Real Estate 2021

Last Updated April 13, 2021

France

Law and Practice

Authors



DLA Piper is a global law firm with lawyers located in more than 90 offices 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, through its multidisciplinary expertise.

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.

Paris will benefit 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 the city's 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.

These projects are undoubtedly boosting the image of the French capital, which has already proved its attractiveness to foreign funds, such as South Korean funds which acquired Tour Europe, Tour Deixia, Tour Majunga and Tour Eqho in La Defense in the first nine months of 2019. At the same time, the COVID-19 pandemic had a significant effect on the French real estate market in 2020, with unexpected consequences.

Effects of COVID-19

Logistic real estate

In the logistic real estate market, the rental market appears to be most affected by the COVID-19 pandemic with a 56% decrease in one year in transactions relating to 40,000 square metre warehouses, whereas the investment market seems less exposed with the total invested from the beginning of the year to the third quarter of 2020 amounting to EUR2.4 billion, which is very encouraging.

Residential areas

On the residential side, the two national lockdowns have led to a fall in sales of 21% in the Ile-de-France region for the first nine months of 2020, compared with the same period in 2019, including a 31% drop in the third quarter alone (-34% in Paris). The annual rise in prices has also weakened, from 7.4% in the second quarter of 2020 to 6.6% in the third quarter. However, the chamber of notaries considers that the COVID-19 pandemic alone should not significantly affect attitudes and therefore, prices, and that only major and persistent economic consequences would be likely to do so.

Office sector

In this sector, the lockdowns have accelerated the development of the home office. Workspaces are being assessed in terms of space, location, type of lease and number of workstations in order to be more flexible and to adapt to market changes.

Construction sector

The construction sector has come up against many obstacles since the end of the first lockdown, limiting its capacity to catch up with production. For example, at the end of May 2020, the construction of housing, which had reached 376,000 homes a year, fell by around 8% year on year compared to 2019, and the number of building permits issued fell by approximatively 11% year on year.

Retail sector

The retail sector has also been strongly impacted by the administrative consequences of the COVID-19 pandemic.

E-commerce

E-commerce as well as the implementation of new digital measures such as "click and collect" have expanded. According to the FEVAD (the Federation of E-commerce and Distance Selling), internet sales continue to grow relative to retail chain sales, jumping +29% in the third quarter of 2020. Internet sales from January 2020 to the third quarter of 2020 were three times higher than over the same period in 2019 (+41% v +13%). 

The impact of blockchain (and crypto-money 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 French real estate transactions is gradually gaining ground, for example, with the increasingly common use of the electronic signature (recently codified under Article 1367 of the French Civil Code) mostly for the signing of commercial leases.

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

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

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).

Different 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. 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.

As a result of the COVID-19 pandemic, buyers as well as their project partners have made increasing use of remote appointments and electronic signatures – see 1.3 Impact of Disruptive Technologies.

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.

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 Law No 2014-626 (“Pinel law”) dated 18 June 2014. 

These past years, US and English compliance rules have burst into French real estate acquisition practice. The latter has increasingly integrated 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 performance of the obligations of the parties. The equivalent French legal provision would be 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 the site after it has been polluted and therefore the investor becomes 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 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 the following 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 erecting 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 the disposal 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 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 vis-à-vis the French Treasury. 

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 payment of rent. The debtor has the option to acquire ownership of the real estate asset upon 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

It is to be noted that a reform of the French security law is currently 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 contemplated, 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, for which the mortgage and lender's lien 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 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) 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 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 of 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, and creditors whose receivables are not privileged by way of law will be prohibited from commencing or continuing any individual legal actions against such debtor. 

Moreover, any new security granted by a debtor during the "hardening period" (période suspecte) – 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 refer 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, aimed to have the Euribor 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, which will be replaced by a “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 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. 

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 Concertéearea, 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:

  • 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 businesspersons (commerçant) who 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, 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 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, the main purpose of which 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 these 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 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:

  • the total value of the assets on the balance sheet is EUR1,550 million or more;
  • the turnover (exclusive of tax) is EUR3,100 million or more; and/or
  • 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).

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 shall be at least nine years;
  • allocation of charges – the landlord shall 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.

