Real Estate 2024 Comparisons

The sources of real estate law are spread over various codes, including:

• 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 relatively unstable macroeconomic climate of the past 12 months (armed conflicts, major elections to come, instability of the interest rates, rise of inflation) has certainly resulted in a year of contrasts for the French real estate market.

In 2023, the overall volume of real estate transactions was circa EUR15 billion, a significant decline of about 53% compared to 2022 – and to the yearly average volume of investment over the past ten years. France is not an isolated case, with the European market also falling 53%.

Large-scale transactions have been relatively scarce, with fewer than 25 deals individually worth more than EUR100 million recorded, accounting for just a third of the volumes invested.

The breakdown of overall investment volume by class of assets was broadly in line with the past few years, with a steady predominance of offices (44%) followed by warehouses (21%), retail (21%) and hotels (14%).

Value-add strategies have been a significant trend over recent months, and increased approximately 30% in 2023. Real estate operators  were also fairly active in the year, with a 122% increase in sale and lease-back transactions compared to 2022.

Foreign investors have been less active this year, their investments representing just 27% of investment volume in 2023 (compared with 40% over the past few years).

The market has shown quite encouraging indicators in recent months as interest rates have stabilised and even fallen. Inflation is also steadier. Potential investors are therefore gaining much more visibility.

Environmental factors have an increasing impact on the obligations borne by all French real estate market participants. Recent meaningful examples of this trend include:

• the law relating to the acceleration of the production of renewable energies (loi relative à l'accélération de la production d'énergies renouvelables) of 10 March 2023, which aims to develop renewable energies, in particular solar energy by requiring installation of solar panels on half the surface area of parking lots larger than 1,500 square metres from July 2026 or July 2028 depending on the type of management and surface area; further, among other obligations, certain buildings must also be equipped with renewable energy production systems or by vegetation systems with progressively increasing minimum coverage (however, the law provides for specific exceptions to be specified by decree);
• the “Net Zero Artificialisation ” (Zéro Artificialisation Nette, ZAN) law of 20 July 2023 to facilitate the implementation of objectives to combat land artificialisation and strengthen support for local elected officials to progressively achieve net zero artificialisation of land by 2050; 
• the “Green Industry” law of 23 October 2023 to finance green industry, accelerate industrial start-ups, rehabilitate brownfield sites and in favour of green public procurement; this  law covers innovations, such as the creation of major urban planning operations in which (i) pre-emption rights may be included when implemented in areas of economic activity; (ii) there may be an exemption from the requirement to obtain a business license for consolidations of stores; and (iii) derogations to the applicable urban planning documentation are possible; and
• the decree of 23 July 2019 (often referred to as the “décret tertiaire”) according to which all existing buildings for tertiary use with a floor area exceeding 1,000 square metres must implement measures to achieve a level of energy consumption reduced by 40% in 2030, 50% in 2040 and 60% in 2050; such rules and objectives have a direct impact on the negotiation of commercial lease agreements since the landlords and their tenants must implement relevant measures enabling the leased premises to achieve the aforesaid energy consumption objectives.

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

Varying legal regimes apply to transfers of title in 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. Institutional non-domestic investors have shown a growing appetite for title insurance policies, although their use remains essentially limited to specific identified risks.

Lawyers and notaries share the responsibility for conducting due diligence investigations, with the former handling tax, social, leasing and insurance matters, and the latter 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 the 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 the seller or third parties in relation to rights such as easements or leases relating to the property;
• a guarantee against hidden defects (vices cachés), which 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.

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

• an obligation to transfer the property in accordance with the 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 the seller or third parties in relation to rights such as easements or leases relating to the property;
• a guarantee against hidden defects (vices cachés), which 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.

As a general rule, the buyer has a period of five years from the date of the sale to file a claim, with the exception of, notably: (i) the action for hidden defects (vices cachés), which is limited to a period of two years from the discovery of the defect; and (ii) the action for a guarantee of eviction, which can be subject to no prescription at all.

