1. The
Notaire's duties
Three questions
will be explained:
(a) Who is
the Notaire?
(b) How are the contracts secured?
(c) How much are the Notaire's fees?
(a)
Who is the Notaire?
As seven
years of law are necessary to graduate, the Notaire is the most qualified
professional of the French legal system. The Notaire is both a Public
Official and counsel. His qualifications allow him to efficiently advise
his clients in specific areas of law such as Real Estate Law, Family Law
and Corporate Law.
He is able
to counsel clients on matters all over France without any restrictions.
A Notaire from Paris can hence equally deal with an acquisition of a house
on the French Riviera as well as supervise the purchase of a supermarket
in Strasbourg or control an industrial plant in Northern France.
The French
State confers to the Notaire an authentic power to legalize certain agreements
such as Real Estate sales which cannot be enforced by any other means.
This monopoly prevents almost any subsequent litigation concerning these
contracts. However, the Notaire does not only draft and authenticate deeds.
As today's legal transactions are more and more complex, counselling clients
is also a major function of a modern Notaire.
(b)
How are the Contracts Secured?
The Notaire
is deemed a Public Official with powers delegated by the State to authenticate
the deeds he drafts and provide complete security to the contracts he
supervises.
The authenticity
of the deeds grants them an undisputable date and content in Court. The
law imposes a personal liability on the Notaire for his professional acts
which is more extensive than that of any other branch of the legal profession.
Not only would the professional mistake be penalized immediately by a
judge, but it would also mean that all of the Notaires would be held liable
as they have a common insurance, providing an immediate financial guarantee
to the client. The American investor is therefore facing a specialized
lawyer fully liable for his deeds.
The Real
Estate Registration system in France is highly efficient. It takes two
months for a sale to be registered, and only the authentic deeds settled
by the Notaire can be registered. The content of the deeds are controlled
by both the Notaire and the Registration Authority. On one hand this procedure
might seem long compared to an immediate transaction occuring in some
other countries, but on the other hand it results in a lack of litigation
concerning these agreements (0.5% per year on Real Estate transactions).
Thus the Notaire has the task to both completely satisfy his clients and
to impose some limits to their queries according to his Public Official
status.
(c)
How much are the Notaire's fees ?
The fees
concerning the contracts performed by a Notaire are fixed by Law. Neither
the Notaire nor the clients may modify these specific fees. For instance
the fees for a purchase of an apartment in Paris totals 0.825% of the
price plus V.A.T. (19.6%). American and British clients undertaking a
Real Estate transaction in France should be aware that if there are two
Notaires, the fees are shared, therefore, retaining their own Notaire
will not increase the professional fees, which are then shared by the
two Notaires supervising the contract.
Concerning
all the other deeds and the counsel fees, both are freely fixed with the
client, as they are by American lawyers.
2. The
Real Estate Purchase Proceedings
An American
or British company wishing to buy land to construct a building for apartments,
offices, or shops will follow the same procedure as an American or British
private individual purchasing a house. First, the investor has to find
the Real Estate to buy. Many professional Real Estate offices exist in
France, and some of them do have international skills, allowing them to
deal with American clients. Some Notaires also have a Real Estate department,
and might be able to be of assistance in finding a property. Once the
Real Estate has been found, completing the purchase involves the following
steps:
(a) the Promise
of Sale;
(b) the Final Sales Agreement.
(a)
The Promise of Sale
This step
is the most important one, as all the legal aspects of the sales agreement
are fixed at the time. At this stage of the contract, the Law does not
stipulate that the deed be authentic, meaning it does not need to be supervised
by a Notaire. A Lawyer or a Real Estate agent may thus sign a Promise
of Sale. However, this mistake is not to be made by American investors,
for only a Notaire is qualified to counsel the clients and prepare contracts
at no extra-cost. This is true not only from a legal stand point, but
also from a Tax stand point. Many promises result in litigation because
the clients are genuinely not aware of the consequences of the deed they
have signed.
Once the
Promise of Sale is signed, the commitments of the parties to a contract
are final and may not be modified. It is at this stage of a Real Estate
purchase that the Notaire's advice is most useful for the client because
all future obligations of the parties rely on the Promise of Sale.
Many forms
of contracts could be signed before closing the final sales agreement.
But only the Notaires use the Promise of Sale which is the most secure
form. The buyer usually places a deposit of 10% of the property price
in the hands of the Notaire. This security deposit guarantees the buyer's
commitment. If the buyer cannot purchase or does not wish to continue
with the purchase anymore, he loses the 10% he has paid which is then
given to the seller.
The buyer
pays the remaining 90% of the property price on the day of the final purchase.
Signing a Promise of Sale with a Notaire provides another advantage to
the buyer if the purchaser happens to die during the proceedings, an insurance
contracted by the Notaires will enable his heirs to finalize the purchase
or lose the safety deposit, up to 75,000 Euros under specific
conditions.
For the above
mentioned reasons, it is very important for foreign investors to rely
on a Notaire at the beginning of the transaction. If the chosen Notaire
has international skills and often deals with American or English clients,
he will be able to send them to Real Estate agents with files in English.
