Sale with right of redemption (now referred to in the Civil Code as vente avec faculté de rachat) is a little-used and little-known form of transfer. This particular type of sale, provided for in articles 1659 et seq. of the Civil Code, has many attractive features for both the seller (in a specific situation) and the buyer.
A sale with a right of repurchase (vente à rémérée) gives the seller the right to take back the property he has sold, in return for repayment of the price and certain costs incurred by the purchaser under a sale with a right of repurchase. The seller has the right to recover ownership of the property for a period of up to 5 years.
The sale with right of redemption is a perfect sale containing a resolutory condition, the realisation of which is left to the free disposal of the seller.
If the seller exercises the option offered by the repurchase agreement, the sale is cancelled and the parties are retroactively restored to their initial situation prior to the sale.
If, on the other hand, no repurchase is made, the purchaser remains irrevocably the owner of the property.
To better understand the issues involved in a sale with right of redemption, we will look at the following topics:
The advantages of a sale with right of redemption (vente à réméré)
Selling your property with the option to buy it back is for certain people in difficult situations. For example, a property sale with option to repurchase can enable an over-indebted person to pay off a difficult financial situation using the sale price.
The property that is the subject of the sale with right of repurchase will generally be a house or flat that is the seller's principal residence, and in which he or she wishes to remain.
The profile of a vendor with a repurchase option is therefore often that of a person registered with the Banque de France and possibly admitted to the Commission de surendettement des particuliers.
The sale with right of repurchase can prevent the property from being seized.
To retain the use of the house or flat, a lease will be signed in favour of the seller.
By setting up a lease at the same time as the sale, the vendor can remain in the house or flat, with the option of buying back the property at a later date. The sale price will put the seller's financial situation on a sounder footing, and during the time allowed (maximum 5 years) the seller will be able to prepare the financing for the purchase of the property.
Buyers with a repurchase option (private investors or specialised companies) will be making a property investment that will enable them to receive rental income or even compensation. The costs of the investment, and even the property tax, may be reimbursed in full.
What's more, the buy-back investment will be secure if certain precautions are taken. If the property is leased to the vendor, it will be possible to include a clause in the deed of sale stipulating that the vendor will forfeit his right to repurchase if he fails to pay the rent on time. In addition, a sum corresponding to the rental payments may be sequestered from the sale price.
Investing in a property with a repurchase option normally avoids the inconvenience of an ordinary tenancy (finding a tenant, risk of unpaid rent, etc.).
In the event of a buyback, a lump-sum payment may be agreed for the benefit of the property investor. Conversely, if the vendor does not exercise his buy-back option, an additional price may be stipulated for his benefit.
It should also be noted that once the property has been removed from the seller's assets under the repurchase option, it can no longer be seized by the seller's creditors. Creditors may, however, exercise the repurchase option in place of the vendor by means of the action oblique provided for in article 1166 of the French Civil Code. In this case, the creditors must reimburse the buyer with a repurchase option under the same conditions as if the repurchase had been made by the seller.
The buyer with a repurchase option may, however, oppose the benefit of discussion to creditors who exercise the repurchase of the property. The benefit of discussion requires the seller's creditors to assert their claim against the seller's assets as a priority.
Disadvantages of a sale with right of redemption
The main disadvantage of a sale with right of repurchase (vente à réméré) is the final cost borne by the seller. This atypical type of sale is often the last resort if you want to keep your house or flat.
This is the case when the seller, in need of cash to pay off his debts, is unable to find other financing, particularly because he is registered with the Banque de France, which makes it difficult to obtain a loan.
However, the cost of remortgaging should be put into perspective. If a person in financial difficulty decides to sell their property out of court, they will certainly have to find a rental property first and then possibly buy another property. This purchase will entail transfer fees equivalent to those for the purchase of the property under a repurchase agreement.
Finally, in the case of a sale by auction, the price obtained for your flat or house may be lower than the market price. Auctions involve much higher costs than ordinary sales. Bids from potential buyers will take these costs into account, and the price obtained may not be enough to pay off creditors.
