When a creditor is faced with an unpaid debt, seizure of property is often seen as the most effective way of recovering the debt from the debtor's assets. However, although this procedure is effective, it is notoriously lengthy and complex. Faced with this situation, French law, particularly since the 2006 reform of security law, has introduced alternative mechanisms enabling mortgagees to obtain ownership of the property used as collateral, without having to go through a compulsory auction. These two options, designed to offer a more direct outcome, are the commissory agreement and judicial allocation. However, their use is strictly regulated to protect the debtor. The use of these alternatives to foreclosure requires an in-depth analysis of the legal conditions and practical consequences of each option.
Alternatives to seizure of property: presentation
The reform of the law on security interests by the Order of 23 March 2006 validated two mechanisms that enable mortgagees to avoid the seizure of real estate by having ownership of the property assigned to them. Previously, the validity of such clauses, in particular the commissory agreement, had been debated. These new prerogatives are designed as tools for the creditor, who retains the freedom to choose between these options and the traditional route of seizure.
The commissory agreement: definition and conditions of validity
The commissory pact is a clause stipulated directly in the mortgage agreement. Under article 2459 of the Civil Code, this clause allows the creditor to become the owner of the mortgaged property if the debtor defaults. In practical terms, if the repayment due date is not met, the creditor can invoke the pact to have ownership of the property transferred to him in payment of his debt.
The validity of this agreement is subject to strict conditions designed to protect the debtor. The most important is the absolute prohibition on applying it to the debtor's principal residence. This exclusion, laid down by article 2459 itself, is a matter of public policy. Any clause contravening this prohibition would be ineffective. Secondly, to prevent the creditor from appropriating an asset for a derisory value, the law requires a valuation procedure at the time of transfer of ownership. Article 2460 of the Civil Code stipulates that the value of the property must be determined on the date of transfer by an expert appointed by amicable agreement or, failing that, by court order. If the appraised value of the property is higher than the amount of the secured debt, the creditor must pay the debtor a sum corresponding to the difference, known as the "balance". If there are other registered creditors, this balance must be deposited.
Judicial attribution: mechanism and implementation
Unlike commissory agreements, which are contractual in nature, judicial assignment is an option available to mortgagees by law, even in the absence of a specific clause. Article 2458 of the Civil Code provides that an unpaid mortgagee may apply to the court to have the property held in payment. This is no longer a matter of activating a clause, but of initiating legal action to obtain a forced transfer of ownership.
The claim is brought before the court, which will generally be the enforcement judge (JEX)The court has jurisdiction in matters relating to enforcement. The protections afforded to the debtor are similar to those provided for the pacte commissoire. Judicial attribution cannot be requested if the property is the debtor's principal residence. Similarly, the value of the property must be determined by an expert at the time of the transfer, and the creditor is required to pay a balance if the value of the property exceeds the amount of his claim. The judgment granting the allotment transfers ownership. This is a form of dation in payment imposed by the judge, which allows the creditor to be paid in kind by handing over the property.
Distinction and choice for the creditor
The pacte commissoire and judicial allocation have a common objective: the appropriation of the property by the creditor. However, their procedures and strategic implications for the creditor differ significantly, both from each other and from traditional seizures of immovable property.
Advantages and disadvantages of each mode
In theory, the commissory agreement offers the advantage of speed. Being a contractual clause, its application should not require lengthy legal proceedings. Once the default has been established, ownership can be transferred. However, this simplicity is often illusory. The need for an expert appraisal to value the property can open the door to disputes and therefore additional delays. Some authors have even described the pacte commissoire immobilier as a "false good idea", pointing out the complexity of the appraisal process and the potential difficulties associated with third-party rights, such as pre-emption rights. What's more, its effectiveness is nullified in the event of insolvency proceedings against the debtor.
The main advantage of judicial assignment is that it does not require any prior contractual stipulation. A creditor who has not thought of inserting a commissory pact in the mortgage deed can always turn to this option. The major disadvantage is that it is judicial in nature. The creditor must take legal action, with all the delays and uncertainties that this entails. The judge has discretionary powers and the process, although more direct than a seizure, remains a contentious one. Like the commissory pact, it is also paralysed by the opening of insolvency proceedings against the debtor, which considerably limits its attractiveness as a means of securing business debts.
Comparison with traditional seizure of property
Conventional seizure of property, as set out in articles L. 311-1 et seq. of the Code des procédures civiles d'exécution, is a compulsory sale procedure. Its purpose is not to transfer ownership to the creditor, but to sell the property at public auction and distribute the proceeds to the creditors. This is fundamentally different from the pacte commissoire and judicial attribution, which are appropriation mechanisms.
The main advantage of alternatives is that they avoid the cumbersome process of the foreclosure procedure These include a summons to pay in the form of a seizure order, an orientation hearing, complex advertisements and an adjudication hearing. These steps are costly and time-consuming. On the other hand, seizure of property remains the only option in many situations, particularly where the property is the debtor's principal residence or where the creditor does not have a mortgage. What's more, unlike the pacte commissoire and the attribution judiciaire, the seizure of property, although suspended by insolvency proceedings, can sometimes be resumed by the liquidator, which gives it a more general scope.
The fate of third parties and notable exceptions
The effectiveness of these alternative mechanisms is tempered by mandatory rules designed to protect the debtor, but also by the impact of specific legal situations such as the opening of collective proceedings.
Protection of debtors and their main residence
Protection of the debtor's home is the cornerstone of the system. Articles 2458 and 2459 of the Civil Code are unequivocal: commissory agreements and judicial allocation are inapplicable if the property is the debtor's principal residence. This protection is absolute and is intended to preserve the right to housing, which is considered to be a greater interest than that of the creditor in rapid recovery. For all other types of property (secondary residence, rental investment, land), the same mechanisms apply.
The second major safeguard is the mandatory valuation of the property by an expert. This requirement, which is common to both mechanisms, guarantees that ownership will be transferred at a fair price. The debtor is thus protected against unjust enrichment by the creditor, who would obtain a property worth much more than his claim. The obligation to return the balance is part of the same logic of balance and contractual justice. These safeguards, although restrictive for the creditor, are essential to ensure the constitutionality and conventionality of these simplified realisation methods.
The impact of insolvency proceedings
The opening of safeguard, reorganisation or judicial liquidation proceedings against the debtor has a paralysing effect on the commissory agreement and judicial attribution. The Court of Cassation has ruled that the application for judicial assignment, being an action for the payment of a sum of money, is stopped dead in its tracks by the principle of prohibition of individual lawsuits set out in article L. 622-21 of the Commercial Code. The solution is identical for the commissoire agreement. Article L. 622-7 of the Commercial Code provides that the opening of the insolvency proceedings precludes not only the conclusion but also the performance of an agreement with creditors.
This neutralisation in the event of company difficulties is a fundamental point that must be taken into account by creditors, particularly credit institutions. While these mechanisms seemed to offer greater security, their ineffectiveness in the event of insolvency proceedings considerably reduces their practical scope for business claims. This situation highlights the constant evolution of security law, which, following the example of recent reforms to surety bondsThis is a delicate balance between the protection of the debtor and the effectiveness of the guarantees for the creditor.
The commissory agreement and judicial allocation are sophisticated legal instruments. Their appropriateness depends on a case-by-case analysis of the nature of the property, the debtor's situation and the creditor's objectives. For a full assessment and support tailored to your situation, we recommend that you contact our firm.
Sources
- Civil Code (articles 2458 to 2460)
- Code of civil enforcement procedures
- French Commercial Code (articles L. 622-7 and L. 622-21)
- Order no. 2006-346 of 23 March 2006 reforming the law on securities
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