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LEGAL GUIDE TO
New BuildFrench Property
Efficient, expert advice
Ability to understandand acknowledgecomplex family issues
Fluent in French andEnglish, a reliable,quality legal advice
In-depth understandingof the Englishimplications of Frenchproperty ownership
navigating theprocess
Buying a property off-plan is a popular optionfor many people. Contracts for the sale ofincomplete properties are different from thoseused for the sale of existing properties andare subject to strict laws for the protection ofthe consumer which largely dictate theirformat.two notaires will then share thestatutory fee.
The three main types of “new-build” transaction are:
• single house construction
• purchase of a property on a develop-ment under construction, (perhaps anapartment or a house on an estate)
• purchase of a property which, uponcompletion, is to be leased to a tenantcompany that will use it for holiday lets,with rent being paid to the owner –generally known as a ‘leasebackpurchase’.
Whatever type of property purchase youchoose, new-build or otherwise, it isimportant to consider the taxation and estateplanning implications.
Single house construction
A single house construction is when youpurchase land and then have your ownhouse built upon it. There are a number ofcompanies that specialise in suchtransactions, often offering to build one of aset of house styles for you, or you can ofcourse contact your own architect and havea house built to your own specification.
Generally an agreement for the purchase ofland is completed along with a separatecontract with a builder for construction of theproperty on that land. This second contractis known as a contrat pour la constructiond’une maison individuelle (CCMI). The twocontracts must work together properly, socareful drafting is required.
As with other types of new-build propertythere are strict requirements as to theinformation which such contracts mustcontain. Larger builders and developers arelikely to have their own standard forms of
contract which comply with therequirements, although again care should betaken to ensure that they are in fact suitable.
The land purchase contract may needcertain special clauses added, including forexample a condition for planning permission.The construction contract would itself bedependent on the land purchase contractbeing completed. In this way, provided thatthe land can be purchased, and planningpermission granted, then the constructioncontract can take effect; on the other handthere should not be a situation in which theconstruction contract is binding, without landor permission to build.
Lotissement
A lotissement is a particular case of singlehouse construction. A developer divides anarea of land and then sells it by lots todifferent purchasers. The developer has toobtain a specific permit and must build inparticular the road, and any communityfacilities. Once the developer has thispermission, he will be able to sign an offerof sale. When he has finished the roadworks, you will be able to apply for the writtenplanning permission and then to sign a saledeed. You sign a sale deed before thecompletion of the road works.
Once you have obtained planning permission,the construction of your home can begin. Yourplans will have to respect certain buildingspecifications (le cahier des charges) whichimpose some rules of construction to ensure asimilar appearance between the differenthouses in the lotissement.
Purchase of a property inconstruction – ‘vente en l’étatfutur d’achèvement’
This is when you purchase a house orapartment on a development underconstruction, a system generally known inthe UK as “off- plan” sales. In France thesetransactions are known as vente en l’étatfutur d’achèvement, (VEFA) which describesthe fact that the sale deed – the Acte deVente – is signed well in advance of theproperty actually reaching completion(‘achèvement’).
Typically you will be required to sign areservation contract, and then the purchasedeed before the building work has finished.You take ownership of everything that hasbeen built by then, and the remainder aswork progresses.
Ownership of the property transfers to you,(the buyer), well before you are able tooccupy it. In general the notaire will look totransfer title when foundations arecompleted, when normally about 35% of thepurchase price is payable. This does meanthat if you are buying a third floor apartment,no part of the work for your particularapartment may even have commenced.Nevertheless, various guarantees as tocompletion must be included in this form oftransaction. There must be ample protectionfor the buyer, to ensure that the propertybeing purchased will actually be completed.
A variation on the VEFA is the vente en l’étatfutur de rénovation which, as the nameimplies is the sale of a property which is inthe process of being renovated. This is nota very common form of transaction but issometimes found when, for example, anolder apartment block is undergoing a majorrenovation.
As mentioned under co-ownership below,where you are buying an apartment, or ahouse on certain estates, you will not only bethe absolute owner of that property, but youwill also take a proportionate ownership ofall of the common parts – that is the landupon which the building is situated, thestructure and common areas of thebuildings and so on.
is a difference between the reservationcontract and the final deed of sale. The buyercould refuse to sign the completiondocuments on the grounds of unreasonabledelay in completion of the building work orbecause the price is 10 % higher than theagreed price.
