Important Note: - The information given here is for information only and is of a general nature and is not exhaustive or comprehensive. Taxation and banking law are technical and complex areas of law and you should not act or refrain from acting without comprehensive specialist advice on the facts of your case. Please note that Sykes Anderson LLP does not provide investment advice and does not act as a mortgage broker or make introductions to lenders.
Q. I have bought a property in France to improve and sell on. The difficulty I have is accessing bank finance for works because of the credit crunch. How can I bring in private money to finance me?
A. As in the UK it is perfectly possible to have a private mortgage in France with either an individual or a company as a lender. Typically in smaller property developments the lenders are wealthy individuals or funds who are looking for a return significantly higher than that which they can obtain from a bank deposit. In exchange they are willing to accept a higher level of risk in dealing with an individual borrower for a higher return. Generally UK developers will be looking to UK lenders with backgrounds in property who may be resident in low tax jurisdictions such as Monaco.
Q. How is the deal structured?
A. Normally the private lender will prefer to lend on a property which does not have an existing bank mortgage on it. This is because there is the risk that the bank with the first mortgage may call in its loan and force a sale which may mean the private lender does not get all his money back. There is no way the first mortgagee can prevent a second mortgage from being put on the property under French law. However the loan agreement with the first mortgagee may provide that the first mortgagee has to be notified about a second mortgage which may result in the loan being reviewed.
Q. Can I negotiate the terms of the mortgage in England?
A. Yes, you can negotiate the interest rate, period of the loan and any special terms in an English document, governed entirely by English law. The loan can also be expressed in sterling. The loan document will, however, need to be translated into French, in order for the notaire to register it at the French land registry. The amount of the charge will need to be shown in euros for this purpose. However for the reasons set out below it is better if the facility letter or agreement between the parties is in sterling. The charge will be governed by French law and any enforcement will have to be through courts.
Q. What happens if there is more than one lender?
A. The lenders can structure the loan as one transaction by lending through a company or other vehicle. Otherwise they can both be registered as holding a first mortgage with equal rights.
Q. What sort of notaire’s fees will I be charged?
A. The notaire’s fees will be payable strictly by the lender, though in most deals the borrower has to pay these in order to get the money from the lender in the first place. Notaire’s fees, including French stamp duty, are roughly 0.7% of the amount borrowed). These fees are fixed by law and it is generally not possible to negotiate lower amounts.
Q. Are there any special French laws which apply to such loans, which could cause problems?
A. Yes, France has consumer protection laws against usury. However, these laws do not apply if the loan is entirely arranged and made outside France with no obvious link to France. The two contracts (deed of purchase of the land and the loan) must not be connected. In addition the French usury laws are aimed at borrowers who are French resident individuals and not companies. This can cause a problem because of the interest rates private lenders require.
Q. Is there any withholding tax on interest I have to pay to the lender, say in the UK?
A. It does not appear that any withholding tax will apply in the UK as the Revenue is likely to view the interest payments as French source. The French authorities are only likely to apply any withholding tax if you are resident in France or have a permanent establishment in the country.
Q. Can I deduct the loan for wealth tax purposes?
A. Yes, the loan should be completely deductible. Please note that you may, however, have to produce a copy of the loan document for inspection by the French Inland Revenue.
Q. I have heard about mezzanine finance. Can you use this structure for this kind of finance?
A. Yes. Mezzanine finance is normally finance which is at a higher rate of interest and bridges the gap between normal secure lending, called ‘senior debt’, and the equity you have or are going to put into the property. In other words, if the project has value of €1 million, and you have €200,000 of your own money available, and can only raise a mortgage of €600,000, you will typically be looking for €200,000 of mezzanine finance. Provided the mezzanine finance is arranged as debt rather than as equity, you should be able to use this structure. It is not unusual for mezzanine finance agreements to have devices in them which come close to giving lenders an equity stake in the venture with the protection of a first mortgage over the property. Lenders will of course seek to resist this.
Q. If there is a dispute between me and the lender does the court case have to be heard in France?
A. No. It is possible to agree in the contract that any dispute between you and the lender is to be subject to English law and any case heard in the English courts. This is normally the best way to proceed with these matters. The French courts would only be concerned with realising the security over the property ie forcing a sale to protect the creditors interests.
October 2008