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Service France
Please note that French tax law is a complex subject and you should not rely on this article without professional advice on the facts of your case.
In the UK if a property is sold at an undervalue the courts will generally not set it aside unless there has been some form of fraud or the seller has been under some form of incapacity at the time of sale. This is usually very difficult to prove. The courts have made it very clear that they do not get involved to help people who have just done a bad deal. This is not the case in France which recognises the Roman law concept of “lesion” which allows a sale to be set aside if the deal has been particularly bad for the seller without the need to prove any form of deceit or fraud by the buyer.
Article 1674 of the French Civil Code provides that when a seller has suffered a loss greater than 7/12 (seven-twelfths) of the price of land, he is entitled to apply for the rescission of the sale. Rescission means that the sale is declared null and void and the buyer has no good title and the seller must pay back the money received. It also affects the security any bank has on the land which the buyer has mortgaged and indeed affects the title of anyone who has bought from the first buyer whose title will also become void. As such it is a draconian provision which could jump out in unexpected ways. It applies without any other conditions having to be fulfilled other than the valuation.
The rescission of the sale must be applied for by the seller within 2 years after the deed of sale was signed. Within these 2 years if the seller thinks that he has sold the house for less than 5/12ths of its value (his loss is then more than 7/12th as provided in article 1674 Civil Code), he could ask the judge to annul the sale of his property. The French Land Registry will then treat the conveyance as a nullity and restore the position to that which prevailed immediately before the sale.
The judge will have to decide if the rescission can apply. In order to be able to do so, 3 experts will be asked to value the property at the day it was sold. The judge will then reach his decision on the basis of the 3 valuations. In order to protect themselves French notaires always put a clause regarding this potential rescission into the deed of sale when a property is sold within 2 years following its purchase. This is a boiler plate type clause which few English buyers ever consider but which would almost certainly mean they will have no recourse against the notaire. There is no need for there to be a sale on for the right to rescind to apply but (see example below) this is more likely to trigger a complaint from the original seller if he finds out the property has been sold on at a much higher price. Amazingly the notaire on a further sale on does not have to tell the first seller that rescission may apply even if it is obvious from the prices shown in the documentation or indeed even if the same notaire is used. It is all down to the seller finding out probably from an estate agents advertising.
The rescission can apply even if there is no sale but the first seller is more likely to notice that he has suffered a loss if his former property is sold with a huge difference between prices.
Example: Mr X sells a property to Mr Y for €90,000 on 1st August 2006. Mr Y sells this property one year later for €300,000. Alerted by the big difference between the 2 prices, Mr X applies for the rescission of this sale. The judge appoints 3 experts to value the property at 1st August 2006. Their valuation is €240,000. 5/12 of €240,000 = €100,000
7/12 of €240,000 = €140,000
According to Article 1674 if the Civil Code, if Mr X has suffered a loss greater than 7/12 of the price he is entitled to rescission. In our example Mr X has sold for €90,000 so his loss is €240,000 - €90,000 = €150,000, i.e. greater than €140,000 which represents 7/12 of the sale price.
Therefore Mr X is entitled to apply for rescission. In practice he will be able to decide whether he wants to cancel the sale or to receive the difference between the amount received for the sale and the actual value of the property. Please note that this will not be possible after 1st August 2008 because the 2 year limitation period will apply.
In practice lesion rarely applies in straight forward house purchases because the price difference has to be very substantial. However it can arise if there is say substantial money under the table by a seller shortly before his death (who may seek to defeat the French rules of forced heirship or evade Inheritance Tax) and any of his heirs intervene after his death but within 2 years of the sale. It could also arise if land with development potential is sold and planning permission is then obtained. The danger is that a perfectly innocent purchaser within the 2 year period could be badly prejudiced which makes it worthwhile being careful if you are buying a property which has changed hands within a short time period.