It may, however, be difficult to proveunreasonable delay on the part of thedeveloper, not least because variouspotential delaying factors will be anticipatedwithin the reservation contract anddeveloper’s liability excluded in that respect.The reservation contract should be carefullyscrutinised. If the seller refuses to sign, hehas to refund the deposit and he could besued for damages. It is at this point that thenotaire’s fees are payable by the buyer -these are normally in the region of 2% - 3%of the purchase price, plus a further 1% if amortgage is secured against the property.
It is important to note that transfer ofownership may take place well before aproperty is ready for occupation. You shouldseparate the point of legal completion fromthe moment when delivery takes place.
3) Delivery of the property
The delivery of the property is a veryimportant stage in the process, which willtake place a good while after the actual legaltransfer of title has taken place, as referredto above.
The seller gives you the keys of your home.You have to declare all the apparent defectsyou can see in a snagging list (liste deréserves) that both you and the vendor willdate and sign.
The process relating to this kind of sale willnormally be as follows:
1) The reservation contract
The reservation contract is the seller’scommitment to reserve the property for thepurchaser in exchange for the payment of adeposit. The reservation contract must besent to the buyer who has seven days afterthe receipt of the letter to retract, by way of acooling off period. If the buyer withdraws hisoffer, the deposit will be refunded to him,provided that the withdrawal fulfils certaincriteria.
The reservation contract must contain certainclauses and in particular:
• a detailed description of the futureproperty
• a technical summary of the siting of theproperty within the development and ofthe materials used
• the anticipated date of signature of thesale deed
• the provisional date of completion of theconstruction
• the amount of the deposit.
2) The sale deed
A draft of the sale deed has to be sent to thebuyer at least one month before the date ofcompletion.
If one of the party refuses to sign the saledeed, then in the case of the purchaser’srefusal, the deposit is refundable only if there
property inconstruction
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Only a Frenchnotaire practisingin France can drawup the deed (actede vente)
Typically you willbe required to signa reservationcontract, and thenthe purchase deedbefore the buildingwork has finished.
Once one of the above guarantees is in place,you will either get your money back, orconstruction is assured. We can advise youabout these different guarantees, and it is wiseto be fully aware of their implications.
‘Leaseback’ sales
Buying a new property on a leasebackarrangement may be an attractive and well-marketed method of reducing your purchasecosts, especially when you are looking to buy asecond home in popular holiday destinationssuch as ski resorts. While it can offer a good wayof structuring your purchase, it is actually highlycomplex and should not be entered into lightly.As a rule of thumb, it is probably prudent tothink of such purchases as very long-terminvestments (although this is a subjective andgeneral comment and not intended to bemade by way of investment advice; you maybe happy to treat it otherwise).
The situation is commonly that a developer willobtain permission to develop a resort, and aspart of this, separate properties (typicallyapartments in a block or chalets on a privateestate) are pre-sold to buyers. At the sametime, those buyers agree that once theproperty is delivered to them, they willimmediately enter into a lease with a holidaycompany who will look to rent out the propertyas short term holiday lets.
If the flat or the house does not conform to itsdescription in the sale deed, you may be ableto seek remedy for breach of contract andsome damages, or to compel the builder tocomply with the contract.
The buyer has one month after the delivery todeclare any apparent defects in the building.After that, the buyer will be able to rely on thebuilder’s liability for all structural defects duringa period of ten years. The garantiedécennale protects the buyer against certainlatent defects during the ten years followingthe delivery of the property.
There are three kinds of guarantees that theseller can choose from:
• The garantie extrinsèque given by abank or a insurance company whichprotects the buyer against the insolvencyof the builder
• The garantie intrinsèque given by thebuilder who promises the completion ofthe property. This guarantee is onlyrecommended when the risk of non-completion or insolvency is low
• The garantie de remboursement whichallows the buyer to be reimbursed in thecase of non-completion of the construction.
breach of contract
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Leasebacksales shouldnot be enteredinto lightly
French lawdoes notrecognise theconcept of“subject tocontract”
Co-ownershipis governed by a set ofrules andregulations
The benefit to the owner is initially agovernment incentive to develop tourism –the TVA (French VAT) applicable on newdevelopments is not charged. TVA iscurrently 20%, and this results in a discountof the purchase price (although see underTaxation below for a further discussion onthis point).
Where the intention is to occupy a propertyfor only a limited time each year, or even notat all, leaseback ownership can offer aregular rental income, without the burden ofhaving to market the property personally, oremploy local Agents to do this. Inevitably thiswill depend on the popularity of a particularresort, and it is important to research suchissues before signing up.
While such schemes normally offer a regularrental stream, it is commonly the case thatthe amount of the rent is lower than may beobtained for a similar property if offereddirectly, although this is probably thecounterbalance for not having the burden ofmarketing the property, cleaning it,managing guests and so on.
