The main highlights of the recent security and guarantees reform in France

21 April 2022

The main highlights of the recent security and guarantees reform in France

New legislation has recently reformed French law relating to security and guarantees. Thomas Ehrecke, partner at LPA-CGR, explains the content and the consequences.

Ordinance no. 2021-1192 dated 15 September 2021, which came into force on 1 January 2022 has (finally) modernised, simplified and completed the range of security and guarantees available to lenders. The reform also aims to enhance the protection for guarantors and in doing so imposes new obligations on lenders benefiting from such guarantees. Its impact on real estate financing is not negligible: it provides for new structuring possibilities, clarifications and simplifications.

The insolvency provisions of Chapiter VI of the French Commercial Code have also been significantly modified and reformed. Hence, some key points will also be mentioned below.

Asset security

The provisions relating to real estate security have been significantly modified. Some key points are summarised below. The former “privilège de prêteur de deniers” (PPD) disappears in favour of a special legal mortgage. Even if that continues to benefit from the favourable tax regime of the PPD it will now only rank on the day of its registration (as it is the case for the contractual mortgage) and will no longer be deemed to take effect retroactively as of the date of the execution of deed. However, the fact that the special legal mortgage does not take effect retroactively should not have a significant impact given the usual diligence made in order to ensure that the mortgage ranks in the order agreed (as is already the case and practice for ensuring that a contractual mortgage ranks effectively as agreed). It will now be possible to grant a mortgage on a specific property to be acquired in the future. This will also put an end to certain debates (which are, after all, rather theoretical) such as the one around the issue of the satisfaction of certain pre-funding conditions precedent (which in some cases due to market practice created a circular “chicken and egg” effect). Another innovation consists of removing the need to grant an additional mortgage to secure applicable interest in the case of financing by way of a subrogation. Of course, a supplementary mortgage is still required if the interest rate is higher than that on the debt which is being replaced.

Finally, another point to note is the possibility of now taking a pledge on movable property by destination such as turbines or solar panels in relation to a building. This will clearly be of particular interest when financing of building equipped with such devices. However, care should be taken when taking such a pledge in the context of a more global operation in order to avoid conflicting real estate security encroachments/overlaps.

Personal guarantee

The personal guarantee has been subject to a major overhaul. The handwritten statement with annotations previously required remains but the annotations’ wording is no longer prescribed provided that it contains certain fundamental elements. It should be noted that this also now applies to guarantees granted in relation to residential property. These handwritten annotations may now be affixed electronically. Also, the duties of the beneficiary of the guarantee have been extended. It has a new duty to warn the guarantor if its financial capacity is inadequate by reference to the guarantee to be granted and any non-compliance will be sanctioned by partial forfeiture of the guarantee. Furthermore, should the guarantor be a natural person and the beneficiary an institutional creditor, in case of a manifest inadequacy of the scope of the granted guarantee by reference to the financial means of the natural person, then the sanction will now simply be the reduction of the scope of such guarantee to a level permitting such adequacy. Moreover, the beneficiary of the guarantee also has the duty to inform such natural person guarantor of the debtor’s default. This duty results from the reform of insolvency proceedings now permitting a guarantor to lodge its claim before having paid under the guarantee as a potential creditor within insolvency proceedings and therefore, by being informed of such default the guarantor will be able to lodge effectively its claim and not be forfeited. Last but not least, an institutional creditor has the obligation to inform the guarantor on 31 March of each year by indicating the principal amount still outstanding and the accrued interest together with any accessories (e.g. penalties). Otherwise, any interest and accessories due for the period since the last information date will be excluded from the guarantee.

Third party security provider

In order to better protect third-party asset security providers, certain protective rules for guarantors are now extended to them. A third-party asset security provider who is a natural person must also be warned if its financial capacity appears to be inadequate for its undertaking as a third-party asset security provider. Also, it must be informed of the debtor’s default and be provided with the same information as a guarantor on 31 March of each year. Moreover, a third-party asset security provider now also benefits from (i) the ability to request that the borrower be legally pursued first for the unpaid amounts before the third party is called upon for payment and (ii) the subrogation right of a guarantor into the rights of the beneficiary (such as security) upon payment. Importantly, these duties not only apply to security granted after 1 January 2022 but also to security granted before this date. Therefore, institutional creditors must check the security granted to them in order to be compliant with their new annual information duty to the benefit of third-party security providers. Hence, the operational impact should not be underestimated.

Pledging of receivables

The widespread practice of creating pledges with different ranks has now been codified. It has also been specified that the pledged debtor not only may challenge the beneficiary of the pledge on the terms and conditions of the pledged debt but also it can oppose the exceptions arising from its general relationship with the pledgor as long as the pledge has not been notified to it for perfection. This emphasises the importance of notifying the pledge for perfection as soon as possible. The practice of notifying the debtor while leaving the pledgor the possibility of receiving payment remains possible as desired by the legislator. The sums that the pledgor could receive from the debtor must be segregated in a separate special account as long as the secured debt is not due and payable. Finally, future debts can also be pledged on the date of the pledge agreement (and no longer on the date they arise). However, they are not protected in the event of insolvency proceedings: debts arising after the opening of the insolvency proceedings will not be included in the pledge.

Significant change: assignment of receivables by way of security under the French civil code

The creation of this new security interest can significantly change market practice, especially in real estate financing. Effectively, the Dailly assignment of receivables by way of security is limited (in a simplified manner) to the assignment by the borrower (solely in its capacity as borrower and not as guarantor) of its receivables arising from its professional activity to certain types of lenders. These two constraints limit certain financial structuring possibilities. Going forward, any receivable, present or future, can be assigned, by the assignor as a borrower or as guarantor, under the general regime of assignment of civil receivables in the now reformed French Civil Code. This will therefore allow, for example, the assignment of civil rent receivables (in particular, residential rent receivables) or the assignment of receivables to funds (not being credit institutions or other authorised entities referred to in the Monetary and Financial Code), as these are important players in the market. Indirect guarantee schemes can therefore be envisaged that are more flexible than in the past. However, two points should be borne in mind: if the conditions for a Dailly assignment are met, it should be used and, unlike a Dailly assignment, the assignment of a receivables as security pursuant to the French Civil Code will be subject to a stay in the event of insolvency proceedings.

Pledge of securities account

It should simply be noted that here too the possibility of granting security interests of successive ranks is codified and that the “special cash account” is now referred to as the “compte fruits et produits”. Also, this account can be opened and pledged after the pledge agreement until enforcement. Finally, the enforcement regime is the same whether or not the securities are publicly-traded.

Pledging shares of sociétés civiles immobilières

By integrating shares of a société civile immobilière into the general regime applying to the pledge of tangible chattels certain technical uncertainties have now been removed. The obligation to notify the pledge to the company via a bailiff has been repealed (but the draft pledge must still be served on the shareholders and the company by registered mail with acknowledgement of receipt). It is also possible to provide for a contractual appropriation clause which will mean that the shareholders no longer require to be notified of the enforcement of the pledge and will no longer be able to substitute themselves to the beneficiary of the pledge.

Assignment of sums of money as security

It is worth noting briefly the introduction of this new security which will be granted by the delivery of a sum of money in euros or foreign currency to the assignee. If the assignee has free use of the sum, then the agreed accrued interest will be paid in cash and if not then it will be capitalised. Any enforcement will be way of set off. At last, the one of a kind security of cash collateral is now codified.

This article was originally published in Immoweek magazine on 22 February 2022.