French buyers beware

French law aims to protect property buyers, and the process of buying a house in France is structured and regulated. But this does not mean buyers can afford relax their vigilance, says French lawyer Fabien Cordiez, a member of the Nice Bar Council and a UK qualified solicitor who is principal of the firm that bears his name. Here he gives a brief guide to the French buying process and associated tax and inheritance rules.

In France the house buying process starts with an initial agreement that sets out the terms and conditions of the sale. Although a provisional contract until the notaire, a state official who acts for both sides, has prepared the title deeds, the preliminary contract is legally binding on both the buyer and seller. It is therefore strongly advised to have the contract drafted by a professional (avocat or notary).

The preliminary contract can take various forms:

• A unilateral undertaking to sell: the vendor alone commits him or herself to selling within a defined timescale and at a given price; the purchaser does not commit him or herself to buying but must pay a deposit which can be lost if if the purchase does not go ahead for a reason other than those which have been agreed with the vendor from the outset (conditions supensives).

• A unilateral undertaking to purchase: the purchaser alone commits himself to buying a property under specific conditions; the vendor is held by no obligation.

• A compromis de vente (bilateral agreement - most widespread): the seller agrees to sell and the buyer to buy except if specified conditions (called conditions supensives) and only if all these conditions are complied with. The property transfer only becomes effective if all the conditions are fulfilled. The condition supensive can be obtaining a loan: if a purchaser cannot gather the funds necessary to the operation, there is no more obligation to purchase and the deposit is returned. Conversely, the deposit can be kept by the vendor if the sale is not carried out and the responsibility falls with the purchaser.

Do not pay any money before signing the contract. And when paying, it is best to pay the notary or the estate agent, but never pay the vendor directly.

Once the notaire has carried out the relevant checks and searches and all the conditions are met, the title deeds (Acte Authentique) are signed at the notaire's office. This can be done by proxy if you cannot attend but your signature on the power of attorney allowing this must be authenticated by the French Consulate or a solicitor or notary public in your country of origin. The purchaser is given a provisional ownership certificate whilst the Title Deed is being registered. The notaire pays the vendor the balance of the price and hands over the keys to the purchaser.

In French law there are only two situations where gazumping can take place. In property transactions, a pre-emption right may arise in favour of one or several authorities. The ‘SAFER’ is an agricultural organisation that can have pre-emption rights over rural properties and agricultural land offered for sale. Furthermore, in agricultural matters, there is often a pre-emption right in favour of a farmer who has worked the land. The DPU (Droit de Préemption Urbain) allows a local authority to buy in urban areas as and when land and properties are offered for sale. Under French law, all purchases made by joint owners can be subject to the pre-emption right of the other joint owner.

There is no direct counterpart to building surveyors in France. Since the 1 September 2002, a survey mentioning the presence or the absence of building materials containing of asbestos (walls, posts, beams, floors etc) must be carried out before the sale of those buildings whose planning permission was delivered before 1 of September 1997. For dwellings built before 1948 and located in designated areas, another survey must be carried out by a qualified technician in order to establish the risks of lead poisoning. In other designated areas, a further compulsory survey reveals whether or not the property is infested with termites. The expert's report must be less than three months old at the time of completion and is attached to the title deeds.

Whilst structural surveys are rarely carried out by most French purchasers, it is highly advisable to do so, especially when buying older properties.

Where apartments or parts of buildings are being bought, parts of the building can be the property of several owners and intended for the use of all: roof, walls, staircases, corridors, floors. These common parts are managed by a factor on behalf of all co-owners. Important decisions are taken in assembly, according to various rules of majority. Other parts of a building are reserved for exclusive use: this is the case with individual apartments for example. They constitute the privative parts. The law of 10 July 1965, which has been recently updated, provides the legal framework for relationships between co-owners.

Prospective purchasers should familiarise themselves with the co-ownership's statutes (Règlement de copropriété), as these provide detailed information about what is or not permitted in the building and the way the building's common charges (for example lift costs, general maintenance) are to be split between all co-owners.

Leasebacks, bring the benefit of tax rebates, equating effectively to a 16.4 per cent reduction in cost are available on new build apartments in designated areas. They can be an attractive formula for rental investment. The investor acquires an apartment in a residence and management is entrusted to a development company during a period ranging between nine and 11 years.

The purchaser is completely exempted from paying VAT. The management company assures the purchaser of a clear annual return throughout the rental contract
(around 4.5 per cent on the purchase price net of tax).

It is the management company which deals with the furnishing and the equipment of the apartment and rules all the inherent expenditure (insurance, maintenance, collecting rents and the like.

Purchasing an apartment in a ‘résidence de tourisme’ costs between 25 per cent and 35 per cent less than a traditional property, but will not always turn out to be the bargain it seems.

The costs associated with the purchase of a French property break up into three distinct elements:

• Sums due to the Treasury
These vary according to the type of property sold, the area where the property is located and the date of its construction.

• The notary's fees
The notary's fees are regulated by a Decree of 8 March 1978 (modified in 1981, 1985 and 1986). They are calculated according to the following scale (and are subject to VAT):

• Miscellaneous disbursements
These include surveyors’ fees, register searches, and excise tax, and may be paid up front by the notary. They usually vary between 458 euros and 1,525 euros.

Buildings will need to be insured. There is a multitude of insurance products whose price and services depend on each case. It is thus necessary to define the various guarantees to which you can or must subscribe.

