprise(CBRE)

Main activities. This is a major real estate consultancy firm in France.

W www.cbre.fr/fr_fr

BNP Paribas Real estate

Main activities. This is a major real estate consultancy firm in France.

W www.realestate.bnpparibas.fr/


Online resources

W www.legifrance.gouv.fr

Legifrance is the French government entity responsible for publishing legal texts online. It provides access, in French, to up-to-date laws and decrees published in the Journal officiel, important court rulings, collective labour agreements, standards issued by European institutions, and international treaties and agreements to which France is party. Translations of French legal texts available on the Legifrance site have no legal force and are provided for informational purposes only.



Contributor details

Jacques Henrot

De Pardieu Brocas Maffei

T +33 1 53 57 71 71
F +33 1 53 57 71 70
E henrot@de-pardieu.com
W www.de-pardieu.com

Qualified. Paris, France, 1979

Areas of practice. Real estate; restructuring and litigation.

Recent transactions. Advising the senior creditors in the Coeur Défense restructuring (sauvegarde).

Emmanuel Fatôme

De Pardieu Brocas Maffei

T +33 1 53 57 71 71
F +33 1 53 57 71 70
E fatome@de-pardieu.com
W www.de-pardieu.com

Qualified. Paris, France, 1992

Areas of practice. Real estate and real estate finance.

Recent transactions

  • Advised on the partnership between Altarea Cogedim and Allianz Real Estate Group in relation to five shopping centres in France operated by Altarea Cogedim.
  • Advised on the partnership between GE Capital and BNP Paribas for the restructuration of the Pont de Sèvres Citylights towers in Boulogne Billancourt, developing a surface area of about 80,000 square metres.
  • Advising on the partnership between Apsys and Sogecap in the context of the “Vill’up” project with respect to the development and operation of a set of shops and leisure activities of 30,600 square metres located within the Cité des Sciences et l’Industrie in Paris (75019), and in connection with the setting-up of the financing of the partnership’s joint structure with Natixis, Caisse d’Epargne d’Ile-de-France and Société Générale.

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