Terms of repurchase under a repurchase agreement
For the repurchase agreement to come into effect, the seller with a repurchase agreement must declare that he is repurchasing the property and repaying the price and costs. The mere intention to invoke the repurchase clause does not deprive the purchaser of ownership of the property.
The purchase price is freely agreed between the parties in the deed of sale with the buy-back clause. It may therefore be a lump sum lower or higher than the sale price. To this price must be added the costs, rental costs and certain expenses. Sumptuary or maintenance expenses, for example, are excluded. In addition, the buy-back price may be increased by interest or a lump-sum payment for the buy-back.
The parties are free to agree any other clause.
In the event of deterioration of the property by the purchaser with a repurchase option, the seller who exercises his repurchase option is entitled to claim damages.
Taxation of the sale with right of repurchase (buy-back clause)
A sale with right of redemption is perfect from the outset, which means that it is taxed in the same way as an ordinary sale. In the case of a sale of real estate with a buy-back clause, the purchaser will therefore have to pay registration duty, land registration tax and notary's fees, just like any other transfer of real estate for valuable consideration.
In addition, the vendor with a repurchase option may have to pay tax on the capital gain arising from the sale of the property (whether it is a capital gain for private individuals or a professional capital gain). It should be noted, however, that the sums borne by the vendor with a repurchase agreement will be refunded if the repurchase agreement is exercised. This is because the cancellation of the sale following the exercise of the repurchase option must return the parties to their original situation.
The only exception relates to registration duties, which are not refunded to the purchaser in the event of repurchase.
Under the terms of article 1961 of the French General Tax Code, "registration duties or land registration tax, where it is used in place of these duties, are not subject to restitution once they have been duly collected on deeds or contracts subsequently revoked or cancelled by application of articles 954 to 958, 1183, 1184, 1654 and 1659 of the Civil Code".
If the seller makes use of the repurchase agreement within the allotted time, only the fixed duty for unnamed deeds is payable, which is currently €125.
However, this tax is only applicable if the repurchase meets certain conditions set out in article 680 of the General Tax Code:
- The repurchase option must be provided for in the initial deed of sale;
- The deed of repurchase must be executed within the stipulated period, no later than 5 years after the sale with right of repurchase;
- The deed of repurchase must be dated with certainty: authenticated deed or private deed with a date certain.
- Lastly, only the vendor with a repurchase option or his universal successor can benefit from this atypical tax system. A third party who assumes the right of repurchase will pay proportional transfer duties, as in the case of an ordinary property purchase.
To buy back their property, the seller will almost certainly take out a loan with a financial institution. If the property is their principal residence, they will be eligible for the income tax credit codified under article 200 quaterdecies of the General Tax Code in respect of the interest on the loan (all other conditions being met, in particular that the property is actually used as their principal residence on the date the loan interest is paid).
If the repurchase is made without complying with the conditions of the repurchase agreement, in particular after a period of 5 years, the transfer will be considered by the tax authorities as a new sale and will therefore be taxed as such.
In terms of wealth tax (impôt de solidarité sur la fortune - ISF), the property will be included in the purchaser's assets, as the sale with right of repurchase has been completed. However, the buyer will be able to take a discount of around 10% off the market value of the property because of the buy-back clause. In addition, a second discount is possible if the property is let.
Conditions governing the validity of a sale with right of repurchase
The sale with right of repurchase must not allow the rights of third-party creditors to be evaded, particularly if the buyer and seller collude to organise the seller's insolvency.
In addition, a sale with right of repurchase agreement may also be challenged if it conceals a pact to sell or a pignorant pact, particularly if the transaction relates to the debtor's principal residence. These prohibited agreements (in relation to the principal residence) are those that enable the creditor to dispose of the property pledged by the debtor.
Once the existence of a prohibited pignorant pact has been proven, the agreement concealing an unlawful pledge loan is annulled in its entirety, not just the prohibited pact.
However, fraud cannot be presumed and is not always easy to prove. The sale with right of repurchase may be reclassified as an unlawful pawnbroking transaction at the discretion of the judges. This may be based on the price being well below the market value of the property, the seller's habit of entering into usurious transactions, or the fact that the property was leased to the seller at the same time as the sale.
The sale with right of redemption should not just be a form of credit repurchase guaranteed by a transfer of ownership.