Within a context of a recovery in the French debt real estate market for high quality assets in a prime location with an emphasis on the strength of a property’s cash flow and the quality of sponsorship, the main challenge for borrowers remains how to reduce the costs associated with securing real estate asset acquisition loans in France, in particular within the scope of foreign loans.
French law provides for two main types of mortgage charges on real estate:
- Mortgage (hypothèque)—a lien over real estate not involving the delivery up of possession, which can result from an agreement entered into between the owner and one or several owner’s creditor(s) (hypothèque conventionnelle); and
- Lender’s lien (privilège du prêteur de deniers)—a legal lien (privilège légal) providing security to a lender who lends funds to finance the acquisition of real estate to the exclusion of any other kind of financing (such as the financing of capex works, hedging, accessories, etc.).
The legal effects of these two types of security over real estate assets are different.The mortgage is valid between the parties and enforceable against the borrower’s heirs from the date of the mortgage deed. Registration of the mortgage with the land registry is not required in order for the mortgage to be valid. However, registration is compulsory for making the mortgage enforceable against third parties as from the date of its registration with the land registry.
A lender’s lien, on the other hand, takes effect from the purchase agreement date, provided that it is registered with the land registry within two months from the date of the purchase agreement.
Various taxes and fees are due upon the granting of a mortgage which are, in practice, borne by the borrower.The main costs in broad terms are:
- Land registry tax (taxe de publicité foncière): currently 0.715 per cent, this is applied to the principal amount of the loan secured by the mortgage plus a percentage of this principal representing additional liabilities (usually between 5 and 20 per cent of the principal amount of the loan);
- Mortgage registrar (contribution de sécurité immobilière): currently 0.05 per cent, this is applied to the amount of the loan secured by the mortgage in principal plus a percentage of this principal representing additional liabilites;
- Notary’s fees (émolument du Notaire): currently 0.45 per cent, applied to the principal amount of the loan secured by the mortgage only plus VAT at a current rate of 20 per cent.
Keeping mortgage costs down
Acquisition loans regarding real estate assets located in
France may be secured without payment of land registry tax— taxe de publicité foncière—by registering a lender’s lien provided that:
- the loan is created pursuant to a French law instrument, in French, drawn up by a French notary public; and
- the loan is incorporated in the acquisition deed for the real estate asset and the loan proceeds are used for the payment of the acquisition price and paid through the notary public’s account.
Securing acquisition loan for French real estate asset in multi-jurisdictional transactions
Obtaining a loan receivable in France becomes a greater challenge when that same loan also finances the acquisition of real estate assets located in other jurisdictions. In order to benefit from the reduced costs described above, the global facility must be governed by French law and drawn up in the form of a notarial deed in French by a French notary, subject to any adverse consequences this may have in a particular jurisdiction. However, most jurisdictions within continental Europe and the UK allow such schemes and local mortgages may be granted and registered as security of a loan governed by French law. Nevertheless, the signing process for the French notarial deed of loan may become cumbersome (depending on the number of jurisdictions involved) since each and every borrower must ensure that a duly empowered individual is available to sign and execute the deed simultaneously in person in the presence of the notary.
Accordingly in transactions of particular complexity and wide geographical scope, the balance between keeping costs down and the need for flexibility may make it more sensible to register a mortgage rather than a lender’s lien.
In order to keep costs at the lowest level possible, parties would need to use existing mortgage(s) and transfer the benefit thereof.
Using existing mortgages or lender’s lien to secure new loans
The transfer of an existing mortgage or lender’s lien through the French subrogation mechanism also allows parties to avoid land registry tax.
However this mechanism is limited to financing the acquisition of real estate assets through share deals and is also limited to the principal amount of the new loan.All accessories still need to be secured by an additional new mortgage which is subject to land registry tax.The transfer of existing mortgages and lender’s lien is possible under foreign loan documentation which comprises French law-governed clauses setting out the principle and mechanism for the subrogation.The procedure is also subject to certain constraints regarding the loan instrument, which must be a notarial deed in France and in the French language.
As a consequence, this procedure may be cumbersome for the same reasons outlined earlier but it does enable the borrower to make important cost savings. In addition, the transfer of the benefit of existing mortgages or lender’s lien is subject to the satisfactory review by the lenders and their advisers of the existing securities over the real estate assets.