1. What are the principal securities which lenders will require borrowers to provide?

• mortgage and special real estate privilege;
• pledge on intangible personal assets;
• providing of a surety;
• comfort letter;
• assignment of property as a security;
• assignment of professional claims;
• trust.

2. What statutory provisions apply to such securities?

3. What are the formal requirements for the establishment of such securities?

See Question 2 above and Question 5 below for the formal requirements of such securities.

As seen above, the scope of the pledge is not the account's securities, but the account itself.

The share account pledge is established between the parties and upon the issuing legal person and third parties with a declaration signed by the account holder.

This declaration shall include the consent to pledge the securities' account, as well as information such as the date, the amount of the pledged debts, and the nature of the elements on the account (Art. D. 211-20 MFC).

The declaration is a condition for the validity of the pledge. The pledgee has a preferential right and shall claim the property of the pledged securities. He has a legal retention right on the pledged securities (Art. L 211-20 IV).

As for the “cession by security”, there is no such requirement per se for the constitution of a share pledge, however there are special requirements regarding the share account (see Question 2).

4. Are there any specific statutory provisions relating to the abovementioned securities; should they be provided in respect of a real estate financing?

Concerning sureties, the French legislation aims at protecting the less informed party on its contractual obligations with reference to real estate financing.

In particular Arts L 313–317ff. ConsC provide a set of rules concerning a natural person who is standing as surety for a consumer in reference to real estate financing.

Concerning privileges, French law provides special privileges for money lenders in Arts 2373ff. FCC.

Concerning mortgages, French law provides specific rules, especially concerning rechargeable mortgages, in order to protect the borrower and grantor of the mortgage in Arts L 313-14–L 313-14-2 ConsC and even regarding reverse mortgages in Art. L 314-1.

5. Should the answer to the above be in the affirmative, what are both the formal and substantive requirements which have to be met for their application? What advantages/ benefits arise therefrom?

Concerning the sureties: A natural person who provides a surety for a consumer in relation to a real estate loan, shall comply with certain provisions.

Two main rules apply: the guarantor shall be informed, and his obligation shall be proportionate.

Information: While the loan contract is executed, the lender is required to report to the guarantor a characterized payment incident from the debtor. This incident is defined as one being potentially written on the national file for payment incidents. If the lender fails to do so, he loses his claims over penalties or default interest, due between the date of the first unreported incident and the date of the information to the guarantor (Art. L 313-9 ConsC).

The guarantor shall sign, under penalty of nullity of his obligation as a guarantor, the following, and only the following (Art. L 313-7 ConsC):

“As I act as guarantor for X … for the maximum amount of … covering the payment of the principal, and the interest and, potentially, the penalties or default interest for the period of …, I undertake to pay the lender the amount due on my income and my assets if X … doesn't cover it.”

If the guarantor is severally liable, a cap, including interest and accessories, shall be stipulated expressly in the contract. An uncapped surety for a real estate (or a movable property) loan is therefore forbidden (Art. 313-8 ConsC).

Proportionality: the guarantor of a real estate loan for a consumer is protected against excessive obligations:

“A credit institution shall not avail itself of a loan contract for a credit operation concluded with a natural person, whose obligation was, at the time of the conclusion, obviously disproportionate to his assets and income, unless the assets of the guarantor, which is called on, allow him to face his obligation.”

If the obligation of the guarantor is still disproportionate at the time he is called upon, his payment is unenforceable with regards to the credit institution (Art. L 313-10 ConsC).

For a guarantor, which is a legal person, the surety is not necessarily limited in time and amount. However, a credit institution which is granted such a surety shall inform the guarantor each year as to the amount and the deadline of the guaranteed debt; and as to the fact that the guarantor can withdraw his guarantee any time he wants, if no deadline is provided in the surety contract.

As seen above, the lender is required to report to the guarantor a characterized payment incident from the debtor.

Concerning the privileges of the lender of money, it supposes a property purchase agreement and a loan. The privilege concerns the property acquired and all its attachments (incorporated constructions). It guarantees the amount of the loan and the interest at the rate stipulated by the loan contract and in the limit provided by Art. 2432 FCC, i.e. three years. These rules protect the lender of money for the financing of real estate.

Concerning the rechargeable mortgage, French law protects the grantor of the mortgage in the case of a property loan. Article L 314-14-1 ConsC provides precisely the conclusion of the property loan granted by a reverse mortgage in order to protect the consent of the grantor.

