Buying a property is an important step, and one that is often financed by credit. While conventional property loans are well known, some situations are out of the ordinary and require extra vigilance. Whether it involves borrowing in a foreign currency, coordinating several loans or understanding the subtleties of suspensive conditions, these special cases involve specific legal issues. Ignorance of these rules can lead to financial difficulties or complex disputes. This article aims to clarify these points to help you navigate these situations with greater peace of mind.
Property loans in foreign currency: a controlled risk
Taking out a mortgage in a currency other than the euro (Swiss franc, dollar, etc.) may seem attractive when exchange rates appear favourable. However, this option involves significant risks associated with currency fluctuations, which can add considerably to the total cost of the loan and the monthly repayments over time.
The scheme before the 2016 reform
Before the mortgage reform and your rights Following Order 2016-351 of 25 March 2016, foreign currency loans were not specifically regulated by the Consumer Code. This lack of a dedicated framework led to major disputes, particularly concerning loans denominated in Swiss francs whose repayment in euros became exorbitant following a depreciation of the euro. Borrowers often found themselves insufficiently informed of the exchange rate risks, which they bore in full. If you took out a loan before this period, you can see our article on mortgages before the 2016 reform, including foreign currency loans.
A strict framework since 2016
In response to the difficulties encountered by many borrowers, legislation has been tightened. Article L. 313-64 of the French Consumer Code now lays down strict conditions for taking out such loans:
- Resources or assets : Borrowers may only take out a loan denominated in a foreign currency if they declare that they receive the majority of their income or hold significant assets (at least 20% of the loan) in that currency at the time of signing. The aim of this measure is to ensure that the borrower has a natural ability to meet repayments in the currency concerned, thereby limiting his or her exposure to exchange rate risk.
- Enhanced information obligation : The lender has a greater obligation to provide information and warnings. In particular, the European Standardised Information Sheet (ESIS) must contain an example illustrating the impact of an unfavourable exchange rate fluctuation of 20% on the cost of credit (article R. 313-4 of the French Consumer Code). In addition, the lender must regularly warn the borrower if the value of the debt increases by more than 20% due to exchange rate fluctuations (article R. 313-32 of the French Consumer Code).
- Transparency of operations : Recent case law emphasises the need for the bank to provide sufficient and accurate information to enable the borrower to understand how the financial mechanism works in practice and to assess the potential economic consequences over the entire term of the contract (Civ. 1re, 20 April 2022, no. 19-11.599). Failure to comply with this obligation may result in certain clauses being considered unfair.
The aim of these measures is to reserve foreign currency loans for borrowers who are least vulnerable to exchange rate risk and to guarantee better prior information.
Interdependence between the loan and the main contract
Unlike common law, where contracts are generally independent, the Consumer Code establishes a strong legal link between the property loan contract and the transaction it finances (purchase, construction, etc.).
The suspensive condition of obtaining the loan
Article L. 313-41 of the French Consumer Code states that the deed of purchase (promise of sale, building contract, etc.) is automatically entered into subject to the condition precedent that the loan or loans required to finance it are obtained. If the borrower does not obtain the loan under the conditions stipulated, the main deed is cancelled without penalty, and any sums paid in advance must be repaid in full. This condition may not be valid for less than one month.
The resolutory condition of non-fulfilment of the transaction
Conversely, article L. 313-36 of the French Consumer Code stipulates that acceptance of the loan offer is subject to the resolutory condition that the main property transaction (sale, construction, etc.) is not completed within four months. If the property transaction is not completed within this period (which may be extended by agreement between the parties), the loan contract is automatically terminated, releasing the borrower from his or her repayment obligations (excluding any fees).
Consequences during execution
This interdependence continues even after the contracts have been concluded. The Court of Cassation has confirmed that the nullity or cancellation of the main contract (for example, the cancellation of the sale of the property) automatically entails the cancellation of the loan contract that was linked to it (Civ. 1re, 16 December 1992, no. 90-18.151). The borrower will then have to repay the capital loaned, but will be released from future interest payments.
The suspensive condition for obtaining a loan: points to watch out for
Although protective, the condition precedent to obtaining a loan is a frequent source of dispute, particularly as to when it is deemed to have been fulfilled or not.
