How repossession works in France
Matthew Cameron looks at how repossession works in France and what a borrower can do to ease the situation
People buying a house in France with the aid of a mortgage will be fully aware of the general caution that ‘your home will be at risk if you do not keep up with mortgage repayments’. And, while they will not enter into a purchase believing this may happen, it certainly can do. Therefore, it is prudent to understand just what may happen if the lender has to repossess a person’s property. In this article, we will look at the steps that may take place when a property owner fails to observe the terms of a mortgage.
Borrowers will of course be fully aware when they have not correctly discharged their monthly mortgage repayment obligation. Most lenders would not be too concerned about one instalment being missed: this can, after all, follow a simply mistake or banking problem. This is generally not a problem, especially if the outstanding payment can be resubmitted without much further delay.
However, once it becomes clear that there is more than just a passing mistake, the bank will seek to protect its position. The first step should of course be that the lender will contact the borrower to establish the gravity of the problem. It is surely at this point, if not before, that a borrower in difficulties should look to discuss the situation with the bank. If part of the problem stems from the fact that monthly repayments are too high, it might be possible to renegotiate payment schedules to make the burden easier to manage. It is imperative, though, to enter into early and proactive discussions. A number of options may be available: a short payment holiday, perhaps, or a general reduction in monthly payments coupled with an extension of the overall loan term, or even a reduction in the underlying interest rate. Yet it is clear that if such opportunities are to be available, it is, as stated, incumbent on the owners to commence early and open discussions with the bank, as there is less chance that it would be disposed to such options if the borrower is already six months in arrears.
It is rarely in a bank’s financial interest to repossess a property, so they may occasionally be prepared to restructure the payment schedule if that is likely to work. Banks are not necessarily geared up to own large portfolios of houses, which they would then have to manage, maintain, and rent for income. This is certainly one reason why they may well be open to negotiating the terms of the mortgage, rather than having to take legal action for repossession.
During the recession of the 1990s in the UK, there were many repossessions of British properties that led to owners “giving the keys back” to their bank. Granted, the economic situation in the UK at the time was vastly different from now, with sky-high interest rates making many mortgages unsustainable. Nevertheless, some borrowers do occasionally suggest just delivering the house to the lender as a way of solving the problem, especially where the property is a holiday home. However, it is not quite that simple.
If the lender is not prepared or able to negotiate, then it can look to commence possession proceedings. The matter will be dealt with by specific debt control departments at the bank, where the main aim is to recoup as much of the debt as possible. The bank will instruct a French lawyer – an avocat – to issue proceedings. These proceedings are most likely, in fact, to be for a request to the court in France to authorise the sale of the property. In general, that sale would be at an auction.
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The lender will, though, generally still take steps to reach an amicable agreement with the borrower before commencing court action – notifying the borrower of the breach, and requiring that shortfalls be paid.
It is important to note that the bank will not look to spend too much time holding on to the property, so it is likely that a rather low reserve price would be put against the property, to ensure that a buyer will be found. One result of this, though, is that the final sale price may well be lower than the level of the debt.
Therefore it will normally be preferable to try to sell the property on the open market first. Again, this will require early discussions with the bank, although it is possible that they will allow some time for a person to sell on this basis. It will, after all, be cheaper all round, since the fees of the debt management process – including penalty interest and extra legal fees – will not accrue.
An important point to note is that the conclusion of a sale – whether it be by auction or on the open market – will not automatically release the borrower from any obligations. While the mortgage deed is a right that is registered against the property, it also includes personal undertakings from the borrower to repay, and to remain responsible for repayment until the obligation is fully discharged. The costs of seeking repayment, any court action, and other additional expenses are also added to the debt to be borne by the borrower.
The bank can still treat the borrower as a debtor for so long as any part of the debt is outstanding. This is why, as mentioned above, it is not really possible just to give the keys back: for so long as any charges are outstanding, the borrower remains liable for these, so irrespective of whether the borrower remains resident outside of France, the debt can still be chased, and simply washing one’s hands of the property would not necessarily extinguish that obligation.
The bank must give sufficient notice of any proceedings, and where the borrower lives outside of France there are formal procedures that must be followed to ensure correct service of documents, including full legal translations.
Such procedures inevitably increase not only the time a matter will take to progress, but also the costs involved. Once a borrower falls into arrears the costs begin to increase substantially, making it perhaps ever harder to avoid full repossession.
However once the property is sold, if there is still a shortfall between the sale price achieved and the total of the debt, it is certainly possible that further proceedings would be issued in the UK. There are a number of ways that this can be addressed, one option being for the bank’s avocat to seek a European judgment, which would allow for enforcement proceedings to be commenced in the UK. The first step in the UK could then be that a charge be registered against the home in the UK, or perhaps even a sale being forced of that home too. This would of course depend on net value of the main home, as there would probably be little benefit in taking such action where there was no equity available.
A mortgage lender is unlikely to want to take back possession of the property, as they will not want to have the burden of managing properties, and there is a real risk of it having great difficulty in being able to recoup the entire loan and any other losses. If a borrower does start having difficulty in keeping up with payments, then it is important to enter into a discourse with the lender. The sooner that discussion starts, the greater the opportunity to avoid losing the house.
This article is for general information purposes only and does not constitute legal or other professional advice. We would advise you to seek professional advice before acting on this information.