According to the abovementioned article, the grantor must be given a document on the situation of the mortgage containing mandatory information. The failure to comply with these formalities is punishable by a fine of €3.750 and forfeiture of the lender's right to interest on the loan; in such cases, the borrower is bound only to repay the principal as scheduled in the loan agreement.

Concerning the reverse mortgage, French law protects the borrower from the risks of the constitution of a reverse mortgage: canvassing is forbidden (Art. L 314-4 ConsC), the publicity has to be informative and honest (Art. L 314-3 ConsC), and a prior offer has to mention the main elements of the loan and has to be maintained for a minimum period of 30 days (Arts L 314-5 and L 314-6 ConsC).

The borrower then has a 10 day period of reflection during which he cannot accept the offer (Art. L 314-7 ConsC). The contract has to be notarized, otherwise it is invalid. Failure to comply with these requirements is an offence subject to criminal prosecution (Arts L 314-16–L 314-19 ConsC).

6. What liabilities are secured? For what amount? In the case at issue, does the novation of the underlying obligation lead to the maintenance/extinguishment of the securities assisting the original debt?

• For mortgages: a distinction should be made for the different types of mortgages:
  • It is now possible to cover different debts, present or future, with a mortgage (Art. 2421 FCC).

    Future debts shall be determinable.

    A determined amount shall be written in the notary act, constituting the mortgage, and in the mortgage registration.

    If the mortgage covers different future debts for an undetermined period of time, the grantor can cancel the debt at any time with three months' notice (Art. 2423 FCC).

  • The rechargeable mortgage allows the grantor to use the mortgage as covering new debts, the amount not exceeding the value of the mortgaged property. This amount has to be written into the constitution act.

    However, the amount of the remortgaging can be higher than the initial secured debt.

    The newly covered debts are hypothetical, thus unknown and the identity of the creditor is also unknown. It can be the first grantor or a third party. The mortgage is then still valid after the extinguishment of the originally covered debt (Art. 2422 FCC).

  • For a reverse mortgage: the claim is the property of the home owner, who was granted a loan. The value of the claim is not known at the time the mortgage is constituted. This amount is determined when the reverse mortgage contract terminates, which is either at the death of the borrower, or when the mortgaged property is sold. In that case, any novation of the underlying debt leads to the extinguishment of the assisting reverse mortgage.
• For sureties: the obligation covers a specific underlying debt. The guaranteed obligation determined in the contract cannot qualitatively and quantitatively exceed the amount of the debt it covers. However it is possible to only cover a portion of it (Art. 2290 FCC).

• For pledges on intangible personal property: it is possible for this kind of pledge to cover one or multiple claims present or future (e.g. different rental incomes, future profits of a company, debt flows).

  A future debt, though potential, shall have an existence “close to certainty”. It could also only cover a portion of the debt, except where the latter is indivisible (Art. 2358, subarticle 1° FCC).

  However, the pledge does not extend to as yet unknown debts and is not extended after the extinguishment of the covered debt.

• For comfort letters: a comfort letter does not give an identical or similar obligation to the person granting the letter. It is a security in personam not attached to a specific obligation, but rather to a person (usually a mother company for its subsidiary, or a CEO for his company).

  The comfort letter provides an obligation of means or of results and not a specific amount of a claim.

• For the assignment of professional claims: it is possible to assign future debts, if those are designated or clearly designable.
• For the special privileges: it guarantees the amount of the loan and the interest at the rate stipulated by the loan contract and within the limit provided by Art. 2432 FCC, i.e. three years.

It is important to note that a cession plan in the insolvency is not considered as a novation of the debtor's debt. Therefore this debt, and by analogy, the surety assisting the original debt, are maintained as before.

7. Is it possible to “divert” such securities (namely, the securities in rem) in order for them to act as collateral for other claims, should the original loan agreement be terminated?

• For mortgages:
  • It is possible to divert a mortgage that covers different debts, present or future, but only if it replaces determinable debts, as the mortgage was undertaken.
  • The rechargeable mortgage allows the novation of debts, as well as the novation of the grantor.
  • The reverse mortgage: a “diversion” is impossible.
• For pledges: a “diversion” to unknown debts is impossible.
• For sureties: a “diversion” is impossible.
• For comfort letters: it is considered that in case of novation of the original debt, the obligation is no longer valid in respect of the provider of the comfort letter.
• For assignments of professional claims: a “diversion” is impossible.
• For special privileges: a “diversion” is impossible.

