Real Estate 2020 Comparisons

Last Updated April 14, 2020

Contributed By DLA Piper France LLP

Law and Practice

Authors



DLA Piper France LLP is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. Concerning the real estate practice, DLA Piper's global team of 500 lawyers devoted to the real estate sector assists clients throughout the entire life cycle of their investments. DLA Piper clients range from multinational, Global 1000, and Fortune 500 enterprises to emerging companies developing industry-leading technologies. They include more than half of the Fortune 250 and nearly half of the FTSE 350 or their subsidiaries. DLA Piper also advises governments and public sector bodies, throughout its multidisciplinary expertise.

The sources of real estate law are spread over various Codes, as follows including inter alia:

  • the Civil Code for property titles, transfers of ownership and civil leases;
  • the Commercial Code for commercial leases and administrative authorisations ;
  • the Construction Code for the construction or repurposing of buildings; and
  • the Planning Code for planning and local planning regulations

The Emerging Trends In real Estate Europe (ETRE) 2020 report, published by the Urban Land Institute and PwC, puts Paris at the top of the list of European cities in terms of its prospects in 2020. The city benefits from the coming 2024 Olympic Games and the implementation of the Grand Paris Express project, which amounts to EUR36 billion and implies the creation of 68 new stations in Paris current transport system (ie, 200 additional kilometres).

Both of these projects are going to redraw the rental map of Paris as the Grand Paris Express alone represents 40 million square metres of potential development and the emergence of new key centres in the suburbs. It has undoubtedly boosted the image of the French capital which has already proven its attractiveness to foreign funds, such as South Korean funds who acquired in the first nine months of 2019 Tour Europe, Tour Deixia, Tour Majunga and Tour Eqho in La Defense.

The French logistic real estate market also confirmed its strength with an excellent year: 2019 is the second best year of the decade for logistics real estate in France with EUR4.7 billion invested and 3.2 million square metres sold.

The impact of blockchain (and cryptomoney loans) on the French real estate market remains limited as the French market is still driven by land register publication.

However, the influence of proptech in the French real estate transactions is gradually gaining ground for example with increasingly common use of the electronic signature (recently codified under Article 1367 of the French Civil Code) mostly for the signing of commercial leases.

Use of cryptology is likely to have a significant impact on the French real estate market over the next year.

The French emergency law enacted within the framework of the COV­ID-19 epidemic (published on 24 March 2020), and more generally the COVID-19 epidemic itself are likely to have a significant impact on the real estate investment area.

In addition to exclusive ownership and timeshare arrangements, ownership can be divided between a right of usufruct (a right to receive the income and produce from real estate without outright ownership) and a bare ownership (ownership without the right to use and derive profit from the property).

Different legal regimes apply to transfers of title to different kinds of real estate, and there are a number of different tax regimes. There are no specific provisions linked to the industrial, office or retail sectors.

Ownership of real estate must be recorded at the locally competent mortgage office registry. Warranty and indemnity insurance and related insurance over titles tend to become market practice for share deal transactions.

Lawyers and notaries share the responsibility for conducting due diligence investigations, with the former being responsible for tax, social, leasing and insurance matters, and the latter for title, zoning, construction and commercial status.

French law imposes the following obligations and warranties on the seller:

  • an obligation to transfer the property in accordance with their specifications set out in the deed of sale;
  • a guarantee of eviction: the seller must ensure that the buyer does not suffer any nuisance from himself or third parties in relation to rights such as easements or leases relating to the property;
  • a guarantee against hidden defects (vices cachés) that may affect the normal use of the property; and
  • an obligation to deliver technical information on the property.

The obligations are stricter when the buyer is not a real estate professional.

The buyer's remedies in relation to misrepresentations by the seller are limited to a claim for financial compensation or, in some cases, the annulment of the sale.

An investor should have a clear understanding of the commercial lease regime as set out in the French Commercial Code which has been deeply modified following the law No 2014-626 (“Pinel law”) dated 18 June 2014.

These past years. American and English compliance rules have burst into French real estate acquisition practice. The latter integrates more and more in the performance of the obligations of the parties some of the provisions of the United States Foreign Corrupt Practices Act 1977 and the UK Bribery Act of 2010 concerning anti-corruption, sanctions and anti-money laundering compliance – which French equivalent legal provisions would be the law “Loi no 2016-1691 du 9 décembre 2016 relative à la transparence, à la lutte contre la corruption et à la modernisation de la vie économique” (often referred to as “loi Sapin II”).

In accordance with the "polluter pays" principle, a landowner cannot be held responsible for historic contamination of the soil/groundwater. However, if it is established that the landowner has been negligent or has not been a "stranger" in the polluting process, then it is assumed that the landowner could incur liability, although the concept of a "stranger" has not been defined in legislation.

When investing in a site that has pollution problems, it is assumed that an investor can take over the obligation to restore a site after it has been polluted and therefore become liable if the site is not properly restored, but the initial polluter will be liable again if that investor becomes insolvent.

The zoning and planning laws and regulations for each local region, which must be checked before applying for a building permit, are available to the public, and copies of the regulations and local decisions can be obtained for a nominal cost.

