Real Estate Law in France

Real estate rights are governed by the French civil code, also known as the Napoleon code, and generally include:

Full ownership of real property (droit de propriété)

This right confers on the owner the right to use the asset (usus), the right to collect any proceeds therefrom (rents, interest, etc.) (fructus), and the right to dispose of the asset (abusus). It is a title with full rights.

Subdivision of ownership (démembrement de propriété)

Ownership is divided into two rights: bare ownership (nue- propriete) and usufruct (usufruit), which includes the right to use the property and the right to collect any proceeds. These two rights belong to different persons. This structure is used for asset management purposes.

Co-ownership (copropriété)

Governed by the French law dated 10 July 1965, it is a way of organizing the ownership of a building consisting of several units. Each unit comprises (i) a privately owned area (e.g., an apartment) with full ownership rights and (ii) a proportional right over the common areas (e.g., staircases and corridors). The coowners are required to abide by co-ownership rules and regulations relating to the use, maintenance, and costs of the property.

Ownership of volume units (division de propriété en volumes)

This type of ownership pertains to a property that is legally divided into volume units of different sizes and shapes (horizontally, vertically, or both; or into three dimensional units i.e., cubic meters). Each owner is entitled to build within the limits of their unit, subject to any easements. The principal difference with co-ownership is the independence of each volume unit and the absence of common areas.

Long-term leases

Long-term leases grant to the lessee the equivalent of real property rights or rights in rem (droit réel immobilier). The two main types of long-term leases (both granted for a term of 18 to 99 years) are: (i) construction leases (bail a construction) and (ii) long-term leases (bail emphytéotique) with or without an obligation for the lessee to build. Under both leases, the lessee enjoys a right in rem over the land and full ownership of any built premises until the end of the lease. Upon expiry of the lease, the land, as well as the constructions, revert to the landlord. The lessee’s right in rem may be freely transferred or mortgaged.

Usual acquisition structures

French real estate may be acquired through limited liability companies or unlimited liability and transparent special purpose vehicles (SPVs) such as SCIs (Société Civile Immobilière), usually depending on tax considerations.

French REITs also exist in the form of OPCI (Organisme de Placement Collectif en Immobilier) regulated investment funds. These funds may be used to acquire or build real estate assets with a view to lease them. They cannot be used to acquire and sell real estate. OPCIs are eligible for a preferential tax treatment.

Investments may also be made through listed property companies (SIIC), which are also subject to a preferential tax treatment.

No restriction on foreign investments.

Foreign-registered or foreign-controlled entities are free to carry out real estate investments in France, but they must file a declaration.

Specific restriction on acquisitions

Under French planning regulations, the direct sale of real estate assets most often gives rise to the application of a pre-emptive right on the part of the municipality or other public authorities. This right may also apply to the sale of shares in a transparent SCI company and to certain other real estate transfer transactions. As a result, clearance of such a pre-emptive right is required before the acquisition of a real estate asset may be completed, failing which the acquisition would not be valid. However, the pre-emptive right is not applicable in the event of a merger, demerger, or certain dissolution of companies, as such a restructuring involves the transfer of an entire estate, not a single real estate asset.

To be enforceable against third parties, transfers of real estate ownership must be registered with the local land registry (services de la publicité foncière).

Only notarized deeds of transfer authenticated by a French public notary can be registered.

Registration with the land registry is not an ascertainment of the validity of title of the registered owner. In other words, there is no state guarantee of title. Any interested third party can challenge the title in court.

Information available at the land registry includes the identity of the current and former owners, acquisition date, registered easements, registered mortgages and encumbrances, leases, and finance leases lasting over 12 years. Since the land registry is a public register, information is available to third parties.

Please note that the current land registry system will be reformed in the near future to simplify formalities and adapt the regulations to our current market (digital tools, updated security interests, etc.).

In asset deals, the parties and the notary execute a notarized transfer deed. The notary authenticates and stamps the deed and must register it with the local land registry (see "services de la publicite fonciere" above) within one month of its execution to make the title transfer enforceable against third parties.

French notaries are public officers. They are liable for the legal efficacy of the transaction made through a notarized deed. As a result, they are responsible for verifying that there is no obstacle to the transaction, including verifying the root of title over a 30-year period.

A real estate transaction is usually a two-step process: First the execution of a conditional sale and purchase agreement or sale option or purchase option agreement. The sale of a real estate asset is most often subject to a pre-emption right on the part of a public authority. The agreement may also contain other conditions precedent, such as the buyer’s obtainment of the necessary financing. Upon signing, the buyer usually pays a deposit guarantee (except in the case of a sale option), which remains in escrow with the notary, pending completion of the transaction.

When the conditions are met, the final notarized deed of sale may be executed, and the transaction is completed. The transfer of ownership is usually expressly deferred to the date of execution of the deed and simultaneous payment of the price.

