France: Legal Considerations For Real Estate Lenders In France (4/4); Negotiation, Execution And Post-Closing Considerations

This fourth article contains a summary of the more hands-on legal considerations pertaining to:

  • the negotiation
  • the execution, and 
  • the post-closing formalities of commercial real estate loan documentation in France. 

1 NEGOTIATION CONSIDERATIONS

(a) Obligation to negotiate in good faith

Non-French lenders should be aware that they have an obligation to negotiate in good faith in France. This obligation was codified on 1 October 2016 at articles 1104 and 1112 of the French Code civil. 

In brief, this means that one should avoid withdrawing abruptly from negotiations, conducting negotiations without intending to close (thus leading the other side to take certain actions on the false expectation that negotiations are progressing), or disclosing confidential information.

Since 1 October 2016, article 1112-1 in the French Code civil also saddles everyone with an obligation to disclose such information (other than on the "value of the service") that one is aware of, and the importance of which is "determining" for the consent of the other, when the latter "legitimately" ignores this information or relies on the former, failing which the contract can be declared void.

In the same vein, one should also refrain from abusing from the state of dependency of the other party and obtaining a "manifestly excessive" advantage thereof, which, since 1 October 2016, has been likened to duress (violence) pursuant to article 1143 of the French Code civil, and being therefore a cause of nullity of the contract. 

(b) Objectively unfair clauses

One should be aware that, even if the negotiation process is not tainted with bad faith or economic duress, since 1 October 2016, pursuant to the new article 1171 of the French Code civil, a "clause creating a material imbalance" in an adhesion contract will be deemed unwritten unless it concerns the main purpose of the contract or the appropriateness of its "price" with its "service". Article 1110 of the French Code civil defines an adhesion contract as a contract "the general conditions of which, not subject to negotiation, are determined in advance by one of the parties".

2 EXECUTION CONSIDERATIONS

(a) Shareholder or board authorisations

A shareholder or board authorisation will often be required.

This is especially true for any guarantee (to which is assimilated a security interest securing the obligations of another entity) granted by a French "société anonyme" (SA), whether it has a board of directors or a dual board (a supervisory board and an executive board): the guarantee will be unenforceable without an authorisation of the board of directors (or the supervisory board) dated less than a year either:

  1. authorising specifically the execution of this guarantee, or
  2. authorising the grant guarantees within a certain annual limit, provided in the latter case that the guarantee obligations are capped to an amount obviously below the limit set by the board. 

Furthermore, in certain types of companies (SAs, SEs, SCAs, SARLs without a statutory auditor), a prior board or shareholder authorisation is required for "regulated agreements", which encompass agreements between companies of the same group or sharing the same officers. In that case, the interested members must abstain from voting.

(b) Powers of attorney

Shareholders and board members cannot generally delegate powers to a person who is not a legal representative of the company – whether a president, manager, general director or general director delegate (except for guarantees granted by SA, where only the general director is empowered) – the only exception being in non-stock companies where the appointee is one of the shareholders. If the signatory is not a legal representative, a power of attorney executed by the legal representative will therefore be required most of the time. 

Under French law, in order to be valid, a delegation of power must have a limited purpose and cannot be drafted in general terms, failing which it covers only administration and conservatory acts. 

Moreover, since 1 October 2016, one cannot represent a party to a contract with himself or herself or represent two parties to the same contract, failing which "the contract is void unless the law authorises it or the principal has authorised or ratified it" (article 1161 of the French Code civil). When drafting a power of attorney, a clause should therefore be inserted authorising the agent to represent multiple parties. These prohibitions should normally concern only attorneys in fact (who have a power of attorney), not legal representatives of companies (who are appointed by a corporate body), but courts have not yet had the opportunity to confirm this.

(c) Execution of authentic deeds versus private (non-authentic) agreements

Agreements conveying title to land or creating (or releasing) a mortgage or easement must take the form of (French-written) authentic deeds drafted by, and executed before, a French notary, in only one original, kept by the notary. The notary is then responsible for the filing with the land registry. 

Typically this authentic deed will contain not only the mortgages but also the loan itself (assuming the loan is governed by French law). This does not entail additional costs and has the advantage of granting an "executory title" to the lenders (with an executory title, a creditor does not need a court authorisation for instructing bailiffs to perform conservative seizures over assets that are not already pledged or mortgaged, if any). 

It is possible to ask the notary to draft the loan agreement either as a "nominative executory copy" or as an "order executory copy". If the loan is later syndicated, in case of a nominative copy the mortgage registrations should normally be updated with the name of the new lender (entailing important costs) or, in case of an order copy, the loan deed should be endorsed (for much smaller costs). According to case law, new lenders who fail to update the mortgage registrations with their names in case of a nominative copy can nevertheless avail themselves of these mortgages, so in practice nominative executory copies are quite frequent. 

Intercreditor agreements, guarantees and personal property security interest documents generally take the form of private (i.e., non-authentic) agreements, which may be drafted in English (except for share pledge agreements and certain other pledge agreements, which must be drafted in French for later filing with the commercial court registry). 

Private agreements governed by French law with two or more parties are normally executed in as many originals as there are parties (or groups of parties with the same interests), with all signatures appearing on the same signature page (i.e., no counterparts), although this is only to satisfy a rule of evidence (article 1375 of the French Code civil) that does not apply to commercial (as opposed to civil) agreements between merchants, to which are assimilated commercial companies. 

Guarantees can, however, be executed in one original by the relevant guarantor, who in some cases may have to handwrite the guarantee's amount in letters and numbers (article 1376 of the French Code civil and articles L. 331-1 ff. of the French Code de la consommation). 

3 POST-CLOSING CONSIDERATIONS

(a) Security interest perfection formalities

It is standard practice in France for mortgages to be taken at closing but registered only post-closing, under the responsibility of the notaries.

Personal property security interest perfection formalities requiring a filing or a notification to a bank with which an account is opened or an insurance company (or any other debtor of receivables outside the group) are done post-closing by the lenders' lawyers.

(b) Annual information of guarantors

Article L. 313-22 of the French Code monétaire et financier provides as follows: 

"Credit institutions and financing companies which have granted a credit facility to a company subject to a guarantee from an individual or a legal entity shall be required, by 31 March of each year at the latest, to inform the guarantor of the amount of the principal, interest, commissions, fees and incidental expenses that were outstanding under the guaranteed obligation as of 31 December of the previous year, as well as the term of said commitment. If the commitment is open-ended, they also make reference to the right to cancel it at any time and the conditions applicable thereto.

"Failure to comply with the formality provided for in the previous paragraph entails, in the relations between the guarantor and the institution bound by such formality, forfeiture of the interest due since the previous report and until the date of presentation of the new information. Payments made by the principal debtor shall be deemed, in the relations between the guarantor and the institution, to be applied prioritarily to settlement of the principal amount of the debt."

Foreign credit institutions should apply these provisions whenever a guarantee is governed by French law or whenever a borrower is French, based on a ministerial response (of 22 July 1985) and a recent decision of the Cour de Cassation (22 may 2013) that refused to quash a decision from the Montpellier court of appeal holding that a Swiss (non EU) credit institution was bound to comply with this annual information obligation. 

Authors, however, tend to consider that foreign credit institutions need not apply these provisions when the guarantee is not governed by French law and only the guarantor is French, not the borrower. 

This summary of the legal considerations relevant to the negotiation, execution and post-closing formalities of commercial real estate loan documentation, concludes our series of four articles on legal considerations for real estate lenders in France.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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