Expropriation processes are used to facilitate major public or semi-public development projects and aim to assess what is in the public interest and the amount paid for expropriated properties.

Transfer taxes apply at the rate of 5.09% to 6.40%, depending on the type and location of the relevant property, and VAT applies at the rate of 20%. Moreover, a specific 0.1% contribution applies to the sale of property (asset deal) ("contribution de sécurité immobilière"). Properties built fewer than five years ago are subject to VAT at the rate of 20%.

Special rules apply to renovation works completed during the last five years on properties built more than five years ago.

Asset dealers who buy and sell properties as their normal business benefit from a reduced rate of transfer taxes (0.715%), provided that the properties are resold within five years of the acquisition.

Transfer taxes are typically paid by the buyer although the buyer and seller remain jointly liable for their payment vis-à-vis the French Treasury.

Indirect transfers of real estate, through the transfer of a company holding real estate assets, are subject to transfer tax at the rate of 5% of the price paid for the shares. Transfer tax applies to all companies, irrespective of their legal form, where the market value of the real estate accounts for more than 50% of the total value of the company's assets.

There are no restrictions on foreigners investing in property located in France, except for agricultural-use properties that must be authorised by the local Prefect, and sensitive activities that must be authorised by the Ministry of Economics. Since 12 May 2017, the sale or purchase of property located in France by non-residents, for an amount exceeding EUR15 million, must be reported to the Banque de France, for statistics purposes only.

Acquisitions of commercial real estate in France are commonly financed through a combination of equity and quasi equity and senior debt in the form of a loan or sometimes bonds, which may be completed with junior (subordinated) debt depending on the risk profile of the transaction, the size of the portfolio and the required loan to value ratio.

Financial leasing (crédit-bail) is another common type of debt financing for commercial real estate, where the creditor acquires the real estate asset from either a third party or the debtor and leases it back to the debtor in return for the payment of rent. The debtor has the option to acquire ownership of the real estate asset upon the term of the financial lease agreement.

Lenders generally accept non-recourse financing for the acquisition of commercial real estate assets, whereas investor and/or bank guarantees will usually be required in addition to the standard security package for development projects.

Typically, the lenders will require security that may take the form of a contractual mortgage (hypothèque) or a lender's lien (privilège de prêteur de derniers) over the real estate asset and/or a pledge over the shares of the entity holding such asset which also ensures that no change to the shareholding of the borrower will occur during the period of financing without the consent of the creditors.

The security package will also include security interest over cash flow related to the real estate asset (eg, receivables from rent), as well as cash flow resulting from the financing transaction (intragroup loans, hedging, etc), usually in the form of an assignment of receivables by way of security ("Dailly assignment"), a delegation or a pledge over receivables.

In principle, French banking monopoly rules prohibit institutions other than licensed credit institutions or licensed financial institutions from carrying out banking operations in France on a customary basis and for valuable consideration. However, there are certain exceptions to this general rule, particularly for European long-term investment funds and certain alternative investment funds.

Generally, with the exception of Dailly assignment, there are no restrictions on granting security to foreign lenders and on payments made to foreign lenders under a security document or loan agreement.

Fees paid on the granting of security over real estate assets are proportional to the amount of the secured debt at the time of creation, and depend on the type of the security granted, for which the mortgage (hypothèque) and lender's lien (privilège de prêteur de deniers) differ and are similar as follows:

  • for publicity tax, the mortgage is 0.715% of the secured amount and the lender's lien is between EUR0 and EUR125;
  • for notary’s emoluments, both the mortgage and the lender's lien are 0.45% of the loan amount, plus VAT; and
  • for real estate security contribution, both the mortgage and the lender's lien are 0.05% of the secured amount.

Under French law, a French entity granting any type of security must ensure that it complies, where relevant, with the following rules.

Financial Assistance Rules

A French entity is prohibited from providing assistance (whether by way of a loan, a guarantee or a security) to finance the acquisition of its own shares by a third party.

Corporate Benefit Requirement

Managers of a French entity must ensure that acts and decisions taken on the entity's behalf fall within the entity's corporate benefit (intérêt social), which is distinct from that of its shareholders and other entities.

Corporate Purpose Requirement

As a principle, any act or decision made on behalf of a French entity must be included in its corporate purpose, as stated in its by-laws.

Consultation of the Works Council

French labour law obliges French entities for which the existence of a works council is mandatory (ie, entities with more than 50 employees) to inform and, in some cases, consult the works council in respect of decisions that may have significant consequences for the company’s future.

The principal risk for a creditor if a debtor defaults is if that debtor opens insolvency proceedings, as creditors may not enforce their security interest for the duration of any such proceedings.

In the absence of insolvency proceedings of the French debtor, and provided that all the formalities regarding the mortgage or the lender's lien have been correctly accomplished, the creditors will effectively have priority over the real estate asset. The secured creditors can enforce the mortgage or the lender's lien in the following ways:

  • by way of application to the court for an order to seize the property (commandement aux fins de saisie); following the proceedings, the property will be sold by way of a public auction at a hearing before a civil court (Tribunal Judiciaire);
  • by way of application to the court for the attribution by court order of the property to the beneficiary of the mortgage or the lender's lien; or
  • if so provided in the security deed, by way of appropriation (pacte commissoire), in which case the creditor becomes the owner of the real estate asset and the value of the real estate asset shall be determined on the day of the transfer by an expert designated by the parties, or judicially if no agreement can be reached.

