Acquiring a French company with real estate assets: key pitfalls & how to avoid them

1. Title and ownership issues

Ensure the target company has clear title to its real estate assets. This means reviewing the
land registry (cadastre and fichier immobilier) for each property and checking that the company is
the proper registered owner.

You should also look for:

• Mortgages and other security interests registered on the property.
• Easements (servitudes) that could restrict use or access.
• Long-term leases or other rights granted to third parties.

In France, deeds of sale (actes de vente) and mortgages are executed before a notary and
recorded. Obtaining the notarial deeds and confirming the property’s legal description and boundaries is critical.

Pitfall to avoid: Buying a company only to later discover a third-party claim, mortgage,
or collateral on its property.

How to avoid it:

• Obtain an up-to-date état hypothécaire (official statement of liens) from the land registry.
• Require the seller to clear any mortgages or encumbrances at or before closing.
• Include specific representations and warranties in the acquisition agreement covering real estate
  ownership and the absence of liens, with indemnities if these are breached.

2. Zoning, urban planning and usage risks

French urban planning laws (urbanisme) can heavily impact property value and allowable use.
A target company’s buildings must comply with zoning plans and building permits.

Typical risks include:

• Undisclosed zoning or code violations.
• An office building used as residential property without proper authorization.
• Extensions or renovations built without required permits.
• Existing orders from authorities for non-compliance.

How to avoid it:

• Review the local Plan Local d’Urbanisme (PLU) for zoning restrictions and allowed uses.
• Request copies of all building permits, renovation authorizations and occupancy certificates
  for the properties.
• Engage a notary or specialist to verify that constructions match what was permitted.
• Check for any pending compliance notices, fines or proceedings from city authorities.
• Include a clause in the SPA where the seller guarantees conformity with planning and construction laws.

If the property’s current use is not expressly allowed by zoning, consider negotiating remedies
(seller to obtain a zoning change or permit, or a price reduction reflecting the risk).

3. Environmental and structural issues

Real estate assets can carry significant environmental liabilities. Old industrial sites might have
soil or groundwater pollution; older buildings might contain asbestos or lead that requires remediation.
These issues can be costly if the company is forced to clean up.

Environmental due diligence

• Ask for existing environmental reports or studies relating to the sites.
• Include a contingency in the purchase agreement to perform an independent
  environmental site assessment (Phase I, and Phase II if needed).
• In France, the seller of real estate must provide certain diagnostics
  (asbestos, termites, energy performance, lead for older buildings). If the transaction triggers these
  disclosures, review them closely.
• Even if the diagnostics are not formally required in a share deal, insist on seeing recent inspection reports.
• Include specific indemnities for environmental clean-up costs if contamination is discovered post-deal.

Structural and safety issues

• Have an engineer or building expert inspect critical buildings.
• Identify major defects, non-compliance with safety standards, or necessary capex that should be
  reflected in the valuation.

4. Corporate vs. asset deal: notary and tax implications

A major pitfall is misunderstanding the transaction structure when real estate is involved.
The consequences differ between a share deal and an asset deal.

Share deal: acquiring the company that owns the real estate

• You acquire the shares of the company, indirectly owning the property through the company’s balance sheet.
• No notary is required for a share sale itself, unlike for a direct property transfer.
• However, you inherit all the company’s history and liabilities
  (environmental issues, tenant disputes, tax risks, etc.).

Asset deal: acquiring the real estate directly

• French law requires a notarial deed for the property transfer.
• Transfer taxes are levied on the property value (typically around 5% for commercial real estate),
  plus notary fees.
• The buyer can sometimes better carve out liabilities by purchasing assets rather than shares.

Real estate–heavy companies and 5% registration duty

If the target company’s assets are mostly real estate, the French tax code may treat it as a
société à prépondérance immobilière (real estate company).
In that case, even a share transfer is taxed like real estate.

Specifically, if more than 50% of a company’s assets are French real estate,
the sale of its shares incurs a 5% registration duty – the same rate as a direct property sale.
Many buyers are caught off guard by this cost on what they thought was a standard share deal.

How to avoid it:

• Determine early if the target is a real estate–heavy company under French tax rules.
• If so, factor the 5% duty into your cost calculations and price negotiations.
• Assess whether an asset deal or a pre-deal restructuring (separating operations and real estate
  into different entities) could optimize tax and liability allocation.
• Work closely with French tax advisors and notaries to identify the most efficient structure.

5. Lease and tenant concerns

If the company’s real estate is leased (either the company is a tenant or it leases out parts to others),
you must carefully review all lease terms. French commercial leases are subject to
specific rules, typically 9-year terms with 3-year exit options for tenants (the “3-6-9” lease).

Key risks to consider

• If the target company is a tenant, a change of control could breach
  anti-assignment or change-of-control clauses.
• If the company is a landlord, some tenants may have
  pre-emption or other statutory rights in certain types of sales.
• Non-compliant lease provisions can be unenforceable under French law.

How to avoid it:

• Review every lease agreement in detail with French counsel.
• If a lease requires landlord consent for a share transfer of the tenant company,
  secure that consent before closing or adjust the structure accordingly.
• Verify rent rolls and confirm that tenants are current on payments.
• Ensure that leases comply with French commercial lease regulations and that there are
  no ongoing disputes with tenants or landlords.

6. Combining real estate due diligence with corporate due diligence

A best practice is to integrate real estate experts into your M&A team.
The company’s value and liabilities can be heavily affected by its property status.

For example:

• An undisclosed planning violation could lead to administrative orders or an inability to use
  the property as intended, directly impacting operations and valuation.
• Significant environmental liabilities could impose substantial costs on the company post-acquisition.

Treat findings from real estate audits as deal issues:

• They may justify a price adjustment or
• Specific warranty and indemnity coverage in the acquisition contract.

It is common in France to ask sellers for specific guarantees about:

• The real estate condition and absence of hidden defects (vices cachés).
• Compliance with applicable laws and regulations.
• The fact that all required permits and authorizations have been obtained.

Conclusion: managing real estate risks in French M&A deals

Acquiring a French company with real estate assets offers the benefit of an established presence and
potentially valuable property, but it carries unique legal, tax and operational risks.

By conducting meticulous real estate due diligence (title, zoning, environment, leases),
understanding the tax and legal implications of how the real estate is held and transferred,
and securing appropriate contractual protections, foreign buyers can avoid the most common pitfalls.

Always involve qualified French notaries or real estate counsel in addition to your corporate M&A lawyer
to ensure no detail is missed. This dual approach will help you reap the benefits of the acquisition while
sidestepping the “landmines” that real estate can hide.

Disclaimer

This article is provided for general information only. Tax and legal rules may change, and their application
depends on your specific situation. You should not rely on this article as legal or tax advice.

Before making any decision, please contact qualified French legal and tax advisors to confirm
the latest applicable provisions and obtain tailored advice.