Measures Adopted Due to COVID-19

In order to contain the effects of the COVID-19 pandemic and to avoid making the tenant’s situation worse, government authorities adopted the following measures (it being specified that no rent discount was applicable per se):

  • concerning the rents due and payable between 12 March 2020 and 11 September 2020, all rents remain payable at their contractual due dates but landlords are prohibited inter alia from applying late penalty clauses prior to 12 September 2020 – depending on the tenant’s size/situation/category – in case of non-payment by tenants of their rent due and payable between 12 March 2020 and 11 September 2020;
  • concerning the period between 12 March 2020 and 23 June 2020 inclusive, the eviction of a tenant (through the implementation of a lease’s termination clause) could only be implemented when the extensions of time limits provided for by the current law/regulation applying to this period had expired – assuming the tenant’s breach had not been remedied by then; and
  • concerning establishments exercising an economic activity affected by the administrative police measure and depending on the tenant’s size/situation/category, sanctions are temporarily not applicable. 

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.

COVID-19 Provisions

Regarding pandemic issues, the parties can agree on rent cancellations on a case-by-case basis depending on the impact of the COVID-19 pandemic on the tenant’s business. In this respect, they can stipulate specific provisions (eg, rent-free periods, a meeting clause stipulated between the parties under certain conditions, the landlord’s participation in the tenant’s works, etc) relating to the context of the COVID-19 pandemic and granted intuitu personae. 

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 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 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. 

COVID-19 legislation does not distinguish between assets, but between the size/situation/category of the natural or legal person likely to benefit from the government measures – see 6.3 Regulation of Rents or Lease Terms.

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 aforesaid 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 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. 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 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 acknowledgement by the court of the termination of the lease.

In the context of the COVID-19 pandemic, the above-mentioned mechanisms have been suspended and postponed if the tenant’s breach occurred during the periods referred to in 6.3 Regulation of Rents or Lease Terms.

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 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 a 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;
  • for 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. 

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 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 if 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 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:
    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.

Housing Tax

Housing tax (taxe d'habitation) is payable 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 Paris and the surrounding areas.

Office Development Tax

Office development tax (taxe pour la creation de bureaux) is payable by the owner of premises for development as office premises in the Paris area, with the rates varying from EUR0 to EUR417.50 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 payable 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.

Tax on Market Value

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 the 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 26.5% (increased by additional contributions), except for large companies with a turnover in excess of EUR250 million in 2021, for which the applicable rate remains at 27.5% (increased by additional contributions).

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 26.5% (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 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 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 26.5%, subject to the provisions of applicable tax treaties. This rate will decrease to 25% for dividend distributions as from 1 January 2022.

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 26.5% tax in France (the effective rate is 27.37% 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 on 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 (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 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). 

DLA Piper France LLP

27, rue Laffitte
75009 Paris
France

+33 1 40 15 24 00

+33 1 40 15 24 01

antoine.mercier@dlapiper.com www.dlapiper.com/en/us/locations/paris/
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Lacourte Raquin Tatar has more than 60 qualified lawyers and legal practitioners, of whom 17 are partners. The firm is organised around three major areas of expertise: mergers and acquisitions, real estate transactions, and tax, and is assisted by recognised experts in the fields of financing, regulatory, public business law and litigation. The partners are known for their commitment, in-depth knowledge of the firm's clients and their business sectors, and the ability to address extremely complex issues. Year after year, the firm's success can be measured by the loyalty and development of its client base, which primarily consists of major groups and professionals with high-level expectations. Lacourte Raquin Tatar advises on domestic and international deals for both French and foreign clients.

Market Overview

The emergence and spread of COVID-19 have greatly affected the real estate market. Although the arrival of several anti-COVID-19 vaccines should offer a way out of the crisis in a relatively short time, analysing the current and future real estate environment is no simple task.

Investment 

The French GDP has fluctuated considerably with the successive lockdowns and curfews. The index fell by 8.3% in 2020, while households' gross disposable income rose. In this context, many institutional investors believe the pandemic will not lead to symptomatic degrowth, according to the latest study published by investment research firm MSCI (Baromètre MSCI de l'investissement immobilier français). They are of the opinion that the spike in public debt (+19.4% compared to 2019) brought on by the unprecedented economic support measures will lead to a rush to safe investments such as real estate. They consider core office, logistic and residential assets should represent the majority of 2021's investments. The scarcity of prime assets and lack of visibility in the rental market could, however, constitute obstacles to growth in the sector.