Payment of the purchase price is made through the notaries’ accounts. The latter are responsible for the payment of transfer taxes to the tax authorities and publication costs upon completion, such amounts being paid out of the funds transferred to the notaries. No transaction will be completed if the notary has not received in advance the price and any additional funds needed to pay the costs and taxes.

Notarized deeds apply to mortgages, restrictions on sale, easements, and leases of more than 12 years. Registration is extremely important for tenants as it renders the lease enforceable against a new owner of the property.
Share deals are completed by private agreement.

The seller of real estate is bound by law to a compliant delivery obligation and a warranty obligation.

It is, however, market practice in investment transactions for the seller to exclude any warranty and provide for a sale of the asset “as is.” This negotiation position is limited in (i) a compulsory eviction warranty (garantie d’éviction) which applies by law whatever the terms of the sale agreement, (ii) the seller’s obligation to provide information under environmental laws and (iii) any express warranties granted by the seller in the agreement. Usually, the seller provides that the matters raised in the data room to which the buyer was given access exclude any warranty. The exclusion of a specific warranty is admissible provided that the information provided is accurate. The same applies to the seller’s representations in the deed of sale (relating to mortgages, encumbrances, easements, building and operational permits, works, authorized use, and so on).

In asset deals, sellers must provide certain compulsory information and documents. Regarding environmental matters, the seller is generally bound by an obligation to inform the buyer about the environmental condition of the asset to be sold. No exclusion of warranty may apply if this obligation is breached.

In the case of share deals, it is market practice to require from the seller the same information and environmental/technical reports and diagnoses.

The seller’s obligation of indemnification may be limited. It is market practice to exclude any such limits regarding the subject matter of the deal, such as title to the shares and real estate. The seller’s liability is usually excluded if the buyer’s claim relates to any matter disclosed in the due diligence process (in particular in the data-room) or in the transaction documentation. Title insurance is developing in the French real estate market, notably among professional real estate investors.

Usual security interests

• General real estate privileges: Securities provided by law that confer a right of preference and take precedence over other real estate securities (for court costs, employee remuneration, etc.).
• Contractual mortgages: Granted under a notarized deed, which is subsequently registered with the local land registry.
• Assignment of receivables: For receivables such as rents, a Dailly (from the French Monetary and Financial Code) assignment is usually required by the bank; the borrower must fill out a Dailly assignment forms in order for the assignment to be effective.
• Specific legal mortgages: Specific security interests of benefit to the seller of real estate when the price is not fully paid upon completion of the sale and to the lender who finances in whole or in part the acquisition of real estate.
• Pledges of the borrower’s shares and pledges of the borrower’s bank accounts are also market practice.
• Another type of security interest is particularly relevant for real estate financing: the “fiducie” which is similar to the concept of trust in Anglo-Saxon countries. It is a very efficient security interest since the real estate asset is excluded from the debtor’s assets (and risks)
  during the security term. It remains an expensive security to create.
  

Protection of the lender

As a condition precedent, lenders typically require from the borrower a valuation report on the financed assets; in accordance with the financing documentation, the borrower must comply with financial ratios and specific covenants.

In addition to the mortgages and assignments of receivables referred to above, the lender may require additional guarantees from another guarantor (e.g., joint and several guarantee, autonomous guarantee, letter of intent, cash reserve, etc.). If the debtor defaults under the loan, a mortgage entitles the lender to:

• Require the sale of the property by public auction or on an amicable basis to a transferee and be reimbursed from the proceeds; or
  
  
• Obtain a court order transferring title to the secured property to the creditor as payment of its claims.

Civil leases: Unless a compulsory legal regime applies to a lease due to the tenant’s activity or use, or to the type of property, the lease is governed by the French Civil Code and there are no compulsory provisions. Residential leases are governed by specific legislation with significant protection of tenants and potential limits on rent depending on the municipality where the residence is located. Such limits are applicable in Paris for example.
Commercial leases: leases of premises for most professional activities have a specific status as commercial leases.

Duration of the lease

The minimum term of a commercial lease agreement is nine years. In principle, the tenant has a break option, which may be exercised at the end of each three-year period. However, in certain conditions, the parties may agree on a fixed term, even for the whole term of the lease and/or other break options.

Renewal of commercial leases

Under certain conditions, the tenant has a right to require the lease renewal. Accordingly, if the landlord refuses to renew the lease, the latter must pay an eviction indemnity to compensate the damage suffered by the tenant. The lease is normally renewed under identical terms and conditions, save for the rent, unless otherwise agreed upon by the parties.

Rent

Usually, the rent is either a fixed amount (e.g., for office buildings) or twofold, i.e., fixed rent (guaranteed minimum rent) coupled with a variable sum based on a percentage of the tenant’s turnover (e.g., for retail space). It may also consist in a step rent.

