Friday, November 27, 2009

Unable to complete on a purchase

An interesting case has occurred recently involving a British buyer of a French off-plan property. When completing the purchase document (initial 'compromis de vente') he stated that he would not be seeking a bank loan or mortgage to pay for the property. As the purchase relied on payments over time, in this case two years, he felt, in good faith, that he would be able to fund the stage payments from income, without the need for a loan. Normally payments are invoiced at intervals, as the work progresses - from foundations to fitting-out and hand-over, typically over a period of 24 months construction.

Unfortunately the recession arrived and the buyer found himself short of cash and unable to complete the stage payments, while on the French side the building work was gradually completed. The developers are now seeking payment in full of the sale price and the buyer is unable to pay - a sum approaching 300,000 euros.

The would-be purchaser has reached an agreement with the developers to try and sell the property (of which he is technically now the owner) at a heavily discounted price, in order to cover the deposit already paid and recoup any losses. Failing which it is likely that the developer will insist on payment in full and will pursue the buyer through the French and British court systems (a relatively simple process following recent EU harmonisation of the applicable laws).

There are several lessons to be learnt from this story, the most important being to have funds in place or formally agreed before committing to a property purchase; and second, should problems arise, to notify the vendor (in this case the French developer) of your changed circumstances and try to arrange re-financing of the purchase.

Tuesday, November 24, 2009

Non-resident selling French property

If you are not fiscally resident in France, selling your French property - such as a second home, holiday home, rental investment - will in certain circumstances attract capital gains tax on the profits of the sale. Profit is defined as the difference between the price you originally paid for the property and the price at which you sell it, subject to certain abatements, such as the costs of acquisition (agents commission, notaire's costs, architect's fees etc) and certain building improvement works certified by registered artisans (with an automatic allowance of 15% if the property has been owned for more than 5 years).

If the property has been owned for more than 15 years (even as a second home) there is no CGT to pay. During the first 5 years of ownership, CGT is paid in full on resale, but is reduced by 10% per year in years 6 to 15 of ownership, finaly reducing to zero after 15 years. A property that is considered to be your 'main and principal home' is not subject to CGT on re-sale, provided the Notaire and the French tax authorities are satisfied as to your status as a French resident. The rules are complex but are based on the concept of your principal 'centre of interest' - the place where you and family live, possibly work, for most of the time.

A further complication for non-residents attracting CGT on the sale of their French property is the requirement to complete a form 2090 and appoint a French accredited fiscal representative in France, who is responsible for ensuring that the taxes are paid. This can be a private individual or one of a group of specially accredited companies that will undertake this task for a fee.

The rules have been recently amended, allowing a dispensation for low value properties that are individually owned, and in some cases it is possible for the non-resident vendor or the Notaire handling the transaction to negotiate an arrangement with the French tax authorities, whereby CGT and any other taxes are calculated and paid over promptly on completion of the sale. There are different rules for properties owned by an SCI or a company, and professional advice should be sought.

The rate of CGT is currently fixed at 16% plus in some cases an obligatory social charge of 10%, and applies to French and non-French owners selling a property that is not designated as their 'résidence principale' and which has been owned for less than 15 years. The French Notaire, in his role as tax collector, is responsible for calculating CGT payable and agreeing his calculations with the French authorities, before transfering the remaining balance of the sale proceeds to the vendor.

Tuesday, November 17, 2009

French expect 500,000 new business creations in 2009

Further signs of confidence in the French economy, as the government anounces record numbers of new business creations in 2009 - 54,000 of them during October alone.

M Hervé Novelli, secretary of state for small businesses and the promoter of the French auto-entrepreneur system, declared that he is delighted with the figures, as of the half-million new enterprises anticipated for 2009, some 231,000 have already chosen the new simplified auto-entrepreneur status - a self-employment regime under which tax and social security charges are payable only against actual income received, as opposed to estimated charges applicable in most other French business regimes.

According to APCE*, the new regime is popular with young people, particularly students, with 70,000 under 30 years of age declaring they are ready to launch their own enterprise. Another survey indicates that 85% of new enterprise creators are happy with their new status as auto-entrepreneurs.

The total number of new auto-entrepreneurs is expected to exceed 300,000 by the end of 2009, against earlier predictions by Noveilli's office of just 200,000 by December.

Source: Le Figaro, 16 November 2009. APCE* = Agence pour la Création de l'Emploi.

