Break-up sale: the institutional landlord's notice to terminate for a sale by lots

An institutional landlord that decides to exit a residential portfolio in the Île-de-France region reasons in terms of exit value and timetable. Two routes are open: a block sale, which is immediate but discounted because of occupancy, or a break-up sale (vente à la découpe), which captures the unit value of the lots but requires successive pre-emption rights to be cleared, statutory lease extensions to be endured and the obstacle posed by protected tenants to be absorbed. The energy capex required by the Climate and Resilience Act, the cost of carrying the assets and the length of time capital is tied up now tip the balance one way or the other depending solely on the make-up of the tenant population. This analysis sets out the regime governing the notice to terminate for a sale by lots (congé pour vente par lots), the interaction between the pre-emption rights arising under the Act of 31 December 1975 and the Act of 6 July 1989, the real scope of the protection afforded to elderly occupants, and the consequences of each constraint for the business plan of the transaction.

What a break-up sale means in legal terms

A break-up sale is not a legal category in its own right. It describes a sequence: the division of a residential building into co-ownership (copropriété) lots, followed by the sale of those lots individually, most often to the sitting tenants and, failing that, to third-party buyers once the units have been vacated.

This sequence brings four sets of rules into play simultaneously. Act No. 65-557 of 10 July 1965 and the French Construction and Housing Code govern the division itself. Article 10 of Act No. 75-1351 of 31 December 1975 on the protection of occupants of residential premises gives the tenant a right of pre-emption on the first sale following the division. Article 15 of Act No. 89-462 of 6 July 1989 governs the notice to terminate for sale given at the end of the lease and the second right of pre-emption that goes with it. Lastly, Article 11-1 of the 1989 Act, Article 10-1 of the 1975 Act as introduced by Act No. 2006-685 of 13 June 2006 and the collective rental agreement of 16 March 2005, made binding by Decree No. 2005-1615 of 22 December 2005, impose lease extensions that mechanically push back the timetable for vacating the units.

The costliest confusion in practice is to treat these regimes as alternatives. They are cumulative. The same tenant may be served with an offer of sale under the 1975 Act, refuse it, remain in occupation, and then receive several years later a notice to terminate for a sale by lots that operates as a second offer under Article 15-II. A landlord that considers it has "cleared" the tenant's pre-emption right after the first notification risks having the later sale declared void.

The technical preliminaries: division, creation of the co-ownership and planning constraints

Before any notification is served, the division must be secured both legally and technically. Article L. 731-4 of the French Construction and Housing Code requires a global technical diagnosis before any building more than ten years old is placed in co-ownership. This diagnosis is not a formality: it feeds the assessment of the amount of works required over ten years, and therefore the multi-year works plan and the calls for funds that the future co-owners will discover after purchase. Its content directly determines the seller's exposure to post-sale litigation for failure to provide information.

To this must be added the drawing up of the descriptive statement of division (état descriptif de division) and the co-ownership rules (règlement de copropriété), the measurement of the private floor area within the meaning of Article 46 of the Act of 10 July 1965, any inaccuracy in which gives rise, lot by lot, to a claim for a reduction in price, the prohibition on creating dwellings below the minimum areas and volumes set by Article L. 111-6-1 of the French Construction and Housing Code, and, in the areas designated by resolution of the municipal council, the prior authorisation for division provided for by the same Code. The consequences for the usability of the lot of a discrepancy between the descriptive statement of division and the co-ownership rules are analysed in our article on that question.

One planning point is regularly overlooked. Article L. 211-4 of the French Town Planning Code excludes, in principle, the sale of co-ownership lots from the urban pre-emption right, unless a resolution has established an enhanced urban pre-emption right. In Paris and in several municipalities of the inner ring, such a resolution exists and puts the local authority in a position to intervene in the transaction. The analysis of the public pre-emption regime applicable at the address must precede the decision to break up the building, not follow it.

The first pre-emption right: Article 10 of the Act of 31 December 1975

Article 10 of the Act of 31 December 1975 gives the tenant or good-faith occupant a right of pre-emption on the first sale of residential premises following the initial division, or the subdivision of all or part of the building, into lots. The triggering event is the putting up for sale, not the expiry of the lease. The landlord must therefore serve an offer of sale before any marketing to third parties, stating the price and the terms of the proposed sale.