Indeed this is a relevant point: it is arequirement of such leaseback schemesthat in addition to the provision of rooms toholiday makers, other ‘quasi-hotel’ servicesmust be available, generally including linenservices, cleaning, food and beverage, bar,leisure facilities and so on. The normalposition is that these services are generallyavailable to property owners as well asholiday makers.
It is also important to be aware of themanner in which the lease anticipatespayment of rent. Some leases agree a fixed
rent, while others split the profits declared bythe tenant company between the whole poolof property owners as a dividend. In thiscase you must bear in mind the possibility ofprofit not being declared.
It may be wise to seek some assuranceabout the viability of the development, thestrength of the holiday company, and thesustainable level of rent. It is also importantto establish exactly how the lease could beterminated, if at all, and whether anypenalties would be payable for such atermination.
If the rental income is to be used to covermortgage payments, give thought to whatwill happen if a variable rental incomeproduces less than the monthly instalment.What if the tenant company becomes unableto pay the mortgage at all – perhapsbecause of insolvency?
It can be seen from the points raised abovethat a leaseback can be an attractive optionfor some, but there are a number of potentialpitfalls and a thorough understanding of theimplications for you is highly desirable.History has shown us that leasebacks havein the past been sold as something like ‘freeproperties’ – where the buyer can obtain an80% mortgage, for which the repaymentsare covered by the rental income, and theremaining 20% just about covered by theTVA reduction. Such talk – if it still persists –gives credence to the maxim that ifsomething sounds too good to be true thenit probably is.
A leaseback purchase may be ideal for you,but you must be careful where you buy, andbe fully aware of all the terms of the
contracts. The contract documentation forsuch transactions is generally quiteburdensome. In reality leaseback purchaseare quite complex and need to beconsidered in detail prior to signing anycontracts.
Co-ownership
In many purchases in multi-occupancydevelopments, such as apartments orhouses on an estate, you will be acquiringnot only the freehold of your own unit butalso rights in the communal areas. Theserights are expressed as a fraction anddetermine your proportion of voting rightswith regard to the running of the co-ownership committee and also yourresponsibility to contribute to the runningcosts and the costs of any agreed works.
The building or development is run by acommittee of the owners, known as thesyndicat de copropriétaires who appoint aperson or company known as a syndic to actas a managing Agent to administer its day today running. The syndicat must hold anannual meeting and all co-owners mustreceive advance notice of this.
The co-ownership is governed by a set ofrules and regulations binding upon all co-owners and anyone using a property. Therules set out how each property can be used(generally to ensure no disturbance ofneighbours), and sets out the constitutionof the management committee and votingcapacity of each co-owner in meetings.
Taxation
Taxation is an important area to considerwhen purchasing new-build properties.There are a number of issues that may arise,especially insofar as new properties onleaseback arrangements, and selling newproperties, are concerned. The main pointsto bear in mind – generally income tax andTVA – are summarised below; it is howeverimperative that a full and in depth analysis ofthis subject be addressed.
Local taxes
It is normal for new property developmentsto be exempted from the local land taxknown as the taxe foncière for the first twoyears following construction. This will not
always apply, and when it does it may not bea total exoneration, since the local authoritywill often reserve the right to charge at leasta part of it. Nevertheless it does offer a smalldiscount. It is the responsibility of theproperty owner to claim the exoneration.
Income tax
Just as is the case when buying any property inFrance, French income tax is applicable on rentalincome derived from the property. This is the caseeven if you are not resident in France.
It is the owner’s responsibility to register forthe tax at the relevant tax office.
If you are UK resident, then you must alsodeclare the income on your UK tax return,
although you are able to take into accountthe amount of tax already paid in France, by virtue of the double taxation treaties inforce. These have the effect of ensuring thatthe greatest aggregate amount of tax ispayable, so you may be required to make abalancing payment of UK tax if yourmarginal rate in the UK is higher than inFrance. On the other hand if your taxation ishigher in France, then you would not beentitled to a rebate in the UK.
If you are UK resident you will need todeclare your French income at the Centredes Impôts des non-résidents in Noisy LeGrand. You may well benefit from contactinga French accountant to address this.
TVA (French VAT)
There are a number of ways in which TVA isapplicable on new-build properties. The rateof TVA is 20%. TVA is applied on thedevelopment of a new house – but not theland if this was purchased separately. In thecase of a vente en l’état futur d’achèvement,the TVA applies to the whole sale price.
Where properties under a leasebackscheme will not be subjected to TVA at thetime of purchase, it is possible that some orall of this TVA allowance can be claimedback by the French state, in certaincircumstances.
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