Rentals

Office rentals in the Paris region plummeted in 2020 and the MSCI study indicates that 87% of the investors surveyed believe that the work-from-home experience will result in a permanent reduction in demand. But the necessary reorganisation of offices, notably to adapt to flexi-office mode and the social issues raised by home working, could thwart this prognosis. The same survey states that 77% of respondents expect logistics requirements to increase in 2021 in light of the rapid expansion in e-commerce triggered by the crisis. In addition, the stoic resilience of the residential sector over the period and the ever-increasing awareness of environmental issues are factors that will have a structural impact on the behaviour of all operators in the sector.

Legal Developments

The most important legal developments in the French real estate market concern first and foremost the measures taken to deal with the COVID-19 epidemic. In addition, environmental regulations remain on the rise, and measures to tackle the housing shortage should also be expected.

COVID-19 measures

Like many other countries around the world, to limit the spread of COVID-19 in France, the government decided to impose a first lockdown as from March 2020. In addition to restrictions on movement, many "non-essential" businesses were forced to close their doors to the public for a period of time that varied depending on the type of business in question. To limit the economic impact of the lockdown, the authorities adopted a number of targeted regulations. Of these, the most emblematic for the real estate sector was the ordinance of 25 March 2020. This ordinance suspended the application of penalty clauses, termination clauses and forfeiture clauses in practically all private-law contracts over the "legally protected period", defined in the ordinance as running from 12 March to 23 June 2020. Very small businesses (ie, those with fewer than 10 employees), having experienced a dramatic drop in turnover due to the crisis, also benefited from a specific law that suspended certain clauses in commercial lease agreements. With the second lockdown in November 2020, a similar law was adopted for SMEs – and still applies. To encourage landlords to offer their tenants a helping hand and to limit the consequences of non-payment, a new tax credit has been introduced (see below). Unfortunately, all these measures have not prevented litigation between the various players in the real estate sector, particularly between lessors and lessees. On many development and construction projects underway, bitter discussions have arisen on the consequences of the increase of time limits caused by sanitary restrictions and new distancing obligations. These arguments also deal with the issue of covering the additional costs linked to the augmentation of deadlines and the production of new sanitary equipment.

Impact of the crisis on rent collection

If the above-mentioned mechanisms do not allow lessees to escape rent payments, they do, however, allow lessees to take advantage of payment delays, in turn jeopardising the cash flow of their lessors. Furthermore, there are many court cases pending involving commercial tenants, mostly for "non-essential" businesses, invoking the principles of good faith, the defence of non-performance or force majeure to avoid or lessen their contractual obligations. A brand-new renegotiation obligation in case of unforeseeable circumstances (a sort of French hardship mechanism), which came into force with 2016 contract reform, is also frequently pleaded when lessors have not set exclusion clauses in their contracts. So far, the only rulings handed down have been from the courts of first instance (tribunaux judiciaires). Their rulings differ so widely that it is impossible to tease out any overall trend in the courts' position. These proceedings may have a crucial impact on a broad swathe of the commercial rental market. If the courts ultimately hold that rent is not due when businesses are prohibited from opening their doors to the public, many lessors will have to refund their lessees for rent paid and could face financial difficulties. Conversely, if the courts ultimately rule in favour of lessors, many lessees could find themselves unable to pay rent and may go bust.

Environmental considerations

European citizens are increasingly concerned about climate change and greenhouse gas emissions, making the EU regulations on environmental issues of ever-greater importance. The past few years have seen major developments in French law designed to limit the environmental impact of real estate activities. These political choices have been amplified by the pandemic and the resulting economic crisis. A number of new measures have recently been implemented under current regulations, and certain existing legislation has been clarified. As pointed out in this section last year, French lawmakers and the government have amended the French Building and Housing Code, imposing a requirement for owners and occupiers of buildings for tertiary use with a floor area of 1,000 square metres or more to take concrete and effective actions to reduce their final energy consumption. The benchmark consumption level was to be defined. This has been done with the issuance of several decrees for certain business sectors, defining operating procedures and absolute energy consumption targets for 2030. The residential sector has also been the object of new measures, under which landlords cannot increase rent for properties in densely populated areas unless they meet certain energy performance criteria. These regulatory changes will undoubtedly have a significant impact on the behaviour of real estate operators in the near term. 