If the loan agreement has not been contracted in the form of a notarial deed, or if the obligation to pay under such loan agreement has not been reiterated in the mortgage deed, such mortgage will not constitute an enforceable title. This implies that, prior to the enforcement of such mortgage, the secured creditors will have to obtain a court judgment stating that their receivable is certain, of a fixed amount and payable.

A creditor may agree to contractually subordinate the existing secured debt to newly created debt by entering into a subordination or intercreditor agreement.

In addition, in the event of insolvency proceedings of the debtor, the existing secured debt will be legally subordinated to super-privileged debts and privileged debts, ie, new debts qualified as "useful" (contracted for the purpose of the running of the insolvency proceedings or the observation period, or as consideration for services provided to the debtor in relation to its business activity) and contracted regularly after the opening of the insolvency proceeding.

A lender holding security over a real estate asset will not be liable for environmental damage, provided it does not itself cause or knowingly permit damage to the environment.

In the event of enforcement of the security over a real estate asset by way of appropriation, the lenders may incur a risk of liability under environmental laws, since in some circumstances owners of a real estate asset can be liable for environmental damage on such asset or emanating from it, even if they did not cause the damage.

In principle, a validly granted and perfected security interest may not be made void in the event of the insolvency of the borrower.

However, if insolvency proceedings are opened against a debtor, most of the security interests will be inefficient for the duration of such insolvency proceedings, creditors whose receivables are not privileged by way of law being prohibited from commencing or continuing any individual legal actions against such debtor.

Moreover, any new security granted by a debtor during the "hardening period" (maximum 18 months from the date determined by the court as being the date of suspension of payments (date de cessation des paiements) and ending on the date of the opening of the insolvency proceedings) to secure pre-existing debts is deemed null and void.

Real estate finance transactions in France are typically denominated in euro and therefore referring to the Euro Interbank Offer Rate (Euribor). The EU Benchmarks Regulation (BMR), agreed and published in the EU Official Journal in 2016 as Regulation (EU) 2016/1011, wanted the Euribor to be replaced by the start of 2020 but this deadline has been extended to 1 January 2022.

As from this date, a new generation of “risk-free” rates will replace the existing rates including the Euribor that will be replaced by an “hybrid” Euribor. The new “risk-free” rates will be determined daily on the basis of objective and verifiable market data whereas the existing rates are currently determined following declarations by reference banks.

Most national regulations regarding zoning and planning are contained in the French Planning Code (Code de l’urbanisme) and local regulations are usually prescribed by the relevant municipality and are covered in local development plans (Plans Locaux d’Urbanisme). Typical restrictions include those on height, location, parking spaces, exterior aspects, green areas, etc.

Public law controls whether a landowner may construct a new building or refurbish an existing building by means of prior planning authorisation, usually a building permit.

Other types of authorisation (eg, declaration of works, authorisation to create commercial space, authorisation for high-rise buildings) may be required, depending on factors such as the location of the building, its future intended use and the extent of any contemplated works.

Overall, responsibility for regulating the development and designated use of the land lies largely with local authorities, as the mayor of the municipality is almost always responsible for issuing building permits (except in certain areas or projects where the person responsible for issuing building permits can be the Prefect).

The process for obtaining an authorisation involves filing a building permit or declaration of works application with the municipality where the building is located.

The time period for the instruction of the application file will depend on the characteristics of the project and its location. The usual time period is one month for the declaration of work, and three months for the building permit (such time period can be up to 12 months).

For major projects, a public consultation may have to be carried out to obtain the opinion of the public.

Building permits are valid for a period of three years, during which time the works must have started (although extensions of time may be granted by the authorities). Furthermore, once started, the works must not cease for any period longer than a year.

Once granted, the building permit or the declaration of works can, for a limited period of time, be withdrawn by the municipality, or be challenged by either the Prefect or third parties (such as neighbours), provided they can evidence an interest to act.

Such challenge can take place in front of either the administrative authority who issued the decision (recours gracieux) or the administrative courts (tribunaux administratifs).

Several agreements may be necessary, depending on the nature and location of the project. For instance, for construction projects located in a Zone d’Aménagement Concertée area, it is often necessary to purchase construction rights in addition to the land.

The owner (maître d'ouvrage) may have to make a financial contribution to the infrastructure in order to support new development.

See 4.3 Regulatory Authorities and 4.5 Right of Appeal Against an Authority's Decision.

Types of corporate vehicle are as follows:

  • the SCI (société civile immobilière) – real estate civil company;
  • the SNC (société en nom collectif) – partnership;
  • the SARL (société à responsabilité limitée) – limited liability company;
  • the SA (société anonyme) – stock corporation;
  • the SAS (société par action simplifiée) – simplified stock corporation;
  • the SCPI (société civile de placement immobilier) – real estate civil investment company; and
  • the SIIC (société d’investissement immobilier cotée) – listed real estate investment company.

SCI

An SCI is a real estate civil company in which the shareholders are liable indefinitely for the debts of the company in proportion to the shares they hold in the share capital.

