Today is: 17 May 2012
Please note that French law is a complex subject and you should not rely on this article without professional advice on the facts of your case
7 Day cooling off period
In an important case decided on 26th January 2011 (number 09-69.899) France’s Supreme Court considered a matter of practical importance to private buyers of residential property. Such buyers have a 7 day cooling off period under Article 271-1 of the Construction and Habitation Code. This allows a buyer without giving any reason to withdraw from a purchase and have his money returned. The Code provides for formal notice to be given by recorded delivery letter. In practice however, especially with foreign buyers, the notaire or estate agent who drafts the contract often simply hands the 7 day notice to the buyer.
In this case the notaire handed the 7 day notices to the buyer. Some time later the buyer sought to withdraw from the transaction claiming that the notice had not been validly served. The buyer sued the seller for the return of his deposit and a declaration that the sale was now null and void.
The Supreme Court upheld the buyer’s contention. The notice had to be served exactly as stated in the Code. The recorded delivery ensured there was certainty of date of receipt of such a notice so it was certain when the 7 day period expired. The seller in the case argued that this certainty was provided because the notaire was involved and as a public official could certify the date. The court refused to accept this argument. The key issue here for sellers is not to let the notaires hand such notices to buyers but to go through the postal service even if this holds up completion of the sale.
Tip - If you are under pressure to get a quick sale then another option is to get a bailiff (huissier) to attend and certify that the notaire handed the form to the buyer.
Wealth Tax
There is an exemption from Wealth Tax for assets used in a business. The assets are typically commercial property and machinery but also include cash and other investments needed say to provide working capital for a business. However what happens if a company has a policy of not paying dividends and instead accumulates cash? Will this make the holder of the shares liable to Wealth Tax because the cash is seen as savings and not needed for the business? In a recent Supreme Court case (14th December number 10-10-139) a company had substantial cash reserves way above what a company with its turnover would need to run the business. The French Revenue claimed that this excess cash was subject to Wealth Tax.
The Supreme Court said it was not. There were two aspects to the test. Firstly you had to establish that the funds were higher than could normally be expected and secondly you had to show that the funds being held were not necessary for the business activity of the company. This can be interpreted as meaning that if a company is building up cash for an acquisition (rather than borrowing) the cash will be viewed as a business asset and thus exempt. There may be other reasons for a cash build up such as a competitor entering the market.
Tip - The best approach is to keep board minutes which show why commercially you need a high cash reserve within the business.
Sale of house – exemption from Capital Gains Tax
You are exempt from French capital gains tax on the sale of your main residence. A house counts as a main residence even if you have vacated it before the sale, provided the length of time the property is unoccupied is “normal”. In a Supreme Court case (6th October 2010 number 2010-018686) the seller vacated their main residence in January 1997. The property was sold in December 1999. The delay was caused by the local authority starting a planning review in the area which made a sale difficult. The court decided taking into account these circumstances the delay was “normal” and the gain was exempt.
Tip - If you are in this position keep evidence of unusual problems which make it difficult to sell.
Suspensive Conditions
Suspensive conditions in a contract for the sale of land usually allow the buyer to withdraw and recover his deposit. In a recent case (15th December 2010 number 10-10.473) the suspensive condition allowed the buyers to withdraw if they did not get planning consent. The sale did not complete and the buyers relied on this clause. The seller showed that the buyer had not made an application and that the failure to get planning permission was caused by the buyer. The buyers argued that there was no prospect of planning permission and so pointless to apply. The court accepted this argument and told the sellers to refund the deposit.
Tip - Suspensive conditions look simple but when invoked rarely are. They need to be carefully drafted at the outset.
Estate agents commissions
Estate agents are always keen for sellers to sign their mandates at the outset and with good reason. Sellers should be careful and not sign mandates they do not understand. In a Supreme Court case (6th January 2011 number 09-71.243) the owners of the land signed a mandate with an estate agent who found a buyer who signed a contract to purchase. The property had first to be offered to the local authority, which is normal, who decided to buy it. The local authority subsequently sold part of the land to the original buyer. The agent tried to get a commission from the original buyer claiming that after the local authority had exercised the option to buy the original buyer had agreed with the agent to pay a commission if the local authority sold part of the land to him.
The court decided he did not have to pay the agent’s commission. The court said that the law was clear that a commission was only due if before any engagement or negotiations the agent had a written mandate signed by the seller or buyer. The court said it was possible to have an agreement to pay a commission at a later date but this was only valid if it was entered into after the sale had been properly completed. It is however difficult to see when a buyer or seller would sign a mandate to pay an agent after the sale was completed.
When very high value properties are involved it can be difficult for agents to get mandates signed. Sellers do not want to be tied down and also do not want a string of “tourists” viewing the property who do not have the means to buy. They often tell agents to first get a “serious” buyer and then they will sign a mandate. This puts the agents at considerable risk and they may have to get the buyers to sign a “mandate de recherche” agreeing to pay the agent a buyers commission. The key point is that estate agents commissions can lead to litigation.
Tip – Don’t sign a mandate to an estate agent unless you understand its implications.
March 2011
David Anderson
Sykes Anderson LLP