The credit crisis is driving creditors to seek increasingly effective protection. In this context, the property-security is emerging as a powerful alternative to traditional guarantees.
Security-property: an ancient concept revisited
Ownership security is based on a simple idea: to use the right of ownership itself as collateral. This approach overturns the traditional system of security.
Article 2375 of the Civil Code recognises this possibility by providing that "ownership of the immovable may also be retained or assigned as security". This separate mention of other property security interests (liens, mortgages and property pledges) reflects a certain reluctance on the part of the legislator.
Property ownership, considered sacred, is only mentioned in the second paragraph of the article, as if it were only a substitute for "real" securities.
However, this technique is not new. It has existed in various forms for a long time, but the 2006 ordinance, supplemented by the 2009 ordinance, gave it a modern legal framework.
Two distinct mechanisms
There are two main mechanisms for security ownership:
- The property selected the creditor retains ownership of the goods until payment is made in full
- The transferred property the debtor transfers the property to the creditor by way of security
This fundamental distinction determines the applicable legal regime.
Real estate applications
Retention of title clause
This arrangement, which is common in property sales, consists of deferring the transfer of ownership until the signing of the deed of sale and/or full payment of the price.
Synallagmatic promises to sell generally contain this type of clause. The seller remains the owner until the conditions have been met.
Property leasing
Property leasing (articles L. 313-7 to L. 313-11 of the French Monetary and Financial Code) is a typical example of property retained as collateral.
Under this arrangement, the financial institution acquires the building and makes it available to the company in return for rent. At the end of the contract, the lessee can exercise the purchase option for a residual price.
This mechanism offers the lessor unrivalled protection, as it remains the owner throughout the term of the contract.
The security trust
Introduced by the law of 19 February 2007 and clarified by the order of 30 January 2009, the trust-security is the most sophisticated form of ownership assigned by way of security.
The debtor (settlor) transfers ownership of a property to a trustee, who holds the property in a special-purpose asset separate from his personal assets. If the debtor honours his commitments, the property reverts to him. If not, the creditor (beneficiary) can seize it.
Security trusts require a written, registered and published contract. It also presupposes compliance with strict rules on the quality of the trustee.
A major advantage: exclusivity
The decisive advantage of security ownership is that it removes the creditor from any competition.
Unlike traditional security interests, which confer a simple preferential right, ownership security offers an exclusive right. The creditor does not have to fear competition from other preferential creditors.
This exclusivity is particularly valuable in the case of collective procedure. Article L. 643-8 of the French Commercial Code explicitly recognises that the right of ownership is "enforceable against the collective proceedings" and is exercised "without prejudice" to the ranking of other creditors.
In practical terms, the owner-creditor is exempt from the rules governing the suspension of proceedings and the freezing of debts. They can reclaim their property without being subject to the vagaries of the procedure.
Limits not to be overlooked
Despite its advantages, security ownership is not without its drawbacks.
In the case of property leasing, tax constraints and complex formalities limit its use to transactions of a certain size.
As for trusts, their implementation requires rigorous formalities and careful monitoring. The transfer of ownership entails significant tax costs.
In some cases, however, ownership security may be disproportionate. The creditor retains or acquires full ownership of an asset whose value often far exceeds the amount of the secured debt.
This potential imbalance has led the legislator to strictly regulate these mechanisms, in particular by providing for the obligation to return the excess value to the debtor in the event of realisation of the security.
When should you opt for security ownership?
Collateral is particularly suitable for transactions with a high economic impact. It is used when the creditor is looking for maximum security and cannot be satisfied with traditional guarantees.
In commercial property, leasing remains an attractive solution for financing business assets. Trusts, meanwhile, are becoming increasingly popular with banks for restructuring major debts.
For transactions between private individuals, retention of title in preliminary sales contracts offers effective and inexpensive protection.
Security ownership is one of the major developments in collateral law. It reflects legal creativity in response to the growing need to secure credit. Its development, which is still modest in the real estate sector compared with the movable property sector, could accelerate in the years to come. To assess whether it is appropriate to use property security or other mechanisms such as mortgages, and to ensure that your transactions are as secure as possible, please do not hesitate to contact a specialist lawyer.
Sources
- Civil Code, articles 2373 to 2375 and 2488-1 to 2488-5
- French Commercial Code, Article L. 643-8
- Monetary and Financial Code, articles L. 313-7 to L. 313-11
- Order no. 2006-346 of 23 March 2006
- Order no. 2009-112 of 30 January 2009
- Order no. 2021-1192 of 15 September 2021
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