Fulfilment of the condition
Case law considers that the condition is deemed to have been fulfilled as soon as a credit institution presents the borrower with a regular loan offer that complies with the characteristics defined in the preliminary contract (amount, term, maximum rate, etc.) (Civ. 1re, 9 December 1992, no. 91-12.498). Formal acceptance of the offer by the borrower is not necessary to consider the condition fulfilled vis-à-vis the vendor or developer.
The borrower's duty of loyalty
The borrower must not wilfully frustrate the condition. They are obliged to apply for a loan in accordance with the terms of the preliminary contract and to take the necessary steps diligently. If he prevents the loan from being obtained through his own fault or passivity (non-compliant application, failure to take the necessary steps, provision of inaccurate information, etc.), the condition will be deemed to have been fulfilled in accordance with article 1304-3 of the Civil Code, and he may be required to pay the immobilisation indemnity or penalty clause provided for (Civ. 1re, 13 November 1997, no. 95-18.276).
Contractual clauses governing the condition
Preliminary contracts often contain clauses specifying the purchaser's obligations regarding the search for finance. While a clause may validly require the buyer to justify the steps taken, it cannot impose excessively short deadlines or obligations that are stricter than the law. The Court of Cassation has ruled that clauses requiring the purchaser to submit his loan application within too short a period (e.g. 15 days) are unlawful, as they infringe the public policy nature of legal protection (Civ. 3e, 6 July 2005, no. 04-13.381).
Multiple loans for the same transaction
A property project is often financed by several loans (main loan, interest-free loan, Action Logement loan, etc.). Article L. 313-37 of the French Consumer Code establishes the interdependence of these different loans.
Where the borrower informs his lenders that he is taking out several loans, each loan agreement is concluded subject to the condition precedent that the others are actually granted. However, this rule only applies to loans where the individual amount represents more than 10% of the total financing. If one of the main loans (exceeding this 10% threshold) is not granted, the other loans automatically lapse, even if they had been individually accepted. This ensures that borrowers do not end up with partial loans that are insufficient to complete their project.
Penalty clauses and indemnities
The Consumer Code also sets out the penalties applicable in the event of borrower default or early repayment.
Early repayment indemnity (IRA)
The borrower has the right to repay the loan early, in whole or in part (article L. 313-47 of the French Consumer Code). However, the lender may stipulate an indemnity in the contract. This penalty is capped by article R. 313-25: it may not exceed either 3% of the capital outstanding before repayment, or the equivalent of six months' interest on the capital repaid, calculated at the average rate for the loan. The lower of the two amounts applies. No indemnity is payable in certain cases, in particular if the property is sold following a professional transfer, death or job loss.
Judicial review
Although article L. 313-47 refers to the possibility of the judge moderating the indemnity in application of article 1231-5 of the Civil Code (relating to manifestly excessive penalty clauses), case law rarely applies this option, considering that the legal ceilings already offer sufficient protection.
Particular situations in property lending, whether involving loans in foreign currencies, complex interaction between contracts or the management of several financing arrangements, introduce specific risks and rules. A good understanding of this legal framework is essential if you are to secure your project. Given the complexity of these arrangements, our lawyers advise you on mortgages to check the conformity of offers and defend your rights in the event of a dispute.
Sources
- Consumer Code: articles L. 313-36, L. 313-37, L. 313-41, L. 313-47, L. 313-64, R. 313-25, R. 313-32
- Civil Code: article 1304-3, article 1231-5
- Order no. 2016-351 of 25 March 2016 on consumer credit agreements relating to immovable property for residential use
- Court of Cassation, 1st Civil Division, 9 December 1992, No. 91-12.498
- Court of Cassation, 1st Civil Division, 16 December 1992, No. 90-18.151
- Court of Cassation, 1st Civil Chamber, 13 November 1997, no. 95-18.276
- Court of Cassation, 3rd Civil Chamber, 6 July 2005, no. 04-13.381
- Court of Cassation, 1st Civil Chamber, 20 April 2022, no. 19-11.599 and no. 20-16.316
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