Moreover, consulting a Notaire before the transaction may be very useful
as Notaires often have Real Estate at interesting prices within their
files.
(b)
The Final Sales agreement
Once the
Promise of Sale has been signed, all the commitments of the parties are
fixed. The Notaire must then collect various documents, such as property
titles and mortgage documents to verify that all the paper work is in
order. Collecting the documents and verifying them may take up to three
months. This delay may be shorter, but it may still seem long to many
American or English investors. This time period is extremely important
because it serves as insurance for the Final Sales Agreement.
After the
Notaire has collected all the documents, the Final Sales Agreement is
signed. It is an authentic contract and is almost undisputable in court.
Litigations on such contracts are very rare, unlike litigations concerning
contracts not prepared by a Notaire.
3. The
Documents Securing a Transaction
The most
relevant points for a Notaire to verify during a transaction are the following:
a) the entitlement
of the parties;
(b) the mortgage situation;
(c) the Town-planning; and
(d) the property verification.
(a)
The Entitlement of the Parties
The Notaire
is liable for examining the identity and the entitlement of all the parties
involved in the contract. He would, for instance, be liable in the case
of a non-binding act of sale if one of the parties is incapable. The Notaire
verifies the capacity of the parties by requesting a legal copy of both
birth and marriage certificates from City Hall.
Unlike other
European Union countries such as Italy or Greece, there are no restrictions
for a foreign citizen to buy Real Estate in France, according to article
11 of the French Civil Code.
(b)
The Mortgage Situation
A Notaire
cannot give the price of a transaction to the seller until he has checked
the mortgage situation of the Real Estate to be sold. Upon the Notaire's
request, the Mortgage Registry delivers a document detailing the complete
mortgage situation of the Estate. If any creditor secured by mortgage
is recorded, the Notaire is liable for paying him with the price of the
transaction before giving the balance to the seller.
This document
is valid for two months after its delivery and binds the liability of
the Mortgage Administration. The delivery of this document may take up
to two months. Because of this kind of delay, Real Estate sales in France
may take up to three months. Nevertheless, it permits the transaction
to be secured, by the combination of the liabilities of both the Notaire
and the Mortgage Registry Services.
(c)
The Town-Planning
The Notaire
must check the applicable Town-planning regulations on the Real Estate
to be sold, and inform the buyer of the consequences of these regulations.
He requests from a surveyor a complete report which he then encloses in
the final sales agreement.
Among the
rules to be verified, the Notaire may, for instance, verify that there
is no easement on a piece of the property. The surveyor is liable for
the content of the delivered document while the Notaire is liable for
controlling and reporting it to the buyer. In addition to the mortgage
document, the delivery of the above-mentioned document requires a certain
delay. Still, it provides the guarantee of a secured transaction.
If the buyer
wishes to build or to change the use of the building (for instance, buying
a shop to transform it into an apartment), a building permit is necessary
and its delivery may take up to six months. The investor will then be
fully counselled by the Notaire on matters such as delivery proceedings
and how to link the permit with the Real Estate contract.
(d)
The Property Verification
The Notaire
must verify the property title. He must search up to thirty years before
the transfer of title which is the limitation period for all Real Estate
transactions to be brought to court.
The Notaires must also keep their deeds for one hundred years after their
execution.
The property
verification is essential to prevent any type of litigation, and particularly
when the assets have been acquired through a deceased Estate.
The above-mentioned
examinations by the Notaire are the predominant ones. However, others
such as clearing preemptive rights or balancing the account with the co-owner's
manager do exist. Generally three months are necessary for all the examinations
and allow any buyer to be fully secured during the transfer of title.
5. Tax aspects of the investment
The three
following Tax aspects are to be explained:
(a) the cost
of a Real Estate purchase;
(b) the cost of a Real Estate ownership; and
(c) the specific aspects concerning non-resident investments.
(a)
The Cost of a Real Estate Purchase
Registration
taxes must be paid to the State upon each transfer of title in France.
These taxes are collected by the Notaires and refunded to the State.
There are
two Tax status concerning Real Estate transfers in France, depending on
whether the Real Estate has been built more than five years ago or less
than five years ago:
i) the V.A.T.
status, which concerns new buildings;
ii) the registration tax status, which concerns buildings completed more
than five years ago.
(i)
The V.A.T. status
When an uncompleted
building, a new building or a building completed less than five years
ago is sold, the Tax status to be applied is the Real Estate V.A.T., at
a rate of 19.6%. The expressed price in the deed of sale always includes
tax. The real price is actually the tax non-included price, to which the
seller adds the V.A.T. to reach the final price.
The above-mentioned
tax status directly concerns French or foreign construction companies.
Because V.A.T. is paid only once for the same product, the companies have
a tax credit that is repaid upon the sale of the building. The Real Estate
V.A.T. is one of the most complex aspects of the French Tax system and
requires a professional such as the Notaire to safely advise investors.
