Rights of First Refusal on French Property
Tuesday 07 July 2020
How to obtain preferential rights on the future sale of land or property that may not be on the market.
The owner of French property who has not made a final decision to sell may be willing to favour a potential buyer by promising to offer them the property as a priority purchaser when it is on sale.
This intention can be realised by means of a pacte de préférence.
Such an agreement does not does not mean the seller is bound to sell the property to them; it merely means that if they decide to sell they are obliged to offer it to the beneficiary when they put it on the market.
Thus, for instance, where there are two neighbours reside on contiguous parcels of land, neighbour A may be granted rights under a pacte de préférence should neighbour B ever decide to sell her property.
It may also be used at the time of a property purchase, such as when an owner does not wish to sell all of their land to the buyer grants the buyer a right of first refusal over their remaining land or buildings.
This may occur either because in a property sale:
- Some land may be retained by a seller for, say, continued farming use;
- The owner hopes to obtain planning consent on the land;
- They may not wish to sell at the present time for tax reasons;
- The land or property may be tenanted by a third party.
Should the seller place the property on the market and obtain a contract for purchase from a third party, they would be obliged to offer the property to the beneficiary before finalising the sale on the same terms.
Of course, the beneficiary may waive or disclaim the preferential right granted to them by the agreement at any time, effectively extinguishing it and releasing the seller to contract with another purchaser of their choosing.
Terms of Pacte de Préférence
The terms of a pacte de préférence are entirely at the discretion of the parties, although you would be well advised to get the agreement prepared under the auspices of a notaire, and for it to be registered as a charge on the land. That way, no future notaire or prospective third party purchaser can claim to be ignorant of it.
Accordingly, particular issues that need consideration are:
- The duration of the agreement; the parties may agree that it will remain in effect for a period of six, ten, or twenty-three years, after which time it would automatically expire, leaving the seller free to contract with a third party purchaser without first offering the property to the former beneficiary.
- Whether the right of first refusal operates in the event of only partial sale of the land or property;
- The penalty that might apply in the event that the owner sells the land to a third party, and whether execution of the agreement could be enforced;
- The basis on which the purchase price will be determined, as the price is unlikely to be stated at the time of the agreement;
- Whether successors to the owner and beneficiary will have an entitlement;
- Any conditional clauses that might apply, eg planning.
Enforcement of the Agreement
But what happens when the property is sold to a third party purchaser without the beneficiary being given an opportunity to exercise his or her rights under the pacte de préférence? Like most questions revolving around the enforcement and interpretation of contracts, it’s complicated.
In a 2006 case, the Cour de Cassation, the highest court in France, ruled that a beneficiary of a pacte de préférence could not force the cancellation of a sale of real property unless the beneficiary could prove that the third party purchaser had knowledge of both the existence of the pacte de préférence and the beneficiary’s intention to exercise their rights under it.
This places a heavy burden of double proof upon a beneficiary seeking to cancel a sale.
In addition to this substantial burden, the Cour de Cassation also ruled that even if the third party purchaser did indeed have knowledge of the pacte de préférence, this knowledge would not obligate the third party purchaser to make an independent inquiry into the beneficiary’s intentions under the pacte. This does not prevent a third party purchaser from making inquiry regarding the existence of a pacte and the beneficiary’s intentions.
In fact, a third party purchaser may ask the beneficiary in writing to confirm within a set period of time the existence of a pacte and inquire if the beneficiary intends to avail him or herself of their rights under the pacte. If the beneficiary fails to respond within the set period of time, so long as that period of time is “reasonable,” the beneficiary may be barred from enforcing the pacte de préférence, essentially having waived their rights.
Even if a beneficiary is unable to cancel the sale to the third party purchaser, the Civil Code grants to them the right to initiate a suit for damages in order to compensate them for the seller’s breach of the agreement. Indeed, Article 1123 implies that the preferred method of sanction for violation of an existing pacte de préférence is the payment of damages and not the complete and total cancelation of the third party sale, although this remains a viable option.
If a beneficiary can meet the double proof standard, not only can they force the cancellation of the sale, they may also petition the court to substitute the beneficiary for the third party purchaser, essentially allowing the beneficiary to step into the shoes of the third party purchaser. In this scenario, ownership of the real property would be transferred from the seller to the beneficiary as if the pacte de préférence had never been breached.
A word of caution is needed about farmer's rights - as always.
If the third party on the land is a farmer it may well be that on disposal of the land they have priority rights to purchase it over the beneficiary of a pacte de préférence.
Whether this occurs will depend on the nature of the farmer's rights; if they hold a ‘bail fermier/bail rural’ they have an automatic right over anyone else to purchase the land if the owner decides to dispose of it.
This right is called a droit de préemption du fermier.
So if you hold a pacte de préférence your contractual right of first refusal will come after the statutory rights of the tenant farmer.
International owners sometimes believe that any land occupied by a farmer is subject to stringent safeguards for the farmer, but this is not always the case, as there are circumstances when a farmer's use of the land can be protected only for a limited period, an issue we covered in our article Farm Tenancies in France.