Preference Rights over Real Estate
22nd Oct 2024
A court rules on the operation of an agreement for the first right of refusal on the purchase of property.
Obtaining preferential rights from an owner to real estate in France is possible through an agreement called a pacte de préférence.
Such a contract might arise during the purchase of a property, when some land or buildings owned by the seller might not be included in the current sale.
This may occur either because:
- 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, possibly for tax reasons;
- The land or property may be tenanted by a third party.
It may also arise between long-standing neighbours, when the property in question may similarly be a contiguous field, woodland, barn or other ancillary buildings.
Such agreements can only be triggered by the owner. They are not an 'option' available to the beneficiary to buy real estate.
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. The agreement grants no preferential terms on price, unless it is contained in the contract.
If the owner of the land or property proceeds with the sale of the property to a third party the beneficiary of the preferential rights is entitled to sue for damages, or, where the purchaser knew of the existence of the contract, the can bring an action for annulment and substitution.
The terms of a pacte de préférence are entirely at the discretion of the parties, although it is best processed through a notaire, as it can be then registered as a charge on the land.
There is a substantial amount of litigation concerning these agreements, as the law is not entirely clear, and jurisprudence has added to the confusion.
In a case recently heard in the French Supreme Court, the Cour de Cassation, an elderly woman had agreed a pacte de préférence for an indefinite period to a couple concerning undeveloped land.
In May 2011, the owner wrote a letter to the beneficiaries notifying them of her intention to sell (as a life annuity and at a very low price compared to the market, probably for tax reasons).
In July 2011, the beneficiaries informed the owner of their intention to exercise their right of preference in order to acquire the land.
In September 2011, during an appointment with the notary, the owner's sole legatee indicated that the latter would not sign the conveyancing deed and invoked termination of the preference agreement.
Following the death of the owner in November 2012, a long litigation for the forced judicial sale of the property followed.
Since 2016 the law on perpetual commitments in a contract have been tightened to allow them to be terminated on 'reasonable' notice. In this case the agreement had been signed in 1990 and was not covered by the new law.
As a result, the Court of Appeal sitting in Aix-en-Provence, ruled that the request for termination of the preference agreement invoked by the legatee could not be granted.
The owner appealed the ruling to the Court of Cassation who dismissed the appeal in the following terms: "Perpetual commitments are not sanctioned by the nullity of the contract but each contracting party may terminate it at any time, subject to respecting the contractually provided notice period or, failing that, a reasonable period. It follows that, in the absence of termination of the preference agreement, the beneficiaries could exercise their right of preference."
In the light of this judgement the advice would appear to be to limit the duration of the agreement to a reasonable period (which might be no longer than 5 to 10 years), failing which, after 'a reasonable period', the owner of the land could terminate the agreement.
Such agreements are also best authenticated through a notaire in order that it is brought to light in the event of a prospective sale to a third-party.
It should also be noted that the rights under a pacte de preference are trumped by the statutory rights of a tenant occupying the land or property in question, as well as the right of pre-emption granted to local councils and the French land agency SAFER, in appropriate cases.