Sale with right of redemption (vente à réméré) is an ancient legal mechanism, often unfamiliar to the uninitiated, which allows the temporary transfer of ownership of an asset while retaining the possibility of repurchasing it. Although provided for in the Civil Code, its application in the business world, particularly for financial securities, raises complex issues. This tool can be used for financing or portfolio management purposes, but it also involves major risks if it is not properly managed. This article provides an overview of the fundamental principles of sale with right of repurchase, its regime and its applications. The more technical aspects are developed in our dedicated articles, which you can access as you read. For any transaction of this type, the assistance of a lawyer is an essential safeguard, as proposed by our banking and finance law firm.
What is a sale with right of redemption?
A sale with right of redemption is first and foremost a sale, but it is distinguished by a specific clause that radically changes its nature: the right of redemption granted to the seller. This feature makes it a hybrid legal instrument, both a transfer of ownership and a temporary transaction.
A definition governed by the Civil Code
The operation is defined in Article 1659 of the Civil Code, which states: "The repurchase option is an agreement by which the seller reserves the right to take back the thing sold, in return for restitution of the principal price and the repayment referred to in article 1673.. In practical terms, the seller sells his asset (a building, a portfolio of securities, etc.) but retains the right, for a specified period, to cancel it by repaying the price. This right may not be stipulated for a period exceeding five years.
A sale subject to a resolutory condition
In legal terms, the sale with right of redemption is analysed as a sale subject to a resolutory condition. This means that the contract is immediately valid and the buyer becomes the full owner of the property. However, if the seller exercises his right of repurchase, the sale is cancelled retroactively. In other words, everything happens as if the sale had never taken place. The buyer must return the property, and the seller must return the price, thus clearing up the effects of the initial transaction.
Key distinctions: repurchase agreements and other financial transactions
The economic purpose of sale with right of redemption, which is often used to obtain cash, brings it into line with other financial arrangements. However, it is essential not to confuse them, as their legal and tax regimes are very different. For a full analysis of these distinctionsTo find out more, read our dedicated article.
Sale with right of repurchase vs. tied transaction
A tied transaction combines a cash sale and a forward resale commitment. The fundamental difference lies in the nature of the transaction: a repurchase agreement cancels the initial sale (rescission), whereas a tied transaction involves a second sale, a new transfer of ownership in the opposite direction.
Sale with right of redemption vs. repurchase agreement
Repurchase agreements, which are very common on the financial markets, involve a reciprocal and irrevocable commitment by both parties: one to sell and the other to buy back. In a repurchase agreement, only the original seller has an option. The buyer, on the other hand, is subject to the seller's decision without being able to oppose or provoke it.
Sale with right of repurchase vs. securities lending
Securities lending is a consumer loan contract involving fungible goods. The borrower must not return the securities loaned, but securities of the same kind and in the same quantity. A sale with right of redemption, on the other hand, is a sale whose cancellation results in the return of the securities initially sold (or their equivalents if they are fungible).
The legal regime governing sale with right of repurchase in detail
The validity and effects of the sale with right of repurchase are subject to precise conditions that determine the security of the transaction for both parties. A poorly drafted contract can have serious legal and financial consequences. Our article on the legal system explores these mechanisms in depth.
Conditions of validity
In addition to the conditions of ordinary law applicable to any sale (consent, capacity, lawful object), a sale with right of redemption must comply with a number of points. The option to repurchase must be stipulated in the initial deed of sale and may not exceed a period of five years. The sale price and the terms of repayment of the repurchase price must be clearly defined. The parties may agree a repurchase price that differs from the initial sale price, for example including a remuneration for the buyer.
The effects of the sale for the vendor and the purchaser
For the duration of the agreement, the purchaser is the true owner of the assets. He or she can dispose of it, collect the proceeds (dividends, interest) and exercise the rights attached to it, such as the right to vote in the case of shares. The seller, on the other hand, only has a claim: the right to take back the property. If the seller exercises his right, the buyer must return the property free of any charges that may have accrued in the meantime.
The tax implications of sale with right of repurchase
The taxation of sale with right of repurchase is complex, as it has to reconcile the principle of annual taxation with the retroactive effect of resolution. The tax authorities have developed a pragmatic approach to dealing with these transactions.
Treatment of capital gains and losses
At the time of sale, the seller recognises a taxable capital gain or loss, because the transfer of ownership is effective. If the repurchase option is exercised during the same tax year, this capital gain is cancelled. If it is exercised in a subsequent financial year, a neutralisation mechanism enables the initial taxation to be offset by the recognition of a loss or gain of the same amount.
Managing the price difference and VAT
Any difference between the sale price and the repurchase price is generally treated as remuneration for a financial service. For the seller, it constitutes a deductible expense, and for the buyer, taxable income. In principle, these securities transactions are exempt from VAT.
Practical applications and legal issues
Repossession is a flexible tool used in a variety of contexts, but its very flexibility gives rise to significant risks, principally that of contract recharacterisation. The uses and risks of repurchase agreements are analysed in more detail in our dedicated article.
Applications in financing and portfolio management
In practice, repurchase agreements are used for short-term financing transactions, where a company temporarily sells an asset to obtain cash. It is also used to carry securities, for tax optimisation or to cover stock option plans. The buyer, often an institutional investor, receives a guaranteed investment through ownership of an asset.
The risks of reclassification and their consequences
The major risk is that the judge will consider that the transaction is not a genuine sale with right of redemption but a disguised loan of money, secured by a transfer of ownership. This is the case when the repurchase option is actually a disguised obligation. This reclassification as a pignorative contract can have serious consequences, particularly if the arrangement was intended to circumvent certain rules (banking monopoly, prohibition on commissory agreements before they were legalised). The legality of commissory agreements since 2006 has reduced this risk, but caution is still called for.
Sale with right of redemption is a powerful but tricky mechanism. Its implementation requires impeccable contractual drafting and a detailed analysis of the intentions of the parties and the tax implications. To secure your transactions and benefit from tailored advice, get in touch with our firm.
Frequently asked questions
What is a sale with right of redemption in simple terms?
This is a sale that includes a clause allowing the seller to buy back the property within a maximum of five years, repaying the price to the buyer. If the seller exercises this right, the sale is cancelled as if it had never taken place.
What is the maximum duration for a sale with right of repurchase?
The law imposes a maximum term of five years for the buy-back option. If the contract provides for a longer period, this is automatically reduced to five years.
What happens if the seller does not buy the property within the time limit?
If the seller does not exercise his right to repurchase within the agreed period, he loses this right definitively. The buyer then becomes the irrevocable and definitive owner.
Who owns the property during the repurchase period?
Throughout the term of the agreement, and until the buy-back is exercised, the buyer is the full owner of the property. He or she may use it, receive its income and even dispose of it, subject to the rights of the seller.
Is a sale with right of redemption a disguised loan?
Legally, this is not a loan. However, if the intention of the parties is that the repurchase should be an obligation and not simply an option, the courts may reclassify the transaction as a loan secured by collateral, with all the legal and tax consequences that this entails.
Is the buy-back price always the same as the sale price?
No, the parties can agree on a different redemption price. It can be higher than the sale price to compensate the buyer for tying up his funds, or lower if the property has generated income during the period.
EN 
FR