SNC

An SNC is a commercial partnership, in which the partners are deemed to be businessmen (commerçant) and are jointly and severally liable for the debts of the partnership.

SARL

An SARL is a limited liability company in which the shareholders' liability is limited to the amount of their investment in the company.

SA

An SA is a stock corporation where the capital is divided into stocks, and the shareholders' liability is limited to the amount of their investment in the company.

SAS

An SAS is a simplified stock corporation and may be formed by a private individual or a corporation as a sole shareholder. As with an SA, the liability of the shareholders is limited to the amount of their investment.

SCPI

An SCPI is a real estate civil investment company, whose purpose is to acquire and hold rental property. These companies are entitled to sell their shares to the public as soon as the total value of the shares held by the founding shareholders is at least equal to the amount of the minimum share capital, and if they provide evidence that a bank guarantee is in place as approved by the French stock market regulator (Autorité des Marchés Financiers). At least 15% of the share capital must have been issued to the public within one year of the first public offering.

SIIC

An SIIC is a listed real estate investment company allowing for special tax exemption arrangements whose main purpose is the acquisition or construction of property for rental purposes, or which has direct or indirect ownership of stakes in legal entities with identical corporate purposes legally classified as partnerships or subject to corporate income tax.

The minimum capital required to set up each type of entity is as follows:

  • SCI., EUR1;
  • SNC, EUR1;
  • SARL, EUR1;
  • SA, EUR37,000;
  • SAS, EUR1;
  • SCPI, EUR760,000 (each share must have a minimum face value of EUR150); and
  • SIIC, EUR15 million.

The applicable governance requirements for entities are as follows.

SCI

The company is managed by at least one general manager, who may be an individual or a legal entity appointed in the by-laws (a statutory manager) or by the shareholders.

SNC

The partnership is managed by at least one general manager, who may be an individual or a legal entity appointed in the by-laws (a statutory manager) or by the shareholders.

SARL

The company is managed by at least one individual general manager, who can be named in the by-laws (a statutory manager) or properly appointed subsequently. Additional general managers can also be named in the by-laws (statutory managers) or appointed by a decision of the shareholders. Only individuals are likely to be appointed as manager.

For the SCI, the SNC or the SARL, the general manager can be a shareholder or a third party.

SA

There are two possible structures for an SA.

Société anonyme with a board of directors

The board of directors must be composed of between three and 18 members appointed through the by-laws when the company is set up, and subsequently by the shareholders. The chairman of the board of directors is appointed by the board, amongst its members. The board must also appoint a chief executive to lead the management of the company.

Société anonyme with an executive board and a supervisory board

The executive board typically has between two and five members, all individuals. If the company is listed on a French stock market, this number may be increased to seven.

If the share capital of the company is less than EUR150,000, the executive board can be replaced by a single chief executive. Members of the executive board are not required to be shareholders of the company. The executive board manages the company.

The supervisory board must contain at least three but no more than 18 members.

SAS

By-laws can grant considerable flexibility on corporate governance. The company is typically managed by a president, who can be either an individual or a legal entity. The by-laws can provide for the president to be assisted by one or more executives, or by one or more deputy executives, and can also provide for the appointment of a joint management body.

SCPI

An SCPI is managed by a management company, which must be either a stock corporation with a minimum share capital of at least EUR125,000 or a partnership of which at least one partner is a stock corporation with at least this amount of share capital.

The management company must:

  • be approved by the French Securities and Exchange Commission (Autorité des Marchés Financiers);
  • present sufficient guarantees regarding its organisation, its technical and financial strength, and the suitability and experience of its managers;
  • take steps to secure the transactions it enters into; and
  • have sufficient financial means to conduct its business and meet its liabilities.

The management company is assisted by a supervisory board comprising at least seven shareholders, who are appointed at a shareholders' meeting.

SIIC

An SIIC is managed by a management company, which must be either a stock corporation with a minimum share capital of at least EUR125,000 or a partnership of which at least one member is a stock corporation with at least this amount of share capital.

The management company must:

  • be approved by the French Securities and Exchange Commission (Autorité des Marchés Financiers);
  • present sufficient guarantees regarding its organisation, its technical and financial strength, and the suitability and experience of its managers;
  • take steps to secure the transactions it enters into; and
  • have sufficient financial means to conduct its business and meet its liabilities.

The management company is assisted by a supervisory board comprising at least seven shareholders, who are appointed at a shareholders' meeting.

Annual entity maintenance and accounting compliance costs for each entity are the following.

SCI

EUR12,000.

SNC

EUR12,000 plus the cost of statutory auditors (EUR10,000 to EUR20,000), although the latter are only required when two of the following three thresholds relating to capital, turnover and the number of employees are exceeded:

  • the total value of the assets on the balance sheet is EUR1.5 million or more;
  • the turnover (exclusive of tax) is EUR3.1 million or more; or
  • the average number of employees is 50 or more.

SARL

EUR12,000 plus the cost of statutory auditors (EUR10,000 to EUR20,000), although the latter are only required when two of the following three thresholds relating to capital, turnover and the number of employees are exceeded:

  • the total value of the assets on the balance sheet is EUR1.5 million or more;
  • the turnover (exclusive of tax) is EUR3.1 million or more; or
  • the average number of employees is 50 or more.