Indexation of the rent

Indexation clauses are market practice and subject to strict legal requirements. Rents cannot be indexed directly on the general cost of living or level of salaries.

Works and repairs: since the Pinel Law

A complete inventory of charges and taxes must be attached to the lease and clearly specify, for each category of charges and taxes, whether they are borne by the landlord or the tenant. This list relates to works, repairs, maintenance and replacement of equipment/the premises.

Major repairs governed by Article 606 of the French Civil Code must be borne by the landlord.

Assignment

Generally, the tenant may not transfer the lease agreement without the prior authorization of the landlord, except for a lease transfer as part of the sale of the tenant’s ongoing business.

Sale of the property

Since the Pinel Law came into force, the tenant enjoys, under certain conditions, a pre-emption right should the lessor decide to sell the leased commercial premises.

Hotel lease

Several types of agreements may relate to the operation of a hotel. The tenant under a lease is the owner of the hotel business (and not the hotel property). Whether the hotel business owner is the tenant or the owner of the property it may operate the hotel directly or grant a lease over the hotel business (location-gérance) or take a franchise for a brand or even grant the management of the hotel to a manager acting on behalf of the owner. Such a possible combination of operational agreements must be carefully looked at with a legal adviser.

Building permits are required to:

• Construct new buildings; or
• Undertake construction works on existing buildings if such works result in a change of function of the various parts of the premises or the creation of additional surface area.
  

In addition, in the Ile-de-France region, a specific authorization (agrément) is required from the competent authorities if the building is dedicated to certain activities (office, industrial, commercial, professional, administrative, technical, scientific, or educational uses). Separately, authorizations (or registration/notification) to operate on-site facilities subject to environmental protection regulations (ICPE) may also be required.

Because of the ambitious and overreaching scope of the EU’s Green Deal a number of new policies, and new legislative acts, will be gradually implemented. Consequently, the ESG rules will be evolving and should be closely monitored.

Protection of the environment

Classified Installations for the Protection of the Environment (ICPE) regulations apply specifically to facilities likely to cause nuisances, hazards, and pollution (including land pollution). As a consequence, a specific authorization (or registration or notification) delivered by the Préfecture is required for the installation of an ICPE. Specific obligations/requirements may be imposed on the ICPE operator. Changes in the operator and discontinuation of the facility’s activity are also regulated. Beyond this specific legislation, operators responsible for pollution are liable for its remediation.

In accordance with the ALUR Law of 24 March 2014 the seller or landlord of a property located in a specific "soil information zone" has the obligation to inform the purchaser or tenant of this situation in writing. The purchaser or tenant may even request the cancellation of the sale/lease, the repayment of a portion of the price or a reduction of the rent, or the rehabilitation of the polluted site if the pollution makes the land unsuitable for the use stipulated in the agreement. Subject to the approval of the Préfecture, the ALUR Law expressly authorizes the transfer of the rehabilitation work to a third party (such as a purchaser).

Green leases

French law requires that leases of premises dedicated to professional activities exceeding 2,000 square meters contain a “green appendix” under which the parties must exchange information on overall consumption and waste removal and must cooperate to improve the energy and environmental performance of the premises. They should also work to develop a program of works to be carried out. This is more an incentive than an obligation to reach certain objectives. However, it is now often completed with the following new obligations regarding energetic performance/installation of renewable energy and so on.

Energy performance and more

Following the Grenelle 1 and Grenelle 2 Laws, and more recent legislation, buildings are subject to strict requirements with respect to their future energy performance. Under the ELAN law of 23 November 2018, specific targets were assigned to buildings where more than 1,000 square meters are used for professional activities. Compared to a chosen reference year (which cannot be prior to 2010), energy consumptions in a building must be reduced by 40% by 2030, 50% by 2040, and 60% by 2050.

This legislation is now completed by the European Directive 2024/1275 which aims at enhancing the energy performance of buildings across the European Union, with long-term goals such as achieving a decarbonized building stock by 2050.

A specific decree of 23 July 2019 sets out various obligations affecting the landlord and tenant, starting with an obligation to record the building’s energy consumption on a government web platform on 30 September each year; and an obligation to set up a plan of works to achieve the legal objectives and to carry out the said works.

Other regulations are being implemented to reduce the energy consumption of buildings, notably the BACS decree (Building Automation and Control Systems), which requires the installation of automation and control systems to monitor, analyze, and adjust the energy consumption of tertiary buildings in order to enhance their energy efficiency.

With the objective to reduce energy consumption, office or warehouse buildings will have to be equipped with solar panels or a green roofing system under certain conditions by 1 January 2028. Similarly, outdoor parking lots will need to be fitted with canopies incorporating renewable energy production systems by 1 July 2026 or 2028, depending on their size.