An American
or an English company is entitled to build Real Estate for the purpose
of sale if a specific company is created that will dissolve after the
last apartment or shop has been sold. The investor's Notaire counsels
the company on each specific operation and draws up the corporate charter.
The seller
is always the V.A.T. subject, except when it is the buyer who assigns
the transaction to V.A.T. For instance, this is what happens when the
building to be sold is an old one, and when the buyer intends to rebuild
it within four years. In this particular case, the price is the former
one to which V.A.T. is added, always at the rate of 19.6%. This last example
is given only to a professional buyer since a private buyer is exempted
from paying V.A.T. in this case since 1998.
(ii)
The Registration Taxes Status
All the transactions
concerning Real Estate completed more than five years ago are subject
to the Registration Taxes status. The Tax amount changes according to
the area of taxation, because of local taxes. It also used to vary according
to the destination of the Real Estate to be sold; the tax status for apartments
was less expensive than for shops or offices.
Commercial
Real Estate transfers were subject to tax at a rate of 18.6%. Since 1999,
all transactions are subject to the same tax of 4,89%.
(b)
The Cost of Real Estate Ownership
Being a Real
Estate owner in France requires the annual payment of several taxes. The
Real Estate Tax is the most important one and has to be paid by all owners,
whether they are private individuals or companies. The amount is calculated
according to the total surface of the ownership.
The Residential
Tax is to be paid by the inhabitants of the buildings. The amount is determined
according to the inhabitable surface. This tax is local and thus differs
from one area to another. In some areas of France, it may be more expensive
than the Real Estate Tax, as it may be the only local tax resource for
the municipality.
The Professional
Tax is paid only by companies. Several criteria are necessary for calculation,
such as the revenue and the number of people employed by the company.
(c)
The Specific Aspects concerning Non-Resident Investments
The following
points are to be explained :
i) the currency of the contract ;
ii) the non-resident accounts in France ;
ie) French and foreign loans ; and
iie) non-resident capital gains.
i)
The Currency of the Contract
As French
Law considers that paying for Real Estate with foreign currencies requires
a flowing back which is obviously impossible with buildings, the Real
Estate price purchased by non-residents must thus be paid in French Francs.
This payment, however, can take many forms, such as a cashier's check
or a money transfer. This obligation leads foreign investors to open accounts
in France.
ii)
Non-Resident Accounts in France
This account
must be opened by English or American investors with a bank in France.
According to the freedom of exchange principle, private individuals may
freely exchange capital. The American investor must thus only open an
account only within an enabled bank such as the "Banque de France".
The account may be supplied by very simple recordings such as international
money transfers from bank to bank.
On the day
of the Real Estate purchase, the foreign investor pays the price with
a cashier's check. This check is given to the Notaire, and thus the entire
price transits within the Notaire's accounting. This ensures the transaction
because the Notaire may thereby pay any recorded creditor before refunding
the balance to the seller. These proceedings ensure the purchaser's acquisition
since the Real Estate is guaranteed to be transferred without any creditor
remaining recorded.
ie)
French and Foreign Loans
An American
or an English investor may need a loan to pay for his/her French Real
Estate purchase. The loan contract may be granted either by a French bank
or by a foreign one.
Many guarantees
may secure a loan contract. The Notaire counsels investors on the least
expensive security and he advises the bank as to the most appropriate
guarantee for each specific transaction.
Any Real
Estate security must be drafted by a Notaire in an authentic agreement.
The most frequent one is the mortgage.
iie)
Non-Resident Capital Gains
Any capital
gain carried out within a Real Estate sale is subject to tax. As the American
investor is a non-resident, he must obtain a banking accreditation before
the final sales agreement. This ensures the payment of the capital gain
to the Tax services.
If a given
transaction does not generate any capital gain, an exemption may be required
from the Tax services. Unlike the resident's capital gain, the non-resident's
one is paid by tax with-holding exempting him from all future taxation
at a rate of 33,33%.
The Notaire
may also advise investors for all proceedings, tax filing rules, and rates
of the Capital Gain Tax, as he may execute tax filing rules for his clients.
6. The Language and Jurisdiction of the Contract
(a)
The Language of the Contract
The French
State provides that the use of the French language is compulsory in any
French written agreement (main provision of a French law enacted on December
31, 1975 as modified by a law dated August 4, 1994 ("loi Toubon").
Consequently, all Real Estate sales must be drafted in French.
Moreover,
French Courts have decided that the use of a foreign language in French
deeds is illegal.
Some Notaires
with international practice may nevertheless translate the agreements
for their clients, having written translation of all of the contracts
they supervise.
(b)
The Jurisdiction of the Contracts
Most of the
contracts are signed in France by all of the relevant parties to the Real
Estate purchase.
Nevertheless,
the French binding contracts do not necessarily need to be signed in France.
They must be published in France for their legal enforcement, but a Notaire
may either send the contract to the United States or to Great Britain
to be signed. The Notaire may also choose to travel to the United States
or to Great Britain to sign the contract with his clients.
Source:
French American Chamber of Commerce
Prepared by Stéphane ZECEVIC, Notaire