SA

EUR20,000 plus the cost of statutory auditors (EUR20,000 to EUR25,000).

SAS

EUR20,000 plus the cost of statutory auditors (EUR20,000 to EUR25,000), if applicable.

SCPI

EUR12,000 plus the cost of internal auditors (EUR10,000 to EUR20,000).

SIIC

EUR20,000 plus the cost of statutory auditors (EUR20,000 to EUR25,000).

Commercial Leases

Commercial leases are granted for a minimum term of nine years, and are subject to the mandatory legal regime laid down in the French Commercial Code. Subject to specific conditions, a tenant has the right to terminate the lease at the end of each three-year period, and also has the right to renew the lease.

Overriding Leases

Overriding leases (or short-term leases) have a duration of up to three years. The tenant gives up the protection of the mandatory regime applicable to commercial leases. Any renewal of the lease must be on the terms of a normal commercial lease.

Professional Leases

Professional leases have a minimum duration of six years and are for professional activities only (to the exclusion of commercial, craft, industrial and agricultural activities). The lease can be terminated by the tenant at any time, by giving six months' notice.

Regular commercial leases are historically tailored for the purpose of merchant activity, but are also regularly used for office or warehouse premises, for instance.

In any event, the applicable rules of the French Commercial Code are mainly designed to protect the tenant vis-à-vis the landlord.

Short-term leases can be seen as a first step on the path to the granting of a commercial lease. Under such an agreement, the tenant is able to start its business operation for a limited period of time (less than three years), while the landlord is not bound for more than such duration.

The statute governing commercial leases is mostly designed to protect the tenant’s interests.

Even though many items are freely negotiable, important terms and conditions are subject to regulation, and any derogation from said regulation is forbidden, or at least limited.

The most common relevant items are as follows:

  • the duration of a regular commercial lease shall be at least nine years;
  • allocation of charges – the landlord shall provide the tenant with a limitative list of repayable service charges;
  • allocation of works – certain types of work, such as structural work, may not be recharged to tenants;
  • the assignment of the lease by the tenant may be prohibited unless the lease is assigned to the purchaser of the tenant's business;
  • subletting is prohibited, unless otherwise provided;
  • the tenant is entitled to renew its lease, which the landlord cannot deny unless he pays an eviction indemnity (most of the time assessed by an expert before the court); and
  • termination clause – its triggering is subject to a specific process.

The minimum term for a commercial lease is nine years (leases are rarely granted for more than twelve years due to tax implications – see 6.20 Registration Requirements). Unless stipulated otherwise, the tenant has the right to terminate the lease at the end of each three-year period.

Under the French Civil Code, expenses relating to the maintenance of the premises and major repairs are payable by the landlord if they relate to structural works listed under article 606 of the French Civil Code (ie, those pertaining to load-bearing walls, vaults, entire roofs and beams).

An extensive and precise list of works completed during the last three years and those to be completed during the three coming years must be drawn up and communicated to the tenant by the landlord upon signing the lease and thereafter updated every three years.

Rent can be revised every three years at the request of either party, even if a formal rent review is not provided for in the lease.

Parties may also agree on an automatic yearly rent revision.  The index chosen by the parties must have some connection with the activity carried out by one of the parties or with the purpose of the lease.

Variable rents, although permitted by law, are not common in leases for offices, but are a common feature of hotel and retail leases.

The parties may freely determine the rent of the renewed lease. Landlord typically aim to fix the new rent of the lease at the then applicable rental value of the premises (such rental value may be capped in certain specific cases). If the parties disagree on the rent of the renewed lease, whether or not the rent cap is excluded, either party may apply to the French court so as to have the current rental value of the rented premises assessed.

In most cases, the judge appoints a judicial expert with the duty to assess the then current rental value of the rented premises and as the case may be, to determine whether rent capping is applicable or not.

The landlord can elect to subject the rent to VAT (at 20%) under certain conditions. VAT can be recovered (totally or partially) by the tenant if it uses the building for the purposes of a VATable business.

If VAT does not apply to the rent, then CRL (Contribution sur les Revenus Locatifs – Contribution from Rental Revenues) does, at the rate of 2.5%. CRL is not recoverable but is a tax-deductible expense.

No specific cost to be paid by the tenant who however often wires the amount of the rental deposit, if any, on the execution date of the lease.

If there is more than one tenant, the expenses are shared according to the terms of the relevant leases and on a prorate basis.

See 6.9 Payment of Maintenance and Repair of Communal Areas.

The landlord must take out an insurance policy to cover risks associated with premises occupied under a commercial lease, while the tenant must insure risks associated with its own activities on the premises.

The insurance policy usually covers the risk of fire, explosion and theft. However, it is common to include an express clause in the lease agreement whereby the tenant to reimburse the owner for the cost of insuring the premises as part of the service charges.

Leases usually specify the permitted use, which is narrowly defined, and any changes require the landlord's consent and/or administrative permissions.

Any works must have prior consent from the landlord if they will have an impact on the structure of the property (walls, floors and roof) or if they will alter the premises' character or legally permitted use.