8. What rights does a share pledge attribute to the pledgee? Are there any arguments against exercising such rights?

See Question 2 above.

After the share pledge contract is duly formed, the debtor has the obligation to pay directly the pledgee, who has a retention right. This rule is of practical importance, should the debtor default.

Three options are available to the pledgee (Art. 2365 FCC):

• He may ask the court to order him the right of ownership over the pledged debt securities (Art. 2347 FCC).
• He may grant ownership of the pledged debt securities according to the conditions of the contract that allows such enforcement. However this option is not available if it is used after the court decision to open insolvency proceedings or if this contract stipulation was agreed on after the opening of insolvency proceedings (Art. L 622-7 CommC).

• If the pledge was duly notified to the debtor, the pledgee is the only one who can receive payment for it. It is not a preferential right, but rather an exclusive right (Art. 2363 FCC).

  The executed payment will be charged on the pledged debt securities. If the payment overreaches the pledged debt security, the pledgee owes the debtor the difference.

Concerning the pledge of shares, the right to vote in corporate meetings belongs to the owner of the shares and not to the pledgee. Also the annual profit distributions belong to the grantor of the pledge and are not transferred to the pledgee.

If a loss of value of the shares is the result of the grantor's conduct, the pledgee has an option to appoint a “management observer” (observateur de gestion) in order to avoid the depreciation of their securities.

In case of decrease of capital the pledge is extinguished and is not extended to the newly issued shares. The creditor loses his right.

Finally, see Question 2 above concerning the share account pledge.

9. What taxes and levies apply to the establishment of such securities and to their cancellation?

• For mortgages: applies cadastral taxes for the registration of mortgages (0.70%). This does not apply to a rechargeable mortgage when it is registered again to cover new debts. However, for both, notary fees and the salary of the mortgages' registrar are to be paid (Art. 844 of the French General Tax Code (hereinafter “GTC”).

  The renewal of the mortgage is not subject to the payment of taxes. The cancellation of a mortgage is free of taxes but the salary of the mortgage's registrar is due.

  The salary of the registrar is due for the registration of each mortgage or privilege and is paid at a rate of 0.05% of the value of the guaranteed asset or debt (Art. 293, Annex III GTC).

10. In the case of default, how will the securities in rem be enforced?

See Question 11 below for the enforcement in the case of insolvency proceedings.

Except for the case of insolvency proceedings against the debtor, the following ordinary law scheme applies:

• For a mortgage: the creditor has several options pursuant to Arts 2458 and 2459 FCC. He can obtain the sale of the mortgaged property and be paid through the sale proceeds; or he can obtain the judicial grant of ownership of the mortgaged property; or he can obtain the ownership of the mortgaged property through a conventional agreement between him and his debtor:
  • Sale of the mortgaged property (Art. 2458 FCC): the creditor summons his debtor to pay pursuant to Art. R 321-5 of the French Enforcement Proceedings Code. This summons is published to the mortgage register within two months (Art. R 321-6). A hearing of the debtor is organized within two months of the registration of this summons (Art. R 322-5).
  • The judge can then order the private sale of the property or order a forced sale (Art. R 322-15 of the Enforcement Proceedings Code). If the private sale is chosen, a new hearing is planned within four months, which can be extended to three additional months for conclusion of the contract of the private sale (Art. R 322-21).
  • The sale proceeds are deposited in a locked-in account at the “Caisse des Dépôts et Consignations” (Art. R 322-23).

    The different registered mortgage creditors have a preferential right to the sale proceeds of the mortgaged property, unless they agreed with the debtor that the sale proceeds will be used to pay, partially or entirely, their claims (Art. 2475 FCC).

    The property is transferred with the mortgages and privileges attached to it pursuant to Art. 2461 FCC. Unless the third party owning the property has proceeded to the redemption of his property (Art. 2462 FCC), by following certain formalities (Art. 2478 FCC), the secured creditor can exercise their resale right as long as the claim is not paid (Art. 2464 FCC).

  • Judicial grant of the mortgaged property: this procedure is restricted in order to protect the debtor. Therefore the option is not open for the principal residence of the debtor (Art. 2458 FCC).