Measures to tackle the housing shortage

Faced with the increasing popularity of holiday letting platforms such as Airbnb and Booking.com, the French authorities have taken steps to regulate this emerging practice. Under the current regulations, different rules apply according to location, as well as according to whether the property is the owner's primary or secondary residence. These regulations faced stiff opposition from landlords, who saw them as a violation of the EU principle of freedom to provide services. Two landmark rulings have recently been handed down in this respect: one from the Court of Justice of the European Union in 2020 and one from France’s Supreme Court (Cour de Cassation) in 2021. Both courts held that the restrictions were lawful and proportionate to the public-interest objective pursued. On the back of these rulings, we should expect tougher legislation in this respect.

Town Planning

The distinctive strict building organisation ushered in by the Haussmann era – shops on the ground floor and housing above in decreasing order of wealth as you moved up the floors – has become a thing of the past.

Nowadays, buildings must be "flexible", "agile", and "modular" in order to keep up with an ever-more frequently changing market. The French town planning rules need to loosen the tight grip they have held on building use for the last 40 years, freeing up developers to meet the demand for new, emerging uses (such as co-living, co-retailing, small offices, home offices).

Reversibility, reusability, and flexibility: main planning issues

These developments have prompted several reforms in recent years.

  • The new town planning documents now recognise five use classes and around 20 subclasses, instead of the nine previously existing use classes. What’s more, a change in subclass does not require any paperwork unless it entails structural or façade modifications.
  • Specific processes are being put in place to make it easier for developers to convert obsolete/vacant office space into residential buildings, especially in Paris and other major cities where land pressure is high. These include "constructability bonuses" and easing of rules relating to building footprints and the requisite number of parking spaces or even social housing units for a given project.

The fact remains, however, that French legislation has not (yet) caught up to these changes: property developers still have to specify just one use class and cannot stipulate that a building’s use will vary over time or that they plan to convert it to a new use at a later date.

For example, a residential property must be classified as either a dwelling or a hotel: it cannot be both at the same time. This ties owners to either short-term (hotel) or long-term (dwelling) rental of their premises.

In this context, some are calling for "dual-use planning permission", which authorises a temporary use and a final use, to be made more widely available. This new type of planning permission has been introduced specifically for the facilities being built for the 2024 Olympic and Paralympic Games. It allows developers to provide for a change in the building’s use down the road (ie, after the Olympics in this case), without needing to apply for new planning permission.

In addition, legislative developments to simplify changes in use class, on the one hand, and building reversibility, on the other, are currently being considered. The changes proposed would touch on town planning, taxation and real-estate law.

Real Estate Investment Vehicles

SCPIs and OPCIs

Historically, the collective investment vehicles dedicated to real-estate activities and investments in France have been: 

  • the real estate investment company (société civile de placement immobilier – SCPI) covered by Articles L 214 – 86 et seq of the French Monetary and Financial Code; and 
  • the real estate investment fund (organisme de placement collectif immobilier – OPCI).

SCPIs and OPCIs are involved in a substantial proportion of acquisitions of assets on the French real estate market. Created in 1970, the SCPI is a type of non-commercial company that can offer its shares to the public. The general view on the French market is that the SCPI is a somewhat "inflexible" real estate investment fund. It was therefore decided to create a more flexible fund: the OPCI, which can invest in properties, real estate rights, shares or units in real estate companies, etc. 

Subscribing to shares or units in SCPIs or OPCIs offers the opportunity to invest indirectly in real estate and to delegate the associated property management to a professional management company. Although they have not outpaced the SCPIs, the OPCIs have proved appealing to many investors and savers, who often subscribe to retail OPCIs as part of unit-linked life insurance savings contracts. The subscription and management fees are usually lower than for an SCPI, and the investment is more liquid.

Alternative investment funds

There are also a number of alternative investment funds offering investments in real estate assets. Specialised professional funds (fonds professionnels spécialisés – FPS) are an alternative investment fund, the main purpose of which is to invest in different types of assets. An FPS can invest in all kinds of financial instruments, as well as in goods, including real estate assets, and is not therefore encumbered by diversification constraints.

A new kind of alternative investment fund able to invest in real estate assets has been created: specialised financing organisations (organismes de financement spécialisé – OFS). An OFS can be viewed as a hybrid structure between a securitisation vehicle (it can issue bonds, participate in loans, etc) and an FPS (it can invest in any type of assets, including real estate).