Monday, November 16, 2009

Property searchers - who are they, can they help?

In recent years a new breed of individual has made an appearance on the French property market - the independent property searcher, in French the 'chasseur de biens'. Essentially, he is someone who will take over the hassle of locating properties that meet a client's specific brief and present a short-list of those he thinks are eventually worth visiting by his client, the potential buyer. The idea is to save time and money that can be wasted in fruitless visits, particularly by someone new to a region or who does not speak fluent French, and relies on the searcher's intimate knowledge of the local property market, and his contacts with estate agents, notaires and private individuals who may have suitable properties for sale.

What is the status of the property searcher and how is he remunerated? The French estate agency business is a 'controlled occupation' regulated by a law - the loi Hoguet - that dates back nearly 40 years to 1972. This fundamental law has however failed to keep abreast of changes in the way that properties are bought and sold, notably widespread use of the internet to search for and sell property, the appearance of specialist publications addressed to private buyers and sellers (responsible for half of all French property transactions), and the role of the property searcher.

Property searching has traditionally been seen as part of the job of the French estate agent, who must continually replenish the supply of properties he has for sale, and accordingly is subject to the loi Hoguet. The law requires among other things the possession of a 'carte professionnelle' issued by the local Prefecture, proof of experience or competence, and minimum financial guarantess covered by insurance. The licensed estate agent must also hold a valid mandate from the owner, authorising him to market and try and sell any property on his books. Many agencies now also describe themselves as 'property finders' and try to give the impression that this job can only be done by someone operating under the loi Hoguet. This is in fact not true.

Independent property searchers
The situation of the property searcher has changed dramatically following a relatively unknown ministerial statement of August 2008.

In an attempt to define the status of the independent property searcher, the French justice minister ('la garde des Sceaux'), in a ministerial reply, stated that:

'if the role of the property searcher is strictly limited to the service of finding a property, and it is paid for directly by his client ('mandant'), then this activity falls outside the restrictions of the loi Hoguet of 2 January 1970 which regulates the estate agency profession, and of the decree of 20 July 1972' (Réponse ministérielle, question no. 20525, Journal Officiel AN 12 August 2008, p. 6987).

This reply has since come in for some criticism, largely by bodies representing estate agents anxious to defend their protected status. And at least two of the bodies representing 'property searchers' have made possession of an estate agents licence a necessary pre-requisite for membership, citing the loi Hoguet.

What this does of course is to try and keep the role of property searching within the traditional estate agency structure, where opponents argue that the agent necessarily represents the interest of the vendor in a property transaction, while the truly independent property searcher works exclusively on behalf of his client, the buyer.

In practice, French estate agents seem to be creating a new role for themselves - at an additional cost to the client/buyer - when it is merely an extension of something they would normally do when presented with a potential buyer - someone who arrives at their premises and expresses his interest in a property offered for sale in the agent's catalogue. If the agent does not have a suitable property to offer, his next step is to contact colleagues (often within a formal network or grouping), and in the event of a sale, he will share a commission with the partner agency. This is not property searching, but standard estate agency business practice. I speak from experience.

The truly independent property searcher will argue that he has access to the same sources as the agent but his role is more closely defined - he works to a brief from the client/buyer and will often reject 50% or more of the properties proposed by the agent as not worth including on his client's short-list. His remuneration does not depend on a property sale.

A possible criticism of the ministerial reply noted above is that it did not define more clearly the role of 'negotiation' or 'intervention' (the French word is 'entremise') within the context of a property transaction, an activity that has traditionally been regarded as coming strictly within the ambit of the loi Hoguet. In practice it is difficult to rule out entirely the role of 'advice giving' by the property searcher - for example he may reject some properties during an initial search because he considers they are over-priced and will tell his client so. And if he receives part of the selling agent's commission, can he be truly regarded as independent and acting in the best interests of the buyer, as well as possibly breaking the law?

The 'agent commerial'
Despite the all-pervading influence of the loi Hoguet, the French estate agency business suffers from a number of inherent defects, particularly concerning the role of the 'agent commercial' - some of whom use this ambiguous status to act as property searchers. The 'agent commercial' depends for his legitimacy, under the loi Hoguet, on a loose association with an agency, for whom he acts as a sales representative, and once in possession of special 'carte professionnelle' can also mandate properties for sale (ie take them onto the agency's books).