Warranty and indemnity insurance policies (often tailored to and/or supplemented by title insurance policies in order to capture specific identified risks possibly affecting, inter alia, the validity of the property title) are now implemented in the vast majority of complex real estate (share deal) transactions. The insurer’s (and the seller’s) liability with respect to representations and warranties are typically limited to two to five years. In the case of implementation of a warranty and indemnity insurance, the seller’s liability is often capped at EUR1 (except, sometimes, for “fundamental warranties” – ie, relating to the title over the asset and/or over the target entity’s shares).

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

Over recent years, US and English compliance rules have had a major impact on French real estate acquisition practice, with increased integration of 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 into the obligations carried out by the parties. The equivalent French legal provision would be Law No 2016-1691 of 9 December 2016 on transparency, the fight against corruption and the modernisation of economic life (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, known as “ 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 “knowing permitter” in the polluting process, then it is assumed that the landowner could incur liability, although the concept of a “knowing permitter” 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 the site after it has been polluted, and therefore becomes liable if the site is not properly restored. However, the initial polluter will be liable again if the investor becomes insolvent.

The zoning and planning laws and regulations for each local region are available to the public and must be checked before applying for a building permit. 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. They assess what is in the public interest and the amount that should be paid for expropriated properties.

Transfer taxes usually apply at the rate of 5.09% to 5.8% on the purchase and sale of a real estate asset that is not “new” (ie, that has been built for more than five years), subject to various conditions:

• 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 this undertaking, a fixed registration duty of EUR125 applies
• a specific 0.1% contribution applies to the sale of property/asset deal (contribution de sécurité immobilière).
• for the disposal of office premises, retail premises and storage premises in Île-de-France, the Paris region, an additional tax of 0.6% of the sale price applies if the disposal is 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 to the French Treasury.

There are no restrictions on foreigners investing in property located in France, except for agricultural 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 payment of rent. The debtor has the option to acquire ownership of the real estate asset at the end of the term of the financial lease agreement.

Investor and/or Bank Guarantees

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.

Contractual Mortgage or Lender's Lien

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.

Assignment of Receivables

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.

Possible Changes to French Security Law

Note that a reform of the French security law is under discussion containing several proposals which, if implemented, could have an impact on the security package described above (among others, modifications regarding personal guarantees and mortgage security are being considered, as well as a new civil assignment of receivables by way of security, as an alternative to the Dailly assignment by way of security).

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 a 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 security granted (mortgage or lender’s lien) as follows:

• For publicity tax, the mortgage is 0.715% of the secured amount and the lender’s lien is between EUR0 and EUR25.
• For the notary’s emoluments, both the mortgage and the lender’s lien are EUR18.87 of the loan amount, plus VAT.
• For real estate security contributions, 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 security) in financing 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 depends on whether that debtor opens insolvency proceedings, as creditors may not enforce their security interest for the duration of 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 will 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, the mortgage will not constitute an enforceable title. This implies that, prior to the enforcement of the 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 proceedings.

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 of such asset or an emanation from it, even if they did not cause the damage.

In principle, a validly granted and perfected security interest may not be made void if the borrower becomes insolvent.

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

Moreover, any new security granted by a debtor during the “hardening period” (période suspecte) – a maximum of 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.

See 3.4 Taxes or Fees to the Granting and enforcement of Security

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 is 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 works, 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 one 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.

This challenge can take place in front of the administrative authority that 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, 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.

The types of corporate vehicle are as follows:

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

SCI

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

SNC

This is a commercial partnership whose partners are deemed to be businesspersons (commerçants) who are jointly and severally liable for any debts.

SARL

A SARL is a limited liability company in which shareholder liability is limited to the amount of their investment.

SA

An SA is a stock corporation in which the capital is divided into stocks, and the shareholder liability is limited to the amount of their investment.

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, shareholder liability is limited to the amount of their investment.

SCPI

An SCPI is a real estate civil investment company, the purpose of which 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 minimum share capital amount, 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 initial public offering.

