PROPERTY INVESTMENT LOANS

The specificities of complex real estate financing

There are a number of ways to invest in rental property. The bullet loan, which allows the borrower to repay only the interest and pay off the capital at maturity, is proving very popular. This formula offers tax advantages for investors, who can deduct the full amount of the interest from their property income. It also makes cash management easier by reducing the monthly repayments.

This type of financing is not without risk. You need to build up parallel savings. As the Paris Court of Appeal pointed out in a ruling on 6 December 2012, "the banker may be liable if it appears that the sums invested in the lease are insufficient to ensure repayment of the loan"..

Variable interest clauses make up these complex financing arrangements. They make it possible to benefit from attractive rates but expose the borrower to fluctuations. Case law, such as that issued by the Lyon Court of Appeal on 9 July 2014, emphasises the following "the clarity of the clauses and their comprehensibility for a normally competent borrower"..

Matching rental income to repayment costs can be problematic. Investors find that the rental income they receive does not cover the monthly loan repayments and ancillary costs. This situation may be the result of over-optimistic rental estimates or under-estimated rental vacancies. The courts punish schemes that are not based on realistic projections.

Schemes for tax purposes

Tax relief schemes are attracting investors. From Robien to Pinel, these schemes have transformed investment in France. The principle is similar: a tax reduction in return for a commitment to rent for a set period and at a set rent.

The investor may acquire the property directly or through an intermediary structure (SCI, SCPI). In a ruling dated 8 January 2013, the French Supreme Court (Cour de cassation) held that "the bank failed in its duty to provide information and advice by offering a tax-exempt property investment without fully informing its customers, who were not shown to have the solid knowledge to understand the risks involved in the transaction"..

Yield promises are the cornerstone of the marketing of these products. They are based on fragile assumptions: rental growth, occupancy rate, maintenance costs, etc. In a ruling handed down on 20 June 2013, the Nancy Court of Appeal pointed out that "the insurer or intermediary must have provided the insured borrower with all the information needed to clearly identify the risks inherent in the investments chosen"..

The professional obligations of the various parties involved

The bank's liability is a key issue in property litigation. It is based on obligations to provide information, warnings and, in some cases, advice. According to the Aix-en-Provence Court of Appeal (11 April 2013), "the credit institution remains solely responsible for the final decision. It alone has the right to assess the borrower's solvency".

Property intermediaries play a key role. Estate agents, wealth management advisers and bank canvassers market tax-exempt property investments. The Court of Cassation (1re civ., 2 October 2013) considers that"A real estate agent who habitually engages in real estate investment transactions must inform and advise prospective purchasers about the characteristics of the investment he is proposing and the choices to be made..

The division of responsibilities in complex arrangements raises questions. The presence of an intermediary does not transform an uninformed borrower into an informed one. The Bordeaux Court of Appeal (20 February 2012) states that "the duties of the intermediary are additional to those of the credit institution". and "responsibility can be shared.

Litigation specific to loss-making investments

The grounds for liability action are: defect in consent (error, fraud), failure to provide information or warnings, misleading commercial practices. The borrower may invoke the indivisibility of the various transactions (loan, acquisition, tax exemption) to obtain the nullity of the whole.

The assessment of the loss is the subject of debate. Is it the loss of the opportunity not to enter into the contract (in which case compensation will be partial) or the loss corresponding to the difference between the promised return and the actual return? Case law favours the former solution.

Trends in case law point to the need to protect unsophisticated investors. This development is part of a trend towards strengthening the professional obligations of financial players. Judges are taking care not to transform the duty to warn into a guarantee of results. For the Cour de cassation (com., 10 Feb 2015), "The bank is not liable if the investor has been informed of the risks inherent in the investments chosen..

The Paris High Court (16 October 2013) ruled that "the banker must alert the borrower to the particular risks involved in the transaction", while specifying that "the borrower cannot absolve himself of his own responsibility for the choice of investment made"..

The area of property investment loans offers a panorama of case law in which the balance between contractual freedom and borrower protection is constantly being constructed.

Sources

• Case law cited in the article (CA Paris, 6 Dec. 2012; CA Lyon, 9 Jul. 2014; Cass. com. 8 Jan. 2013; CA Nancy, 20 June 2013; CA Aix-en-Provence, 11 Apr. 2013; Cass. 1re civ, 2 Oct. 2013; CA Bordeaux, 20 Feb. 2012; CA Aix-en-Provence, 10 Apr. 2013; CA Lyon, 29 Sept. 2013; CA Angers, 2 Oct. 2013; Cass. com. 10 Feb. 2015; TGI Paris, 16 Oct. 2013)
• Dominique Legeais, "Bank liability and financial engineering", JurisClasseur Commercial, Fasc. 346-1, 14 April 2015.