There is a specific law that governs residential leases, which are normally granted for terms of three years and require a cash deposit corresponding to one month's rent.

Offices, retail space and hotels are usually let under commercial leases, with the level of rent determined by reference to the market value of similar premises.

Professional premises are usually let under professional leases with a duration of six years.

Under an insolvency proceeding, the administrator appointed by the court can decide whether to terminate or continue the lease. This option is a public policy rule, and the lease cannot provide for an automatic termination when the tenant is subject to an insolvency proceeding.

In the continuation of the lease, rents due for the period after the opening of the insolvency proceeding are to be paid on time, failing which the landlord can ask for the lease termination as usual.

The opening of an insolvency proceeding shall freeze the triggering of the termination clause based on unpaid rent and charges, as long as a court did not acknowledge the effect of the termination clause.

A security deposit usually equals to one rent instalment excluding VAT, but can bear interest to the benefit of the lessee for sums exceeding two rent terms pursuant to Article L 145-40 of the French Civil Code.

Cash security deposits are increasingly being replaced by bank guarantees and/or corporate guarantees (which overall guaranteed amount is not framed by the aforesaid article L 145-40 of the French Civil Code).

Subject to certain exceptions, the tenant under a commercial lease has a right to renew the lease for a nine-year term and the landlord must pay compensation (indemnité d'éviction) to the tenant for a refusal to renew, unless the refusal is due to serious and legitimate reasons, or in certain other circumstances provided for by law.

The assignment of the leasehold right may be framed and/or prohibited by the lease’s stipulations and the assignment of the business which includes the leasehold right may not be contractually prohibited (it may only be framed under certain specific conditions).

Article L 145-31 of the French commercial code states that, unless the lease provides to the contrary, any sub-letting whether of the whole or a part of the leased premises, is prohibited. Subletting authorisation are typically granted for parent companies and/or third party companies having an equivalent financial healthiness.

The landlord under commercial leases may terminate the lease at the end of each three-year period based on certain limited grounds, such as:

  • to build or rebuild the existing building;
  • to reassign the ancillary dwelling to this use; or
  • to carry out works imposed or authorised for a property restoration operation.

In principle, the landlord should pay an eviction indemnity to the tenant (see 6.21 Forced Eviction).

In addition, commercial leases usually provide for an automatic termination clause in favour of the landlord in the event of the tenant breaching its obligations under the lease.

The tenant is in principle entitled to break options at the end of each three-year period, and the parties may agree on additional break options in favour of the tenant.

If it is not mandatory to register commercial leases in the Trade and Companies Register, all leases with a term exceeding twelve years shall however be executed in a notarised form and published at the French land registry. Such publication is required for the rights under the lease to be enforceable against third parties. It gives rise to the payment of the notary fees and the land registry tax, to be borne by the tenant (it being specified that the lessor is, however, jointly liable for the payment of such tax), equal to approximately 0.715% of the total amount of the rent and service charges due over the whole duration of the lease (within the limit of 20 years).

In some cases, the landlord may force a tenant to leave at the end of the three-year period, but will have to pay compensation (indemnité d’éviction) unless the refusal to renew is due to circumstances provided for by law.

If the tenant defaults on the rent, the landlord can force the tenant to vacate the building. Associated legal proceedings can take around six months or more.

In addition, if the lease contains a termination clause, the landlord may terminate the lease prior to the date agreed if the tenant fails to comply with the terms and conditions of the lease. The implementation of the automatic termination clause requires a formal notice to address the breach to be served to the tenant by a bailiff. Should the tenant fail to address the breach within one month, the landlord is entitled to initiate proceedings to obtain the acknowledgment by the court of the termination of the lease.

Where a compulsory purchase order takes effect, the lease is automatically terminated and the tenant is paid compensation by the purchaser.

There are two main types of construction contract under French law:

  • fixed price construction contracts (marché à prix forfaitaire), where the contractor carries out construction works (as detailed in documents attached to the agreement) for a fixed price agreed prior to the execution of the works; and
  • quantity construction contracts (marché au métré), where the contractor carries out construction works for a price that depends on the quantities used for the works.

The owner can enter into:

  • separate contracts with the design team and the contractor(s). In such cases, responsibility for the design studies will mostly be placed on the design team, while the contractor(s) will be liable for the works;
  • a single “design and build” contract (contrat de contractant général) with a contractor which will also take responsibility for the design; and
  • a real estate development agreement (contrat de promotion immobilière), whereby a developer – as agent – will appoint the design team and the contractors on behalf of the owner and be liable for both the design and the works.

Contractual devices that are commonly used for managing construction risks are:

Retention Provisions

The owner is entitled to retain an amount not exceeding 5% of the entire price of the contractor agreement in order to guarantee the remediation of any defects arising on the date of acceptance of the works. The contractor has the right to replace this retainer by a bank suretyship (cautionnement bancaire).

Indemnity Provisions

Although such provisions are enforceable in principle, a court may revise the amount of the indemnity if it is deemed to be obviously excessive or insufficient.

Contract Provisions Regarding Penalties for Delay

Delay penalties are calculated by multiplying the contract price by the rate of delay damages, and are payable unless the delay was due to force majeure/unforeseen event, or was the fault of the owner.

