When signing a deed of sale in a future state of completion, the seller undertakes to complete the buildings specified in the contract. In order to protect the purchaser, the law requires the seller to provide guarantees concerning the buildings to be constructed, on pain of nullity.
There are two types of guarantee: the completion guarantee and the repayment guarantee.
Completion guarantee
According to article R261-17 of the French Housing and Construction Code, the completion guarantee is based either on the existence of conditions specific to the project(intrinsic guarantee), or on the involvement of a financial organisation(extrinsic guarantee).
The intrinsic guarantee: the completion guarantee resulting from conditions specific to the project
Articles R. 261-18 and R. 261-19 of the Code de la Construction et de l'habitation provide for several cases of intrinsic guarantees. This is not a real guarantee, but rather a "probability of completion" of the construction. The cases covered by the law include situations in which the progress of the work and the financial situation of the transaction provide sufficient security for the purchaser. In these situations, the seller is exempt from having to take out a guarantee with a financial institution (extrinsic guarantee).
The law provides for the following situations:
- in the case of multi-family buildings, when the building has been rendered watertight and is not subject to any liens, mortgages or property pledges. A building is out of water when the shell is complete and the roof has been laid.
- for multi-family buildings, when 75% of the sales price is used to finance the building or buildings included in the same programme. The 75% rate is reduced to 60% when 30% of the sales price is financed by funds belonging to the vendor.
- where the sale is of a detached house, the foundations of which have been completed, and provided that the planned payments do not exceed in total:
* 20% of the price on completion of the foundations ;
* 45% on completion of waterproofing;
* 85% on completion of the house.
- When the vendor is a semi-public construction company approved for this purpose by the Minister of Finance and the Minister of Construction and Housing, or in which a public authority holds at least 35% of the share capital;
Extrinsic guarantee: the completion guarantee provided by a financial institution.
If the seller does not meet the above conditions (intrinsic guarantee), he will have to call on the services of a financial institution that undertakes, in the event of the seller's default, to provide the funds required to complete the building. This will be done either through a credit facility, or through a guarantee agreement under which the guarantor undertakes to pay the purchaser, jointly and severally with the vendor, the sums required to complete the property.
The repayment guarantee
Rarely used in practice, article R 261-22 of the French Construction and Housing Code allows the vendor to sign a guarantee agreement with a financial institution under which, in the event of the sale being cancelled for lack of completion, the financial institution undertakes to repay the sale price to the purchaser jointly and severally.
In practice, this type of guarantee is rarely used, as buyers are more interested in seeing the building completed than in being reimbursed for the sale price already paid.