When a property is already insured at the time of its sale, the policy cover automatically extends to the purchaser. The vendor must give the buyer the insurance policy and contact the insurer to inform him about the transaction.

Property and contents can be insured against a number of risks: fire, water damage storms, explosions, natural disasters and acts of terrorism. Insurance cover against fire hazards will include a guarantee against storm damage. Most insurers offer an electric damage cover which insures you against a dysfunction of the electric system and its consequences (provided the damage does not arise from a lack of maintenance).

In properties shared between several co-owners, the building's manager insure the common parts of the building (staircases, elevator and the like) and some privative parts of the apartments and their inside fittings. This is referred to as group insurance and provides cover for fire damage, lightning, explosions, water/flooding, natural disasters, acts of terrorism, storms, hail, snow and more. In these contracts, a clause must specify that co-owners are regarded as being third parties between themselves.

Bear in mind that France has relatively high taxes including income, property, and residential taxes, wealth and capital gains tax. Although the French Government has pledged to reduce income tax by 30 per cent in the coming years, tax is still rather high in France and there are hefty penalties for late payers, so check your French tax return for the deadline.

Property owners will have to pay a local tax (taxe foncière) which covers services such as road maintenance and rubbish collection. The cost varies from area to area. Wealth tax applies if your French assets exceed 720,000.euros. Properties with a rental value of over 4,600 euros attract a residential tax (taxe d'habitation). The tax is due by whoever lives in the property. Income tax applies to rental income. Regardless of their nationality, individuals who do not reside in France are taxed on their income from French sources only.

In accordance with the provisions of Article 164 B of the French tax code, income from immovable property situated in France is subject to French tax. Non-residents should file their tax forms by 30 April in the following year. If a property is rented out furnished and provides a gross renrtal income of more than 23,000 euro, a specific return has to be submitted to the local tax office. Net rental income from French property is taxed at a minimum of 25 per cent , but no assessment raised if liability less than 305 euros.

French capital gains tax may apply when you sell the property. Income earned from French property is considered to be income arising in France and, as such, must be declared to the French Inland Revenue. For non-EU residents, the rate is 33.3 per cent of the net gain. You may have to appoint a guarantor which may be a bank or other approved financial institution operating in France.

Your beneficiaries may be liable to French inheritance tax when you die. Parents, spouses and children benefit from higher tax free allowances, but successors who are neither blood-related nor married to the deceased are liable to pay tax at the rate of 60 per cent.

Your French property will be governed by French succession law. The consequences are that children automatically inherit part of their parents' estate. There is a limit to how much may be left by Will to non-blood relatives.

An individual’s assets on death consist of the retained portion (reserve légale) and a disposable portion (quotité disponible). The former goes to the protected heirs, regardless of the wishes of the deceased. If there are no children or grandchildren but there are surviving ascendants (living parents or grandparents), the retained portion is 25 per cent of the deceased person’s estate.

That difficulty can be avoided by opting for a purchase en tontine for jointly owned property: the whole French estate then devolves to the surviving partner, as if the property were owned in the survivor’s sole name from the time of purchase. For married couples, changing your marriage regime to "Communauté Universelle" is also an excellent method of ensuring that when either spouse dies the other inherits the property in full and avoids inheritance tax liability.

Communauté universelle involves all of the couple' assets falling into in joint ownership. A special clause (clause d’attribution intégrale au conjoint survivant) allows all the assets to devolve on the surviving spouse without the payment of French inheritance taxes. The French civil code has been recently amended in consideration to the 1978 Hague Convention on marital regimes. As a result, it is a lot easier for couples married abroad to change their matrimonial regime than it is for French couples to do it.

Changing your matrimonial regime affects your French assets alone and therefore any provisions made in your home country remain unaffected.

The Acte Authentique can also be amended to include a Tontine clause. With such a clause, the survivor has complete autonomy to dispose of the property as he or she wishes. The surviving partner or spouse is deemed to have owned all the property from the beginning. The downside of a tontine resides in the fact that:

• in the event of a dispute between joint owners a judge may have difficulty making an order in relation to the property because there will be uncertainty as to who is the owner. A court could therefore only order a sale by both parties.

• the sale of a property when both parties to the Tontine are alive is only achievable if both agree. If one refuses to sell, the other cannot force the sale.

A general rule is that you must be sure you know what it is you are buying: inspect the property thoroughly and enquire whether there are any covenants (servitudes) such as rights of ways for example.

Caveat emptor applies to French property purchases: remember that buyers take responsibility for the condition of the items they purchase and should inspect them before purchase.

Where a property is purchased off-plan, the purchase process is strictly regulated. It is nevertheless advisable to check what completion guarantee is offered by the developer. Is the latter financially sound? Will the works realistically be completed by the contractual date?

Check that there is proper access to the property. If this is an older property, has a survey been carried out? Are you buying the contents too? Are there any rights of way? Where are the property's boundaries and who pays to define them? Is there agricultural land and is it farmed? (If this is the case, the farmer may have a right to gazump you);

Be careful with attractive tax loopholes: never neglect the character and quality of a property in consideration to tax advantages. Seek legal advice on what happens to the property when you sell, upon your death or in the event of a dispute with co-owners.

Do not pay money directly to the seller, since you may lose it or have to pay twice: sometimes the seller is not empowered to sell, or the property is subject to mortgage. And when you sell, do not let the buyer enter the premises before signing the final deed of sale or before paying the purchase price.

Fabien Cordiez can be reached at cordiez@french-solicitor.com