Mandatory Set of Warranties Covering Damages to the Construction

  • a one-year warranty from the date of acceptance of the works (garantie de parfait achèvement), whereby the owner can claim for the repair of all defects that were not apparent at the date of the acceptance of the works;
  • for two years after the acceptance of the works, the owner can claim for the repair of damages to equipment of the buildings (garantie biennale); and
  • for ten years after the acceptance of the works, the owner can claim for the repair of structural damages caused to the building or where the ability to use the building is jeopardised (garantie décennale).

Construction risks are also covered through specific/mandatory insurance.

Construction contracts provide for damages for delay.

As mentioned, an owner is entitled to monetary compensation for delays in achieving milestones and completion dates, through delay penalties. Parties may even provide for termination of the contract by the owner for material delay.

Additional forms of security are often requested by owners in major projects such as performance bonds issued by banks or a contractor's parent company. If an advance payment is made to the contractor, owners also often request a corporate or bank guarantee to secure the repayment of such advance payment in case of termination of the contract.

In most contractor agreements, the owner shall either provide for a direct payment by the bank to the contractor in the event a loan was secured by the owner to finance the construction works, or provide the contractor with a joint bank guarantee (or any other type of guarantee agreed) equal to the entire price of the contract.

These provisions are mandatory, otherwise the contractor – if unpaid – can legally suspend the construction works.

Architects and contractors benefit from a legal lien (privilège) over the building.

A building is deemed to be completed once the works and associated essential equipment can be operated in compliance with the agreed use. Parties are free to provide for any other definition of completion, except for residential buildings subject to mandatory requirements.

From a town planning perspective, the owner has the obligation to file a declaration of completion and compliance of the works. Upon receiving this declaration, the administrative authorities have from three to five months to verify if the works are compliant with the administrative authorisation obtained. Then, the owner can request a certificate of non-opposition to the compliance of the works.

Specific administrative authorisations may be necessary in order to be able to use/operate the building in some limited cases (eg, high-rise buildings and premises to be open to the public).

Some of the rules applicable for VAT are described below:

  • Transactions involving non-developable land (terrain non-constructible) are exempt from VAT (unless an election for VAT to be payable is filed, in which case the VAT is due on the total purchase price).
  • Transactions involving developable land (terrain à bâtir) are subject to VAT (i) on the total purchase price if the VAT incurred by the seller on the initial acquisition was deducted or (ii) on the margin if the VAT incurred by the seller on the initial acquisition was not deducted.
  • Transactions involving new buildings (ie, acquired less than five years after its completion from a VAT-liable entity acting as such and also special rules apply to renovation works completed during the last five years on properties built more than five ago) for VAT purposes are subject to VAT on the total purchase price.
  • Transactions involving other properties are exempt from VAT (unless an election for VAT to be payable is filed).

If the seller is not registered for French VAT, the transaction is not subject to VAT.

Transfer Taxes

Transfer taxes usually apply at the rate of 5.09& to 6.40% on the purchase and sale of real estate as an asset, subject to the following comments.

  • Transactions involving “new” buildings or transactions whereby the buyer commits to re selling the property within a five year period are subject to a 0.715% transfer tax.
  • If the buyer commits to erect a building within a four year period and complies with such undertaking, a fixed registration duty of EUR125 will apply.

Moreover, a specific 0.1% contribution applies to the sale of property (asset deal) (contribution de sécurité immobilière).

For sales relating to disposals of office premises, retail premises and storage premises in Île-de-France, an additional tax of 0.6% of the sale price applies if the disposals are not subject to VAT.

Indirect transfers of real estate, through the transfer of a company holding real estate assets, are subject to transfer tax at the rate of 5% of the price paid for the shares. Transfer tax applies to all companies, irrespective of their legal form, where the market value of the real estate accounts for more than 50% of the total value of the company's assets.

Transfer taxes are typically paid by the buyer although the buyer and seller remain jointly liable for their payment vis-à-vis the French Treasury.

The sale of shares in a company owning real estate assets (where the value of the real estate represents more than 50% of the company's assets) is subject to a transfer tax of 5% on the price paid for the shares.

If the price of the shares reflects the fair market value of the real estate assets minus the liabilities of the company, the transfer taxes are, in principle, lower than those due on the sale of the real estate assets.

Property tax (taxe foncière) is payable for the whole calendar year by the owner of a property asset as of January 1st of each calendar year.

Housing tax (taxe d'habitation) is payable by the occupier of the property as of January 1st.

Office tax payable yearly by the owner (as of January 1st) of premises used as offices or for commercial or storage purposes located in Paris and the surrounding areas.

Office development tax is payable by the owner of premises for development of office premises in the Paris area, whose rates vary from EUR0 to EUR417.5 per square metre depending on the district in which the office is located.

Tax on unoccupied premises is payable by the owner of any premises that have been unoccupied for at least one year (as of January 1st) and located in certain areas

Local development tax is payable in relation to building, rebuilding or extension projects for all types of premises.

A 3% tax applies on the market value of real estate properties and rights owned in France, directly or indirectly, by any French or foreign legal entity, regardless of whether the entity has a legal personality. The tax is subject to various exemptions linked to the quality of investors or resulting from the disclosure of certain information regarding the ultimate investors.

