French Reservation Contract
The law controlling French Reservation Contract has been made clear by a French Supreme Court (Cour de Cassation) judgement regarding off-plan property and the obligations resulting from the signing of a reservation contract.
Since the 2008 recession started, a lot of developments have been left unfinished in Greece and in Spain but this is still rare in France where the effects of the recession have not been felt as badly as in some other European countries.
Recent research has shown that purchases of new builds in France, which dropped by more than 20% in the first quarter of 2012, are recovering but that some developers have failed to survive the recession. For those who have to give up on projects, the question of informing and explaining the reason why to their customers may increase the risk of litigation.
Planning permission is becoming increasingly difficult to obtain in certain areas of France and local authorities are not willing to have skeleton buildings erected in their communities; as a result, they usually ask for some guarantees from the developer that the construction will be completed.
The reservation contract has a different effect from the other binding contracts for the purchase of a property, ie a Compromis De Vente, and the Purchase Deposit Rules are different. The reservation contract is a sui generis contract and was described by the court as a contract that only obliged the developer to propose the purchase of the property to the purchaser, nothing more.
From the definition given by the court, and despite the obligations set out in the Construction and Habitation Act and in the Civil Code, the developer has only a limited responsibility and obligations, and is within his rights to cancel the project up to the very last-minute. In fact the developer is not bound by an obligation to actually build; if he cannot complete the construction, he does not have to go ahead and offer the property for sale to the purchasers.
The reservation contract is regulated by the Construction and Habitation Act, which imposes on the developer a duty to provide some information to the purchaser on the potential purchase and notably regarding the description of the property, price, stage payment, timescale for the construction and completion of the deed.
Any potential purchaser who signs a reservation contract will expect the developer to be committed to the terms of the contract and complete the purchase of the property at some point during the stage of the construction.
The reservation contract is often signed at the beginning of the construction or even before any authorisation such as planning permission is obtained. It is for this reason that developers will insert several cancellation conditions to make sure they will be able to withdraw from the contract should one of the conditions not be fulfilled.
An example of this is provided by a court case from November 2011 in which a developer had to abandon the construction of the development after being unable to obtain one of the compulsory guarantees. No reason was given why he could not obtain it and he simply refunded the deposit paid by his customers. Many customers accepted this fact, but in this particular case the problem was that the developer decided to abandon to the project more than two years after the clients signed reservation contracts. Some clients went to court to prove the developer’s liability for negligence and tried to complete the transaction to obtain compensation.
In this particular case, it is believed that the developer did not manage to obtain one of the guarantees to secure the construction of the building. The purchasers asserted that the developer was negligent and tried to prove him liable when he decided to give up and declare the contract null and void.
The question was raised with the court as to whether or not the developer acted in good faith. However the court does not have to consider the good faith of the developer and would allow him to declare the reservation contract void even if it was the developer’s failure to request the required authorisation within a reasonable period that caused the contract to be void. Essentially, it is the purchaser’s responsibility to prove the developer’s negligence to the court and it now seems that the developer can walk away from his responsibilities.
Analogous cases can be found concerning buy and leaseback developers who have signed a long-term rental contract with their buyers but who have reneged on the rental payments. For this reason, it has become very much more difficult to obtain mortgage funding for buy and leaseback developments unless the lending bank is satisfied as to the financial stability of the developer.