Buying French property ‘en viager’
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Flexible and cost-effective or an imprecise science? Hervé Blatry examines a form of French property transaction that is making a comeback – the viager
With the concerns of elderly people over the future of their pensions, the difficulty for first-time buyers to get on the property ladder, and people’s desire to make sound investments, an old French institution has come back to life and is giving rise to a rapidly increasing number of transactions.
Known as the viager, this is how it works. French law allows the freehold title to a property to be split into two distinct rights: the bare title to the property, and the right to use the property and to receive an income from it.
The viager usually consists of selling the bare ownership of a property in exchange for ‘arrears’, an amount payable regularly until the death of the vendor. Alternatively, the full freehold title can be sold, with the vendor retaining a simple right of occupation of the property.
It is usually coupled with a payment of an amount in cash, but this is not compulsory. It is not necessary for the vendor to remain in occupation of the property (if not, the cash lump sum payment will be higher). If the vendor sells his rights as user, the buyer can occupy the property immediately or rent it out etc. Typically, the arrears payable to the vendor will be cheaper than repayments under a mortgage, which makes this arrangement all the more attractive.
It is even possible for the vendor to waive his right of occupation for a period of time during the year – for example, during the summer – allowing the purchaser to occupy the property during that period while the vendor goes on holiday elsewhere.
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The vast majority of sales with a viager are made with the vendor in occupation. This is a cheaper arrangement for the buyer than an unoccupied property, as the arrears payable to the vendor are lower and the vendor remains liable for the payment of outgoings and the maintenance of the property.
During his or her lifetime, the vendor can either stay in the property or rent it out. In this latter case, the vendor will receive the rental income and on his or her death the purchaser will be bound by the terms of the lease and will receive the income. The buyer will be able to terminate the lease agreement in circumstances authorised by law.
Any individual who owns a property can sell it under a viager formula. In practice, vendors are usually at least 70 years old. It is also important to mention that the purchaser of a property sold under a viager may be a corporate body. It is thus possible, for instance, for a group of friends to pool together the purchase price and use a special purpose vehicle in order to purchase and manage a property under a viager arrangement.
One of the key features of the viager is its freedom of contract and flexibility. In fact, both the amounts of the cash sum payable on completion and that of the arrears are set freely by the parties. In practice, the older the vendor is, the higher the payment will be.
It is possible to provide that the arrears will be payable for a fixed period of time, which has to be reasonable. In that case, both parties take a risk; the vendor in that he may not have any rent if he outlives the agreed period and the purchaser, who will need to pay the arrears to the heirs of the vendor even if he dies long before the end of the contractual period. However, this enables accurate financial planning.
As regards the expenses pertaining to the property, in the case of an occupied property (the majority of cases) the vendor will be responsible for taking care of the property and maintaining it and will pay the taxe d’habitation, utility bills, habitation insurance etc. The expenses pertaining to the bare ownership of the property, principally major repairs, will be borne by the purchaser.
As in a standard sale of property, the stamp duty and notaire fees and taxes are paid by the purchaser.
The viager solution can therefore be very advantageous, enabling one to acquire a property for a much reduced capital price and thus make a long-term investment at a very significant potential profit.
A VARIETY OF OPTIONS
Due to the increasing interest in the viager, and in order to address its downside lying in the uncertainty of the time before the vendor passes away (although mortality tables are often used to provide some kind of indication), more sophisticated investment products have started to appear, such as the mutualised viager.
In this case, a special purpose vehicle (for example a société civile immobilière (SCI) or an investment fund) is created to purchase a portfolio of properties under a viager arrangement. Then shares in the company or fund are sold to individual investors or companies. Certain formulae are starting to exist in which the amount paid to the vendor is a capital amount only – represented by the full market value minus the value of the right of occupation, calculated based on the value of the life expectancy and an estimated rental value.
The advantage of such a formula for the vendor is that he does not have to worry about the purchaser’s solvency with regards to the payment of the arrears.
In cases where the vendor remains in occupation, it is also possible to provide for them to have the option to leave the property earlier than their estimated date of death (for instance to go into a retirement home) and redeem in cash the estimated value of the balance of unused right of occupation. It can then be sold earlier than scheduled by the purchaser, with it usually being specified that the heirs of the vendor have a right of first refusal.
Whether you wish to sell on death and make an extra income or make an investment, the viager can be an attractive proposition. Caution is required in the choice of the buyer, as non-payment of arrears can be a tricky issue.
However, institutional investors are creating viager investment funds (such as the Caisse des Dépôts et Consignations, a very large French institution, in the process of creating a €100m fund along with other investors), which is very reassuring in terms of solvency.
There are many advantages for both parties in entering into a viager agreement, but there are also many pitfalls, and it is therefore essential that one seeks specialist advice beforehand.
Hervé Blatry is an ‘avocat’ with the Tees France division of Tees Law
Tel: 01279 322 511, www.teeslaw.co.uk