Rental Income

Owning a property in France does not itself constitute a permanent establishment.

If a permanent establishment exists, current income is fully taxable in France at the rate of 28% except for large companies whose turnover exceeds EUR250 million in 2020 for which the applicable rate remains at 31% for the portion of taxable income exceeding EUR500,000.

Foreign owners are generally subject to French tax on rental income either under the individual income tax regime at a progressive rate ranging from a minimum of 30% up to 45% (increased by additional contributions), or under the corporate income tax regime at the standard rate of 28% (increased by additional contributions.

Deductions

Several limitations on interest deductibility may apply, including a general limitation regarding the net financial charges which may be deducted up to the higher of the following two amounts:

  • EUR3 million; and
  • 30% of the adjusted taxable income, before offsetting of tax losses.

Lower thresholds may apply when a company is thin capitalised.

No withholding tax on interest expenses applies in France, except when they are paid in a non-co-operative state, in which case a 75% withholding tax is triggered.

Finally, the Finance Act for 2020 has transposed into French law the provisions regarding hybrid mismatches of Directive (EU) 2017/952 of 29 May 2017 (ATAD II). These provisions aim at neutralising the tax effects of hybrid mismatch arrangements, which exploit differences in the tax treatment of an entity or instrument under the laws of two or more EU Member States.

Dividends

Resident individuals

A flat tax (PFU) is set to 30% (12.8% of individual income tax and 17.2% of social contributions) and applies to dividends distributed as from 1 January 2018.

Under certain conditions, individual taxpayers may still elect for dividends to be taxed at the progressive income tax rate if lower to the PFU.

Non-resident individuals

Withholding tax rates depend on the applicable tax treaties. The French standard withholding tax rate on dividend distributions to non-resident individuals is aligned to the PFU rate (12.8%). The withholding tax rate is 75% for dividends paid on a bank account located in a non-co-operative state within the meaning of the French tax code, or paid or accrued to persons established or domiciled in such a non-co-operative state.

Resident companies

Unless the participation exemption on dividends applies, dividends arising in France paid to corporate shareholders are included in taxable income for corporate income tax purposes.

Under the French participation exemption regime, 95% (99% in certain circumstances) of the dividend is tax exempt.

Non-resident companies

Dividends arising in France distributed to non-resident shareholders are subject to a final withholding tax at a rate of 28%, subject to the provisions of applicable tax treaties. This rate will decrease to 26.5% and to 25% for dividend distributions as from 1 January 2021 and 1 January 2022 respectively.

Subject to certain conditions, the withholding tax is reduced to nil for dividends paid by a French resident company to a qualifying EU parent company if the parent company holds at least a 10% shareholding in a French subsidiary for at least two years (or 5% when the EU parent company cannot offset the withholding tax in its country of residency). The rate is 75% for dividends paid on a bank account located in a non-co-operative state, or paid or accrued to persons established or domiciled in such a non-co-operative state.

Capital gains

Other than usual profits derived by asset dealers, profits on the sale of a French property by a non-resident company are subject to a 28% tax in France (the effective rate is 28.92% for corporate taxpayers whose turnover exceeds EUR7,630,000), although certain treaty exemptions may apply.

Profits on the sale of a property by an individual – resident or non-resident – are subject to a 19% tax, plus 17.2% in social contributions, subject to the provisions of tax treaties as regards non-resident individuals.

Furthermore, a progressive 2% to 6% tax applies on real estate capital gains on sales of property. This tax applies indifferently on real estate rights or assets, other than building lands.

Allowances increasing with the holding period can be deducted from the taxable gain, leading to a full exemption of individual income tax after 22 years of holding and social contributions after 30 years of holding.

Real estate wealth tax (IFI)

IFI is assessed on the real estate owned directly or indirectly by the taxpayer via companies or collective investment vehicles when it is not allocated to the business of the relevant entities to the extent that the value of the taxpayer's real estate net assets exceeds EUR1.3 million.

A limited number of exemptions applies.

Subject to tax treaties, non-residents holding corporate securities will henceforth be liable to the IFI for the part of the value of such shares corresponding to real estate.

Depreciation

If the owner of the property is a company subject to French corporate income tax, depreciation is allowed (on a straight-line basis) on the acquisition value of the buildings but not the land (generally at rates between 2% and 5% per year for commercial buildings).

DLA Piper France LLP

27, rue Laffitte
75009 PARIS
France

+33 0 140 15 24 00

+33 0 140 15 24 01

antoine.mercier@dlapiper.com www.dlapiper.com/en/us/locations/paris/
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Law and Practice in France

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DLA Piper France LLP is a global law firm with lawyers located in more than 40 countries throughout the Americas, Europe, the Middle East, Africa and Asia Pacific. Concerning the real estate practice, DLA Piper's global team of 500 lawyers devoted to the real estate sector assists clients throughout the entire life cycle of their investments. DLA Piper clients range from multinational, Global 1000, and Fortune 500 enterprises to emerging companies developing industry-leading technologies. They include more than half of the Fortune 250 and nearly half of the FTSE 350 or their subsidiaries. DLA Piper also advises governments and public sector bodies, throughout its multidisciplinary expertise.