Mortgages and trusts: the best tools for securing your property transactions

Property transactions involve considerable sums of money. The risk of non-payment threatens every creditor. In this context property security interests offer effective protection. They guarantee you a right to a property if the debtor defaults.

These legal mechanisms vary in complexity and effectiveness. Your choice will determine your level of protection. Recent reforms have modernised these tools. Now is the time to master their specific features.

The conventional mortgage: the cornerstone of property guarantees

The mortgage is still the most common form of property security. Article 2393 of the French Civil Code defines it as "a real right over immovable property assigned to the discharge of an obligation".

A framed constitution

A conventional mortgage requires strict formalities:

• A compulsory notarial deed
• A precise description of the property
• Land registration
• A fixed or determinable amount

This formalism protects the owner. It also ensures the reliability of the guarantee. The registration establishes the creditor's rank and makes the mortgage enforceable against third parties.

Powerful rights

The mortgage confers two essential prerogatives:

• A right of resale: you continue to own the property wherever it is sold.
• A preferential right: you are paid before unsecured creditors

These rights continue even after the sale of the property. They protect you for as long as your claim exists.

Recent innovations

The 2006 reform introduced major improvements:

1. Rechargeable mortgageInitially open to everyone, it is now reserved for business loans. It allows an existing mortgage to be used for new loans.
2. The commissory agreementIt authorises the allocation of the property to the creditor without legal proceedings. This clause must be expressly provided for in the deed.
3. Amicable purgeIt makes it easier to release the mortgage in the event of a sale.

These innovations make mortgages even more attractive. They offer greater flexibility and efficiency.

Types of mortgages

There are several types of mortgage:

• Conventional mortgage: resulting from a contract
• Legal mortgage: imposed by law for certain creditors
• Judicial mortgage: resulting from a court decision

Each type of mortgage responds to specific situations. The conventional mortgage offers the greatest flexibility.

Lifetime mortgages: a solution for senior homeowners

The life mortgage is an original mechanism. It enables elderly homeowners to increase the value of their property without selling it.

A specific way of working

This loan has a number of features:

• The owner receives a sum of money
• No reimbursement is required during your lifetime
• Debt accumulates with interest
• Repayment is made on death through the sale of the property

The mortgage guarantees repayment of the capital and interest. The final amount cannot exceed the value of the property.

Benefits for senior homeowners

This mechanism offers significant benefits:

• Staying in your home until your death
• Additional income without immediate taxation
• No obligation to make regular repayments
• Protection of personal assets other than mortgaged property

It meets the liquidity needs of senior homeowners. It preserves their living environment.

Precautions and limits

There are a number of points to watch out for:

• High cost (higher interest rates)
• Rapid erosion of the net value of the property
• Potential impact on transmission
• Limited banking offer

A detailed financial analysis is essential. It should compare this solution with other options such as life annuity sales or bare ownership.

The property pledge: the old antichrèse modernised

Property pledgesformerly known as antichrèse, is a little-known alternative. Article 2379 of the French Civil Code defines it as "the assignment of a property as security for an obligation with dispossession of the person who created it".

Dispossession as a distinctive feature

The main feature of a pledge on immovable property is dispossession:

• The creditor takes possession of the property
• It receives the fruits and revenues (rent)
• This income is deducted from the interest and then the capital
• The debtor loses use of the property

This dispossession is both the advantage and disadvantage of the mechanism.

Advantages for the creditor

The property pledge offers a number of advantages:

• Immediate receipt of income from the property
• Right of retention enforceable against all
• Preferential right in the event of sale
• Protection against loss of value

The creditor takes over the administration of the property. He or she has control over its value and maintenance.

Disadvantages and use cases

There are limits to this mechanism:

• Restrictive management for creditors
• Cost of formalities (notarial deed)
• Unsuitable for business premises
• Loss of use for the debtor

These constraints explain its rarity. It is useful in specific situations:

• Investment property (rental)
• Creditor able to manage
• Distrust of the debtor's management capacity

The property security trust: the ultimate weapon

The immovable property security trust is the ultimate protection for creditors. Introduced by the Act of 19 February 2007 and clarified by the Ordinance of 15 September 2021, it is based on a temporary transfer of ownership.

A powerful mechanism

It works as follows:

• The settlor transfers ownership of an immovable to a trustee
• The latter holds it in a separate asset
• The transfer guarantees an obligation to the creditor
• In the event of default, the asset reverts to the creditor or is sold.

This type of security uses property as collateral. It offers maximum protection.

Incorporation procedure

The trust requires a number of formalities:

• A registered written contract
• A notarial deed for buildings
• Land registration
• Involvement of an authorised trustee (financial institution, lawyer)

These formal requirements secure the transaction. They guarantee the traceability of the goods.

Decisive advantages

The trust offers major advantages:

• Full ownership by the trustee
• Exclusion of property from collective proceedings
• No competition with other creditors
• Simplified implementation in the event of default

Its resistance to insolvency proceedings is a fundamental difference. Assets held in trust are not subject to insolvency proceedings.

Limits and cost

There are a few disadvantages:

• Complexity of implementation
• High cost (notarial deed, registration)
• The need for a trustee
• Controlling taxation

These constraints reserve the trust for large-scale transactions. It protects large receivables.

Optimal strategies according to your profile and objectives

The choice of a property security depends on a number of factors.

Professional creditor vs. individual creditor

Strategies differ depending on your status:

• Professional creditor (bank, credit institution):
  • Conventional mortgage for standard loans
  • Trust for complex financing
  • Lifetime mortgages for senior citizens
• Individual creditor:
  • Conventional mortgage (relatively simple)
  • Property collateral if income is required
  • Trust for major transactions

Your ability to manage the security will influence your choice. A trust requires a professional trustee.

The importance of valuing the property

The value of the property determines a number of factors:

• The maximum amount of financing
• The right type of security
• Impairment risk

A professional assessment is essential. It must take account of foreseeable developments in the property market.

The impact of the length of the commitment

The duration of the debt influences the choice:

• Short term: simple mortgage
• Medium-term: rechargeable mortgage
• Long-term: security trust
• Life annuity: life mortgage

The longer it lasts, the greater the risks. It justifies reinforced protection.

The determining criteria

Your final decision will depend on:

• The cost of installation
• Flexibility of use
• The level of protection required
• Simple to make

No safety system is perfect. The choice is the result of a compromise between these criteria.

Are you planning a property transaction that requires a solid guarantee? Our firm can help you in choosing and implementing the right property security. Make an appointment now.

Sources

• Civil Code, articles 2375 to 2488
• Order no. 2021-1192 of 15 September 2021