Buying a French property off-plan – make sure you read the small print

First published: 9th May 2005 by FrenchEntrée

By FrenchEntrée

When buying a French property ‘off plan’ there are some issues a buyer should take into consideration both before signing the contract agreeing the purchase and during the construction process.

The Contract

You should not sign any agreement until you are entirely happy with its contents and fully understand the legal implications of what you are signing. If you are unsure, then you should first consult with a solicitor who is an expert in French Property Law.
Once you have spoken with a developer and wish to go ahead with an off-plan purchase, you will be asked to sign a Contrat de Reservation. This fully commits you to the purchase of the property – it does NOT allow you to withdraw only at the cost of your reservation fee, as other contracts might.

Contracts for the sale of property off plan are known as VEFAs or ‘Vente en état future d’achèvement’. They are quite distinct from other contracts for the sale of land and they have certain legal and practical pecularities that are not seen in English law.

Deposit

On signing such a contract you will usually be asked to pay a deposit of between 2 and 5 per cent. The maximum of 5 per cent is set by law. If, however, the developer states in the contract that the property will not be completed within a year of the date of signing it, then the maximum is 2 per cent (Rule 261-28 Code de la construction et d’ habitation).
You should also ensure that the contract makes provision for the deposit to either be held in a bank account in your name set up by the developer or, alternatively, held by the notaire until the date that the legal title to the property is transferred to you.

This is actually a legislative requirement and if the developer fails to comply with it, this is an offence punishable by a fine and/or imprisonment. Your knowledge of the law in this area may ward off unscrupulous developers if you encounter difficulties in getting your deposit repaid (Rule 261-29 Code de la construction et d’ habitation).

You are entitled to the return of your deposit within three months of requesting it if the developer does not proceed with the transfer of the property to you within the timescale set out in the contract, or if you are unable to obtain a mortgage offer (provided that details of the mortgage you have applied for are contained in the initial Contrat de Reservation which you signed). Once again this is your statutory right.

When signing a ‘Contrat de Reservation’ you are effectively agreeing to complete the purchase of the property at some later date. The date at which the legal title in the property is transferred should be stated in the contract.

It is important to note that the date of transfer of the legal title to the property is not necessarily the date that completion of the building works takes place and thus the date that the property will be available for occupation.

Transfer of the legal title takes place when
a) the developer becomes the legal owner of the property and
b) is able to offer you a legal guarantee that either the construction of the property will be completed or that if it is not, your funds will be repaid. Once again these two provisions are legislative requirements set down in the Code de la Construction et d’habitation.

With respect to legal ownership of the land, the British assumption that the developer owns the land is not always correct – the developer can in fact enter into a contrat de reservation with you without owning the land that he intends to develop. The contrat de reservation should set a date by which the legal title in the property should pass to you and if the developer is still not the legal owner at this date then he is entitled to withdraw from the contract as long as your deposit is returned within three months. You will be able to claim for damages if you have sustained a loss as a result of the breach.

If the developer is already the legal owner of the land upon which your proposed property is to be built, the transfer of the legal title in the property from the developer to you cannot take place unless the developer is able to offer one of the two types of guarantee detailed below. The type of guarantee to be offered may be very important to you in determining whether you should sign the contrat de reservation at the outset.

Builders’ Construction Guarantees

Garantie extrinsique
This is either:
a) the opening of a line of credit by a bank to the developer or
b) a bank accepting joint liability with the developer and agreeing to complete the construction of the property if the developer fails to do so.

Garantie intrinsique
This is the personal guarantee of the developer and can only be made in limited circumstances where either
a) the property is already protected from the elements (ie: the roof is on) and it is not subject to a mortgage, or alternatively
b) if the foundations of the property are built and the developer can prove that he has available to him funds equivalent to 75 per cent of the sale price of the property through either bank finance or through sales receipts from other properties.

The key distinction between the two guarantees is that the first provides that if the developer is unable for some reason to complete the purchase of the property, then the bank will step in and fund the construction. However, the latter guarantee only requires the developer to repay you the funds that you have paid out for the purchase of the property.

Thus, in the latter case, there is a possibility that, having signed a contrat de reservation, you may find a year or so later that you do not have the property you contracted to purchase and are only offered a refund of the monies you have paid out. You might then have to go to court to pursue any damages to which you might be entitled.

For most buyers off plan, the first guarantee is normally the most acceptable. You should try to ensure that the contrat de reservation states that this guarantee will be given on the transfer of the legal title to you. Usually, however, the developer will not agree to do this unless he already has the bank guarantee in place. It is more common for the developer to include a clause in the contract de reservation to the effect that he, the developer, will be able to determine which guarantee is offered on the date of the transfer of the legal title.

The reason why it is necessary to have either one of the guarantees set out above and why it is a statutory requirement that the guarantee must be offered is that, unlike in the UK where the balance of the purchase price (less the deposit) is paid on completion of the construction of the property, in France development contracts provide for stage payments to be made by the buyer to fund the construction of the property by the developer.

The maximum stage payments allowed by French law are as follows:

1)5% deposit on signing of the contrat de reservation.
2)35% on completion of the foundations of the property.
3)70% when the property is weatherproof.
4)95% on completion of the construction of the property.

(Art R 261-14 Code de la construction et d’habitation)

Buyer’s Contractual Leverage

You pay the final 5 per cent when you receive the keys to the property. If you are unhappy with the completed property in that you feel the developer has not complied with the specifications contained in the ‘notice descriptif’, then you can withhold this remaining payment. However, you must place it in the hands of a stakeholder who will hold it until the dispute is resolved by an independent arbiter. Once you comply with this requirement, the keys to the property can then be released to you.

Mortgages

French mortgages take into account the structure for financing the purchase of a new-build property and the mortgage funds are advanced in accordance with the requirements of the contract. Legal title is usually transferred on completion of the foundations of the property when 35 per cent of the total cost of the property is payable. You need to take care that the contrat de reservation includes all necessary ‘clauses suspensives’.

Costs

New-build properties are subject to VAT at 20 per cent, which is usually included in the price. This results in reduced ‘frais de notaire’. If you are planning to rent out the property, in some cases you can recover the VAT. This needs to be discussed with your professional adviser at the outset.

Sale and Leaseback

Many developers offer sale and leaseback schemes to purchasers. These allow you to purchase the property as a rental investment. The developer usually drafts the contractual documentation. Although we are unable to cover sale and leaseback agreements within the scope of this article, a purchaser should have the contractual documentation checked carefully by a legal expert prior to signing as there are a number of potential pitfalls.

Pre-contract enquiries

These are not usually raised in a formal way as in England because it is not within the legislative framework of a VEFA. This is often because French buyers carry out their own enquiries. We recommend that you ask the developer to include service charge levels and information about any proposed development in the immediate vicinity. We also recommend that you arrange to have the equivalent of a English local search carried out.