The National Low-Carbon Strategy (SNBC) adopted by France sets a target of reducing greenhouse gas emissions by 49% by 2030 compared to 2015. Greenhouse gas emissions can be reduced either through the decarbonization of energy sources or through energy efficiency measures (such as in the specific decree of 23 July 2019). To meet these objectives, France has notably implemented a more ambitious and demanding energy and environmental regulation (RE 2020) for the construction sector, which incorporates not only energy consumption but also carbon emissions, including those related to the building's construction phase. This regulation imposes strict requirements regarding energy efficiency, decarbonization of energy, and the reduction of carbon impact. The RE 2020 is progressively applicable to various types of buildings.

The following developments cover the regime applicable to corporate investors.

Sales and acquisitions of French real estate assets

Direct taxes

Capital gains on the sale of French real estate assets are subject to French Corporate Income Tax (CIT) at the standard rate applicable at the time of the sale. The CIT rate is currently set at 25% plus the social surcharge of 3.3% levied on the part of the CIT liability which exceeds €763,000 (US$805,697*) tax losses that are available at the level of the entity disposing of the French real estate assets can be offset against the taxable capital gain. As a general rule, tax losses can be carried forward without any time limit (except in case of change of activity or in certain cases of restructuring). However, carry-forward tax losses can only be used to offset in a given financial year up to €1 million (US$1,055,960*) plus 50% of the taxable profit of that year exceeding €1 million (US$1,055,960*). Upon proper election, tax losses may also be carried back but only up to €1 million (US$1,055,960*) and offset against the taxable profit of the preceding year.

Indirect taxes

Upon acquisition of French real estate assets, transfer taxes should be due at circa 5.8%, plus additional duties and notary fees, unless certain commitments are taken by the purchaser to rebuild or to resell the property within a certain timeframe. These charges are a liability of the purchaser, but the seller may be held jointly liable.

Acquisitions of French real estate assets may also be subject to value added tax (VAT) when the seller is subject to VAT. The standard VAT rate is 20%. Reduced rates may be applicable to certain residential buildings. Certain transactions are VAT exempt. However, the seller may waive the exemption. VAT is, in principle, due on the price. Under certain circumstances, VAT is due on the margin (sale price less acquisition price). A “transfer of going concern” VAT exemption is applicable, under certain conditions, when the sale of the real estate assets occurs in the context of a transfer of activity, e.g., the asset is sold with a lease subject to VAT by the lessor to another lessor, who will continue to rent the asset with VAT.

Direct taxes

Subject to the provisions of applicable double tax treaties, if any, capital gains on the sale of the shares in a company qualifying as French real estate company for capital gain taxation purposes is, in principle, subject to French CIT at the standard rate applicable at the time of exit (i.e., currently 25% plus the social surcharge of 3.3% levied on the part of the CIT liability which exceeds €763,000 (US$805,697*)).

Under French domestic law, a French real estate company is defined as any French or foreign unlisted company, the assets of which, at the closing of the three fiscal years preceding the disposal (or at the closing of the financial years for which it existed if it has closed less than three financial years at the time of the disposal), derive more than 50% of their value from French real estate properties or shares of an unlisted company which itself is a “real estate” company. The assets that are used by a company or its parent company for the purposes of its operational commercial or industrial activities are disregarded for the appreciation of the 50% threshold.

If the company the shares of which are sold is a French tax transparent entity, capital gains arising from the disposal of its shares should be calculated following the specific rules provided by the Quemener Case Law. Under this case law, capital gains or losses on the disposal of shares in a tax transparent subsidiary must be calculated taking into account several adjustments.

Indirect taxes

The acquisition of shares in a company qualifying as a French real estate company for transfer taxes purposes is subject to transfer tax at the rate of 5% applied on the sale price (or fair market value if higher). This is a liability of the purchaser, but the seller may be held jointly and severally liable.

A French “real estate company” is defined for transfer tax purposes as a non-listed French or foreign company whose assets are comprise more than 50% in value of French real estate or rights in rem or shares in companies qualifying themselves as French real estate companies. The test is applied either at the time of the transaction or any time during the previous year.

Some tax considerations regarding lease agreements

Lease agreements of more than 12 years in duration are subject to registration duties. Registration duties will apply at the rate of circa 0.715% (plus CSI at 0.1%) and be assessed on the estimated total amount of the rents and service charges over the rental period (broadly limited to 20 years). This is in principle a tenant’s liability, but the lessor can be held jointly and severally liable.

In accordance with the provisions of an ordinance dated 19 June 2024, lease agreements of more than 12 years should no longer be subject to the current publication/registration formalities and duties by 1 January 2029 at the latest. Specific publication and registration formalities should still apply to specific leases including those granting real estate rights to the tenants. The matter should be followed-up as further clarifications are expected to be provided by decree.

*According to the 10 December 2024 exchange rate

Download: Handbook for Real Estate Transactions