    In order to avoid unjust enrichment of the secured creditor, the property shall be assessed by an expert, designated by the parties, or the judge. If the assessed value exceeds the value guaranteed through the mortgage, the creditor owes the debtor the difference. If there are other mortgage creditors, the difference shall be kept in a deposit account (Art. 2460 FCC).

  • Conventional grant of the mortgaged property: the same restrictions apply as for the judicial grant of the property (Art. 2459 FCC).

    The property is assessed in the same way as the judicial grant, and the sale proceeds are kept as a deposit. However, as this procedure is even easier to enforce, the conventional grant shall be done in the presence of a notary and the agreement is subject to the land registration (Art. 2460 FCC).

    It is important to notice that this conventional agreement is impossible if the debtor is subject to an insolvency proceeding (Art. L 622-7, I CommC, referring to Art. L 631-14, paragraph 1, and Art. L 641-3).

• For a surety: the creditor has a right to be paid from the guarantor for his claim only if the debtor defaults, pursuant to Art. 2298 FCC. The guarantor cannot be asked for payment before the payment deadline.

  After the deadline, his surety is limited to the creditor's claim against the debtor, or to the extent of the surety he provided, which could be less than the entire claim (Art. 2290 FCC). The surety is limited to the principal and does include or not the accessories of the debt (e.g. penalties). If the surety is unlimited in its amount, it is extended to the accessories of the debt if the guarantor has granted it (Art. 2293 FCC).

  If the surety covers future debts, only those which resulted before the surety was cancelled are enforceable.

  Should the original debtor default, the creditor shall inform the guarantor, if he is a natural person. Otherwise he loses his claim on penalties and payment delays resulting between the date of the first default and the date of receiving the information thereof (Arts L 313-9 and L 341-1 ConsC).

• For a pledge on intangible personal property: should the original debtor default, the pledgee has three options to enforce his claim (Art. 2365 FCC):
  • the judicial grant of ownership of the pledged debt security (Art. 2347 FCC);
  • the conventional ownership grant of the pledged debt security, with the abovementioned same prohibition as for the mortgage if insolvency proceedings are opened against the debtor (Art. L 622-7 CommC);
  • After the deadline, the pledgee is the only one who can receive payment for it. It is not a preferential right, but rather an exclusive right (Art. 2363 FCC) (see Question 8).

11. Will securities be automatically preserved, should the borrower's debt be restructured?

In theory, the securities will be automatically preserved in the case of insolvency proceedings, but are not enforceable after a court decision opening the insolvency proceedings. Nonetheless, these rules are subject to certain exceptions (Art. L 622-21 CommC).

Securities shall be filed to the insolvency proceeding within 2 months after the notification of the opening of this proceeding (Art. L622-24 CommC).

The claims which are not filed within this timeframe are not enforceable against the debtor during the execution of the plan if the undertakings mentioned in the plan or decided by the court have been kept. During the execution of the plan, they are also not enforceable against co-debtors which are natural persons; or persons that provided a security in personam; or persons who provided a surety in rem (Art. L 622-26 CommC).

Initially, the following proceedings shall be defined for the best understanding of the following analysis:

• The “observation period” is the period after the opening of the insolvency proceedings during which an insolvency plan is prepared. This period aims at determining the situation of the insolvent debtor and the options available: e.g. cession of parts or the whole activity of the debtor, receivership, or liquidation (Art. L 622-1 CommC).
• In the safeguard procedure, the debtor is granted the protection of the law after a court decision, and his creditors can no longer file enforcement proceedings against the debtor at the time of the procedure (Art. L 620-1 CommC).

The abovementioned rules regarding the registration of claims in the insolvency proceedings are not applicable to the surety guarantor. If a creditor cannot enforce a payment individually against the debtor, he can nonetheless enforce the payment against the surety guarantor, as long as he is not himself subject to insolvency proceedings.

The prior creditor can take protective measures or obtain a payment order against the guarantor, even after the opening judgment.

The surety is maintained and is enforceable against the surety guarantor, even if the creditor cannot enforce his claim against the insolvent debtor.

As seen above, the creditor shall submit his claim to the insolvency proceeding against the guarantor, if the guarantor is insolvent. He shall do so whether the guarantor gives a guarantee in rem or in personam. He shall further do so, even if the original debtor is solvent and is not in default of payment.

In that regard, he will be able to call upon the guarantor, should the original debtor later default.