The FPS and the OFS are both flexible vehicles that do not require prior approval from the French financial markets regulator (Autorité des Marchés Financiers – AMF) but do nonetheless need to be declared to it.

Both of these collective investment schemes, which can take the form of a company with legal personality, meet the needs of professional investors (or similar) for structuring investment projects, in particular, tailor-made real estate investments.

Taxation

As part of the COVID-19 support package put together to foster a recovery in the French economy, the French Finance Act for 2021 included a number of tax measures of particular interest for the real estate sector.

Measures to support landlords

Steps have been taken to mitigate the financial impact for landlords of granting rent holidays to commercial tenants during the pandemic. Landlords will enjoy a 50% tax credit on rent waived during the second lockdown (ie, in November 2020), subject to certain conditions. In particular:

  • landlords must have agreed to the rent holiday by 31 December 2021; and
  • the tenant must have fewer than 5,000 employees, have been forced to close their doors in November 2020 (non-essential shops, other restricted activities, etc), and not currently be in business rescue or insolvency proceedings (this last condition does not apply to certain small businesses).

In that it is tenants that reap the economic benefit of this measure, the following limits apply to the tax credit: (a) it is capped at EUR800,000 of rent waived per tenant; and (b) for tenants with 250 employees or more, it is calculated on two thirds of the rent waived, rather than the full amount.

Moreover, an earlier provision that allowed landlords to treat rent holidays granted between 15 April 2020 and 31 December 2020 as a deductible charge, has been extended until 30 June 2021.

Help for property owners

The Finance Act also included measures focusing more specifically on property owners.

As from 1 January 2021, the taxation of capital gains from sale-and-leaseback transactions can be spread over a number of years.

A sale-and-leaseback involves selling a real estate asset to a financial institution, which then leases it back to the seller under a finance lease. With this new measure, taxation of the resulting capital gain can now be spread over the entire term of the lease, provided the seller/finance-lessee or a related entity pursues a commercial business in the property once it is leased back to them. This measure applies to sale-and-leasebacks executed up until 30 June 2023 (provided the financing is approved by 31 December 2022).

A tax-neutral opportunity for French companies

Another measure introduced under the Finance Act gives French companies an opportunity to step up the book value of their assets to fair market value. For non-amortisable assets (eg, land), the resulting capital gains benefit from a rollover regime; for amortisable assets (eg, buildings), they are spread over 15 years. The idea is to encourage French companies to boost their statutory net equity (with the knock-on effect of strengthening their balance sheets). Conversion of the revaluation surplus (ie, the associated capital gain) into distributable reserves occurs:

  • progressively, in step with the amortisation of the underlying asset (for the portion that corresponds to capital gains on amortisable assets); and
  • for the portion that corresponds to capital gains on non-amortisable assets, when the underlying assets are sold.

Summary

The above measures reflect recent trends in terms of real estate taxation in France. On the one hand, property owners are under increasing pressure from the authorities and the general public alike to lend their tenants a helping hand in these challenging times while, on the other, they are facing ever-tougher financing conditions. Many are therefore looking for ways to reconfigure their corporate structures or refinance their assets so as to make the best possible use of their cash. Reducing the associated tax burden for them, offers some welcome respite in the current storm.

Lacourte Raquin Tatar

36 rue Beaujon
75008
Paris
France

+33 01 58 54 40 00

+33 01 58 54 40 99

contact@lacourte.com www.lacourte.com
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DLA Piper is a global law firm with lawyers located in more than 90 offices 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, through its multidisciplinary expertise.

Trends and Development

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Lacourte Raquin Tatar has more than 60 qualified lawyers and legal practitioners, of whom 17 are partners. The firm is organised around three major areas of expertise: mergers and acquisitions, real estate transactions, and tax, and is assisted by recognised experts in the fields of financing, regulatory, public business law and litigation. The partners are known for their commitment, in-depth knowledge of the firm's clients and their business sectors, and the ability to address extremely complex issues. Year after year, the firm's success can be measured by the loyalty and development of its client base, which primarily consists of major groups and professionals with high-level expectations. Lacourte Raquin Tatar advises on domestic and international deals for both French and foreign clients.

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