Property Round-up in France

By David Anderson solicitor and Chartered Tax Adviser at Sykes Anderson LLP Solicitors and Chartered Tax Advisers.

Please note that international property law is a complex subject and you should not rely on this article without professional advice on the facts of your case.

This is a short summary of a few matters in 2011 which affect owners of French property and some practical advice in relation to them.

1. Asbestos discovered after purchase

The purchaser bought a house under a contract which contained a clause exempting the seller from any liability for “vices cachés” which means any hidden faults. Shortly after the purchase, the buyer discovered that there was asbestos in the premises. The buyer sued the sellers as well as the company which carried out the diagnostic search. The diagnostic search had not revealed any asbestos. Diagnostic searches in France are part of the conveyancing process and are typically commissioned by the seller and are a form of survey.

The Supreme Court decided that neither the sellers nor the company which carried out the asbestos diagnostic report was liable. The Court decided that the sellers had carried out their obligation to provide such information as they were aware of and because there was a clause in the contract exempting them from any hidden faults, they could not be found liable. The company which carried out the diagnostic search for the asbestos had carried out what was required of it under the relevant French law which required the company to find any asbestos which was accessible without having to carry out any works which would destroy the property. It had not been proved that any visible asbestos was present.

Advice: this goes to show that it is sensible to have an English style survey done on the property, which is unusual in France. You cannot fully rely on the diagnostics and it is very difficult to claim compensation from companies which carry out these reports. Be careful of floors which have a new surface laid over them, this may be hiding a termite problem or walls which have been covered with plasterboard, there may be asbestos behind it. If there is a mention of traces of say asbestos being detected you may decide this has to be looked into further.

It is difficult to have the standard clauses regarding the limits on sellers' liability for the condition of the property changed. In practice it is “buyer beware” so if there is anything suspicious ask the seller to agree to further checks. The diagnostic searches are technical and can be difficult for people with limited French to fully understand. It is sensible to make sure you understand what is in them.

2. Second homes new capital gains tax exemption

A new exemption has been inserted in the French Tax Code for second properties. The new rule provides that on the first sale of a property, which is not the seller's main residence, if the seller has not been the owner of his main residence for 4 years before the sale there is to be an exemption from capital gains tax on the sale of the property. The exemption is limited to the fraction of the sale price which the seller, within a period of 24 months from the sale, uses to buy or to build a residential property which from its completion, or the date of his acquisition, he uses as his main residence.

In other words, if the sale price of the property is entirely used to purchase another property which is used as a main residence then no capital gains tax will be payable in France on the sale of the first property. Rules have not yet been made as to how this is to apply, especially to non-residents.

Advice: this last minute amendment to the new capital gains law looks like it could be useful to some UK sellers. The way it will work has not been set out. Assume you wanted to sell a French property you had and buy a main residence in the UK would the tax have to be held in France and only released once you could show the French tax authorities you had bought a main residence. How would you prove this? It is something which is going to become more important.

3. Computer diagnostic

A draft law has been submitted in the French senate for a “computer diagnostic”. This would be added to the other diagnostics the seller is obliged to obtain such as for lead, asbestos and termites. Currently, you also have to obtain an energy diagnostic and also one for natural risks, such as earthquakes. The new diagnostic will give information to purchasers about the accessibility of the property to communication services, such as the internet. Implementation of such a diagnostic is currently being studied.

4. Renting flats

Several owners of flats had rented their properties on a furnished basis. The syndicat (Management Company) opposed this on the basis that the co-property rules (like the rules in a lease) provided that the flats could only be occupied “in a bourgeois fashion by people of good lifestyle and morals”. They could not be rented out furnished without the authorisation of the majority of the flat owners. The Court of Appeal decided that the flat owners could rent their properties out furnished in this way and decided that the restriction on their right to rent were not justified by the use of the building and that the clause restraining the rights of the co-owners on the private parts which they owned were invalid.

Advice: care should be taken when buying properties in “bourgeois” buildings if you are planning to rent them out as holiday rentals which is likely to annoy neighbours. In these cases, the Court may well be more sympathetic to preventing this use, as it is not what the building is intended to be used for.

5. SAFER – right of first refusal

SAFER is an organisation which has a right of first refusal on the sale of agricultural property. This right can extend to farmhouses and larger buildings with agricultural curtilage. At the moment, the right of pre-emption only applies if the entire legal title is sold. If a usufruit (life interest) or a nue-proprieté is sold then SAFER has no right of pre-emption. It has been possible to get round the SAFER rules by selling a usufruit and then sometime later, in a supposedly unconnected transaction, selling the nue-proprieté. Because of the spread of this practice which is undermining SAFER's control, a new law is being considered which would give SAFER the right to pre-empt such disposals.

Advice: when buying a country property always ask what the position is with SAFER. Usually it has been dealt with. Be particularly careful if you are buying a house from one seller an adjoining land from another seller. You do not want to end up having to buy the house but not being able to buy the adjacent agricultural land because SAFER pre-empts you. SAFER is more likely to buy (cheaper) agricultural land than property which comes with a house.

6. Wealth Tax loophole partially closed

The finance law passed in 2011 has ended a useful Wealth Tax saving loophole. It used to be possible for foreigners to purchase very expensive properties using a French SCI and then lend money to the SCI to purchase the property. This shareholder loan to the SCI was deductible when valuing the shares in the SCI which meant that, in practice, anyone using this route would not pay Wealth Tax until the property increased considerably in value from the date of purchase. Many commentators say this loophole has now ended because of this year's Finance Act. This is not however the case and planning opportunities still based on this structure are available which are simple and likely to work.

Advice: Wealth Tax planning here is technical and requires expert advice. Tax planning here really only starts to become worthwhile once your investment in a property is for over €3 million.

November 2011