However, if the guarantor, who is a natural person, is a co-debtor of the insolvent debtor; or has provided a personal surety; or has secured or transferred an asset as a surety the claim against him is not enforceable in the “observation period”, up until a judgment opening the insolvency plan or deciding the liquidation.

After this period of protection, the judge may even grant the guarantor an extended payment deadline up to two years, from the moment when the claim is enforceable again, if the situation of the guarantor so requires (Art. L 622-28, paragraph 2, CommC).

The creditors can take protective measures against the guarantor during the “observation period” to avoid frauds on his part (Art. L 622-28, paragraph 3, CommC).

Retention rights are an exception to the abovementioned prohibitions. They are not considered as securities, giving them an advantage over any other claim, either privileged or covered by a security. However, retention rights are not enforceable during the observation period and the enforcement of the plan, unless the retained property is part of a business cession plan (Art. L 622-7 CommC for the observation period and the execution of the plan; Art. L 641-13, II for the liquidation proceedings).

• During the “observation period”, during the execution phase of a safeguard or continuation plan, and if the property is covered by the following rights: a special privilege; a pledge or a mortgage; a share of the sale proceeds of the secured properties is deposited in a locked-in account at the “Caisse des Dépôts et Consignations”, which is a public financial institution. The creditors receive payment after the enactment of a plan, according to their respective ranking (Art. L 622-8 CommC).

  However, the creditors benefiting from those rights will receive payment after the creditors benefiting from the privilege of subsequent debts (Art. L 622-17 CommC), who themselves receive payment after the employees and their “super-privilege” (Arts L 143-10, L 143-11, L 742-6, and L 751-15 of the French Labour Code).

  There is no option for a judicial award of a pledge during the “observation period”, in order to respect the equal treatment between creditors. It is also not awarded after a continuation plan, a receivership, or a safeguard procedure, if the secured debt resulted prior to the opening judgment of the insolvency proceedings (Art. L 622-7 CommC).

• In the liquidation: the mortgaged creditors are paid after the privileged employees and the procedural costs which resulted after the opening of the insolvency proceedings for the requirements of the procedure, but before the subsequent privileged creditors.

  In the liquidation, unlike in the cession plan, the property transfer shall comprise redemption of the security even if the secured creditor is not fully paid off, which would very likely be the case since other creditors receive payment before him (including the “super-privilege” of employees, and the procedural costs of the insolvency).

  If the assets of an insolvent company are transferred through a cession plan to a transferee, the securities attached to the property will be transferred with them, if they cover a credit given to the company in order to finance a property.

  The transferee shall then pay the creditor the amount of the transferred security still due to him. As the creditor still has his claim on credit payment deadlines that the insolvent debtor didn't pay, the transfer of the assets coincides, from a substantive viewpoint, to a transfer of debt.

  The creditors, who have a retention right, can exercise this right against the transferee. The transferee then has the option to pay the creditor's claim back in totality and not just the remaining rental.

  However, the original lender and the transferee may reach an agreement governing their situation. The creditor has the option to withdraw his securities (Art. L 642-12 CommC).

  For pledges: the creditor may ask the court for the judicial award of the pledged asset before the assets of the debtor are liquidated (Art. L 642-20-1 CommC).

  Consequently, the secured creditor who obtains the judicial award of the property of the pledged asset will be paid even before creditors with higher rankings.

Finally, from the date of the opening of insolvency proceedings, the interest stops running. That includes penalties and increased charges, unless they result from a loan contract concluded for one year or more, or from a contract with deferred payments concluded for one year or more. Natural persons, which are co-debtors, or which have given a personal security, or which have pledged or given a property as a security, can avail themselves of these provisions (Art. L 622-28 CommC).

12. Are banks entitled to enforce a mortgage directly/through a receiver without having recourse to the competent court?

See Question 10 above and Question 13 below.

13. What is the average overall duration for the enforcement of a mortgage following enforcement proceedings?

See Question 10 above.

In the ordinary law procedure, from the point when a summons to pay has been registered, the procedure usually lasts not more than 12–15 months.

In the case of a prior insolvency, the enforcement of the mortgage is only possible after the “observation period”, lasting six months, which is renewable once upon request of the debtor, the receiver, or the public prosecution office (Art. L 621-3 CommC).

In the case of a prior insolvency, which is extended, the overall duration for the enforcement should not exceed two years.