Problems can arise where the 'agent commercial' operates unsupervised and more or less independently of the agency that has given him his 'carte professioonnelle'. Or in some instances when he is a member of a loose network of affiliated property agents/searchers, which relies on a licence granted by a remote Prefecture in another department of France.

Our position
Proponents of the protections offered by the loi Hoguet cite the competence of agents and their staff, and the presence of financial guarantees. However the latter can be as low as the minimum 30,000 euros currently required, even for a network that sub-licences its members. Many truly independent property searchers offer a superior level of competence (such as a law degree) and considerably higher levels of insurance cover (£250,000 cover + £100,000 legal costs is not uncommon).

In examining French law and deciding our own position, my firm has taken the view that in order to remain truly independent and fair to our clients, in the area of property searching we would operate strictly within the terms of the 2008 statement cited above - that is, being remunerated by our client and not accepting commissions from estate agencies, as explained in our terms of business. It was not an easy decision, particularly in view of the many 'free' property finding services currently offered by estate agents and others.

However, we see this as the only legitimate way to propose our independent professional services and reflect the true added value of the range of expertise that we bring to the French property buying process. I am pleased to note that one or two other independent property consulting/search firms have reached the same conclusion.

Wednesday, November 11, 2009

SIREN, SIRET numbers

Correctly registered French businesses can be identified by their SIRET and SIREN numbers, which are created when the (new) business is established.

Registrations are handled either by the CFE ('centre des formalités des entreprises') at the local chamber of commerce or the 'chambre des métier' for occupations classed as 'artisanal'. There are also special CFEs for some occupations such as commercial agents among others. In the case of the new 'auto-entrepreneur' (self employed) regime, declaration of the start-up of the business can be made using downloadable forms. See the website for more information.

Once the registration formalities are completed, the CFE forwards the documents to the tax office, social security etc, and eventually the new business will be issued with an identifying code, known as its SIREN (9 digits) and a SIRET number composed of the SIREN plus a further 5 digits, identifing the place(s) where the business operates. This information can be used to find information about a registered business using the site - similar to checking the UK Companies House online.

If the business operates under a TVA/VAT regime, it should also be issued with an Inracommunautaire TVA number which is made up of part of the SIREN plus an 'F' country prefix for France.

French business occupations are also classified nationally by code numbers, known as the APE code appropriate to their activity, but this is largely for statistical purposes.

Saturday, November 7, 2009

UK will could soon override French succession rules?

Good news indeed for British expats resident in France and concerned by France's antedeluvian system of inheritance laws. Under current legislation, British and other foreign owners of French property are forced to comply with complicated rules of inheritance, that closely define who can inherit their French property and which penalise bequests to those outside the immediate family.

All this could soon change, according to a report in November's issue of the English language newspaper The Connexion, if Community members accept proposals adopted by the European Commission, under which a will could decree that the deceased's estate be dealt with under the laws of their nationality - such as a British person living in France, or a British resident owning a property - such as a second home - in France.

This would bring France into line with other European countries where successions involving property are dealt with under the (deceased) owner's national legislation. It would also affect the many French citizens living in Britain and owning property there.

However the brief statement from the European Commission on 15 October somewhat confusingly adds that 'the measure wil not affect inheritance taxes, which will continue to be covered by national law, as will issues such as who inherits and how survivors share assets'.

Adoption by the European Commission is the first stage in the new legislation becoming EU law, and would be followed by national enabling legislation in order for it to become law in each Member State.

Source: The Connexion, Issue 85, November 2009.

Wednesday, November 4, 2009

French interest rates down again in October

According to a report by the French Obsevatoire du Crédit Logement, average interest rates offered to borrowers in October were 3.80% against 3.93% during the third quarter of 2009. Some 82.8 billion euros were lent during October to property buyers, and early 86% of all loans proposed were are rates between 3.5 and 4.5%.

The average length of the loan period is now 214 months (just less than 18 years), though slightly higher at 239 months (nearly 20 years) for new-builds and 227 months (just under 19 years) for older properties.

At the same time, further encouraging news from the European commission confirms that Europe is slowly rising out of recession, following a similar trend in the USA, thanks to measures taken by the European Central Bank, European governments and national banks. The Commission's Economic and Social Affairs spokesman Joaquin Almunia stressed however that further actions are necessary to control 'bank excesses' and in future 'to avoid their damaging effects on public spending, jobs and potential growth'.

(Source Le Figaro, 3 November 2009)