SIIC

An SIIC is a listed real estate investment company that allows for special tax exemption arrangements – the main purpose of which is to acquire or build property for rental purposes – or directly or indirectly owns stakes in legal entities with identical corporate purposes legally classified as partnerships or subject to corporate income tax.

Listed real estate companies (sociétés d'investissement immobiliers côtées) are listed companies that benefit from a favourable tax regime. A company can become a SIIC if it complies with certain conditions, including:

• a minimum share capital of EUR15 million; and
• a principal corporate purpose relating to the acquisition or construction of buildings with a view to renting them, or the holding, directly or indirectly, of interests in entities with the same corporate purpose, the share capital or voting rights of which are not held to the extent of 60% or more by one or more persons acting in concert, and the share capital and voting rights of which are held, at the time of incorporation, to the extent of at least 15% by persons holding less than 2% of the share capital and voting rights each. 

SIICs are available to non-French investors.

The SIIC and its nominated subsidiaries (which must have the same business purpose and be at least 95% owned, directly or indirectly) are exempt, upon SIIC election, from tax on renting or subletting of real estate under finance lease agreements, on capital gains arising from the disposal of real estate assets and on dividends received from SIIC subsidiaries, subject to distribution (ie, 95% of the rental income, 100% of the dividends received from nominated subsidiaries, and 70% of gains arising from the sale of real estate or shares in a SIIC subsidiary).

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 these entities are as follows.

SCI

The company must be 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 must be 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 must be managed by at least one individual general manager, who may 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 an individual is likely to be appointed as a 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, from among 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 a maximum of 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 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.

Costs

The annual entity maintenance and accounting compliance costs for each entity are as follows:

• SCI: EUR12,000 plus the cost of statutory auditors (EUR10,000 to EUR20,000), if applicable; the        appointment of an auditor is mandatory for an SCI of a certain size that has an economic activity, when two of the following three thresholds relating to capital, turnover and the number of employees are exceeded:
1. the total value of the assets on the balance sheet is EUR1,550 million or more;
2. the turnover (exclusive of tax) is EUR3,100 million or more; and/or
3. the average number of employees is 50 or more;
• SNC: EUR12,000 plus the cost of statutory auditors (EUR10,000 to EUR20,000), if applicable;
• SARL: EUR12,000 plus the cost of statutory auditors (EUR10,000 to EUR20,000), if applicable;
• SA: EUR20,000 plus the cost of statutory auditors (EUR20,000 to EUR25,000), if applicable;
• 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); and
• SIIC: EUR20,000 plus the cost of statutory auditors (EUR20,000 to EUR25,000).

Mandatory Appointment of an Auditor

For the SNC, SARL, SA and SAS, the appointment of an auditor is mandatory 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 EUR4 million or more;
• the turnover (exclusive of tax) is EUR8 million or more; and/or
• the average number of employees is 50 or more.

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 will be at least nine years;
• allocation of charges – the landlord will provide the tenant with a limited list of repayable service charges;
• allocation of works – certain types of work, such as structural work, may not be charged 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 the landlord 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 12 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 next three 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 a renewed lease. The landlord will 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.

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 VAT-able business.

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

There are no specific costs to be paid by the tenant at the start of a lease, although the tenant will often transfer 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 pro rata basis.

See 6.9 Payment of Maintenance and Repair.

The landlord must take out an insurance policy to cover the risks associated with the premises occupied under a commercial lease, while the tenant must insure the 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 reimburses 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 the prior consent of 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 governing residential leases, which are normally granted for terms of three years and require a cash deposit corresponding to one month’s rent.

Offices, retail spaces and hotels are usually let under commercial leases, with the level of rent determined with 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 termination of the lease, as usual.

The opening of an insolvency proceeding freezes the triggering of the termination clause based on unpaid rent and charges, as long as a court has not acknowledged the effect of the termination clause.

A security deposit usually equals 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 aforementioned Article L 145-40 of the French Civil Code).

Subject to certain exceptions, a 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 subletting, whether of the whole or a part of the leased premises, is prohibited. Subletting authorisation is, however, typically granted to parent companies and/or third-party companies of equivalent financial health.

