Service France

Conversation in February 2005 between a UK seller of a French property and David Anderson French property and tax specialist at Sykes Anderson LLP.

Please note that the information herein is of a general nature and you should not act or refrain from acting on it without professional advice on the specific facts of your case. Property law is a complex subject and the above is a basic outline only and is intended only as a general guide. Nothing herein constitutes financial advice.

Q. I am selling a French property I have owned for a few years at a very good price to a UK buyer. My worry is about the contract, which the buyer wants to be subject to obtaining a mortgage. I know the property is overvalued and the buyer bought without researching the local market.

A. As most people know, contracts in France are subject to “suspensive conditions” the most usual of which is the buyer obtaining a mortgage. In practice this is not usually an issue and sellers rarely find themselves studying the wording in the contract. However a prospective UK buyer who starts to worry about valuations may seek to use it as a way out of the deal. Most English sellers have no experience of how this works and how to protect themselves.

Q. I thought it was just a case of the buyer applying for a mortgage and if he couldn’t get one the estate agent finding a bank that would lend?

A. That’s the common view but it is more complex. The contract has to state whether the buyer needs a mortgage. If the purchase is to be without a mortgage then the buyer has to write this out by hand acknowledging that he will no longer have the right to withdraw from the transaction if he does in fact need a mortgage. The first point to note is that a person without the necessary knowledge of French needs to do this through an interpreter otherwise the whole contract will probably be null and void. This is where an English lawyer representing the UK buyer at exchange of contracts is helpful.

Q. Any other obvious ways I can be caught out?

A. Be especially careful of contracts signed under a power of attorney because the mortgage “opt out” needs to be in handwriting in the power of attorney personally written out by the buyer. This is most unlikely to cross the mind of a buyer’s lawyer asked to produce a power of attorney for a busy jet-setting client who leaves the “minutiae” of sorting out the purchase to others. My view is to avoid powers of attorney or “procurations” here.

Q. How long does the buyer have to find a mortgage?

A. A minimum of one month. This can be extended and it is worth considering whether you should let the buyer have more time. At its simplest then if the buyer cannot obtain a mortgage in one month he can withdraw.

Q. Are any other terms such as amount of mortgage compulsory?

A. No. Everything else is up to the buyer and seller to agree and this is where careful drafting can pay off. The amount of the mortgage, interest rate, repayment period, bank(s) and special conditions should be thought through. If for instance a particular or unusual mortgage is stipulated and the bank refuses for extraneous reasons to lend then the buyer will be able to walk away from the contract. The same applies to low rates of interest or repayment periods which extend beyond the buyer’s retirement date. If the buyer is moving to France he may well have a good job in England which will make getting a mortgage easy but have difficulty if he plans to start a small business in France.

Q. What sort of terms should I add as the seller?

A. A useful one is to be able to require production of a letter of refusal from the bank called an “attestation”. This should stipulate the date the mortgage was applied for, the amount and the interest rate. Another useful clause is to require the buyer to apply to several banks. Be careful about imposing conditions which are onerous or illegal such as requiring a mortgage offer to be accepted immediately when by law borrowers must have 10 days to consider the mortgage offer.

Q. If the seller claims he cannot obtain a mortgage and wants to withdraw what legal steps can I take?

A. Normally you will rely on Article 1178 of the Code Civil and seek to get an order from the French court that the buyer’s deposit is forfeited to you. Article 1178 states that the suspensive condition is deemed to be satisfied if the buyer has prevented it from being satisfied. This has given rise to a lot of litigation! For example sellers were successful when the buyer applied for a substantially greater mortgage than the one stated in the contract, when the buyer did not give full information about his income and not putting in a mortgage application by the time stipulated.

Q. What about examples when the buyer managed to walk away and recover his deposit?

A. The buyer was able to show he simply did not earn enough and could not afford the repayments, the conditions imposed by the bank were excessively onerous and finally the contract stated a specific bank, which inexplicably turned the buyer down though other banks were willing to lend.

Q. What happens if I just tell the notaire to keep the deposit to put pressure on the buyer?

A. If you lose in court interest starts running on the money after 15 days from the buyers demand for repayment at around 5%. You may also have to pay a fine of up to Euros 30,000.

Q. What about any estate agents fees and my costs?

A. You are not allowed to deduct these from the deposit.