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.

Although it is not mandatory to register commercial leases in the Trade and Companies Register, all leases with a term exceeding 12 years must 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. This gives rise to the payment of 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 it 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 acknowledgement 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.

In the event of a tenant breach and termination of a lease, there are no legal or contractual limits concerning damages that a landlord may collect.

Landlords typically hold a security deposit, which is often equal to three months of rent (one instalment) in order to avoid the application of interest at the legal rate of 6.75% which is applicable if the landlord holds more than two instalments of rent. Furthermore, this could be completed or replaced by a first demand bank or corporate guarantee, the amount of which is not limited by law.

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 aumétré), where the contractor carries out construction works for a price based on the quantities used for the works.

The owner can enter into:

• separate contracts with the design team and the contractor(s), whereby 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 who 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 construction works.

The following contractual devices are commonly used to manage construction risks.

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 with 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. The damages 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

These include:

• 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 acceptance of the works;
• or two years after 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 acceptance of the works, the owner can claim for the repair of structural damage 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.

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 will 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 agreed guarantee) 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 that the works are compliant with the administrative authorisation obtained. Thereafter, 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 opened to the public).

Some of the rules applicable to 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:
1. on the total purchase price if the VAT incurred by the seller on the initial acquisition was deducted; or
2. 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 completion from a VAT-liable entity acting as such, and also renovation works completed during the last five years on properties built more than five years ago) 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.

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

Property tax (taxe foncière) is payable for the whole calendar year by the owner of a property asset as of 1 January of each calendar year. The amount of property tax is calculated by applying the rate of the tax set by each local authority to the cadastral income obtained by applying a reduction of 50% (20% for non-developable lands) to the local rental value (valeur locative cadastrale).

Housing Tax

Housing tax (taxe d'habitation) is due for secondary dwellings by the occupier of the property as of 1 January.

Office Tax

This is payable yearly by the owner (as of 1 January) for premises used as offices or for commercial or storage purposes, located in the Ile-de-France and the PACA (Provence-Alpes-Côte d'Azur) region.

Office Development Tax

Office development tax (taxe pour la création de bureaux) is payable by the owner of office premises in the Paris area, with the rates varying from EUR0 to EUR455.75 per square metre depending on the district in which the office is located.

Tax on Unoccupied Premises

Tax on unoccupied premises, located in certain areas, is due, at the rate of 17% in the first year and 34% thereafter, by the owner of any premises that have been unoccupied for at least one year (as of 1 January).

Local Development Tax

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

3% Tax

A 3% tax applies to the market value of real estate properties and rights owned in France, directly or indirectly, by any French or foreign legal entity (with exception for some categories of investors).

Rental Income

Ownership of a property in France does not itself make it a permanent establishment.

If a permanent establishment is deemed to exist, current income is fully taxable in France at the rate of 25% (increased by additional contributions) in 2024.

Foreign owners are generally subject to French tax on rental income either under the individual income tax regime at a progressive rate ranging up to 45% (increased by additional contributions), or under the corporate income tax regime at the standard rate of 25% (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; or
• 30% of the adjusted taxable income, before offsetting of tax losses; lower thresholds may apply when a company is thinly capitalised.

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

Finally, the Finance Act for 2020 transposed into French law the provisions regarding hybrid mismatches of Directive (EU) 2017/952 of 29 May 2017 (ATAD II). These provisions aim to neutralise 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, or PFU (prélèvement forfaitaire unique), is set at 30% (12.8% of individual income tax and 17.2% of social contributions) and applies to dividends distributed 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 than 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 with 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 25%, subject to the provisions of applicable tax treaties.

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 25% tax in France (the effective rate is 25.83% for corporate taxpayers with a turnover in excess of 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 both to real estate rights and 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 a full exemption of social contributions after 30 years of holding.

Real Estate Wealth Tax (Impôt sur la Fortune Immobilière, 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 apply.

Subject to tax treaties, non-residents holding corporate securities will henceforth be liable for 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).