The tenant has two months in which to accept, extended to four months if the tenant states that a loan will be used. If the tenant does not buy, the lease continues until its term: unlike a notice to terminate for sale, this notification has no effect of terminating the tenancy. The lot may then be sold with sitting tenants to an investor, which yields a lower exit value but an immediate one.

The text also provides for a second round of pre-emption: if the landlord decides to sell on terms or at a price more favourable than those originally notified, the notary must inform the tenant, who then has a fresh period in which to come forward as buyer. The sanction for failure to comply with these obligations is the nullity of a sale concluded in disregard of the tenant's pre-emption right. This is the principal legal risk of the initial marketing phase, and it affects the buyer as much as the seller.

The notice to terminate for a sale by lots under Article 15-II of the Act of 6 July 1989

The notice to terminate for a sale by lots is subject to formalities whose strictness is the leading ground for annulment. It must be given at least six months before the end of the lease of an unfurnished dwelling, by registered letter with acknowledgement of receipt, by an act of a commissaire de justice (bailiff) or by hand delivery against a signed receipt. It operates as an offer of sale to the tenant, must state the price and the terms of the proposed sale, and must reproduce, on pain of nullity, the first five paragraphs of Article 15, II. The formalities of this notice and the choice between a sale with sitting tenants and vacant possession of the asset are dealt with separately in our article on the notice to terminate for sale.

"The notice must, on pain of nullity, state the price and the terms of the proposed sale. The notice operates as an offer of sale to the tenant." (Article 15, II, of Act No. 89-462 of 6 July 1989)

The tenant has two months in which to accept, or four months if the tenant states that a loan will be used. Acceptance starts a period for completion of the notarial deed, on expiry of which the acceptance becomes void by operation of law and the tenant loses any title to occupy. As under the 1975 Act, a later sale on more favourable terms requires a notification by the notary opening a new pre-emption right for the tenant.

Two structural constraints weigh specifically on the investor. First, Article 15-I prohibits a landlord that has acquired an occupied dwelling from giving notice to terminate for sale where the term of the current lease falls less than three years after the date of acquisition: the notice can then take effect only at the end of the first renewal. A fund that acquires an occupied building as a block therefore cannot trigger the notices immediately, which moves the starting point of the break-up business plan. Second, a corporate landlord cannot give notice to terminate for the landlord's own occupation (congé pour reprise), which is reserved for individual landlords and, under the conditions laid down by law, for the family property holding company (société civile immobilière). Its only means of recovering possession are the notice to terminate for sale and the notice to terminate on legitimate and serious grounds.

Finally, the notice must be served on each of the joint tenants, as well as on the spouse who is a joint tenant by operation of law under Article 1751 of the French Civil Code and, under the conditions laid down by the 1989 Act, on the partner bound by a civil solidarity pact (PACS). A notice given only to the signatory of the lease cannot be relied on against the other protected occupant, which nullifies the intended terminating effect.

Two successive pre-emptions, not one

The interaction between the two regimes is the most frequent stumbling block. The tenant in place on the day of the division has the pre-emption right under Article 10 of the 1975 Act from the moment the property is put up for sale. If the tenant does not exercise it, the lease continues. At the end of the lease, if the landlord wishes to recover the lot with vacant possession, the landlord must give a valid notice to terminate for sale, which operates as a new offer of sale under Article 15-II. The same tenant is thus put in a position to buy twice, at two separate moments, on the basis of two separate texts, with two sets of formalities.

This succession has a direct operational consequence. The price notified in the first offer and the price notified in the notice must be consistent and, above all, genuine. A deliberately inflated price in the notice, followed by a sale to a third party at a markedly lower price without notarial notification, amounts to a misuse of the pre-emption right. The sale is then exposed to annulment and the landlord to an award of damages. The temptation to calibrate the price in the notice so as to induce the tenant to leave is, in a whole building being broken up, a strategy carrying a high risk of litigation, because tenants organise themselves and compare notifications.

Lease extensions and block sales: the timetable constraints

The law specifically regulates large-scale operations. Article 11-1 of the Act of 6 July 1989 extends current leases by operation of law where the notice to terminate for sale concerns more than five dwellings in the same building, in order to avoid a wave of simultaneous departures. The collective rental agreement of 16 March 2005, made binding by Decree No. 2005-1615 of 22 December 2005 and applicable to sales by lots concerning more than ten dwellings in the same building, adds an obligation to inform tenants beforehand and extensions graded according to length of occupation, age and the tenant's resources. These agreements are concluded under Article 41 ter of Act No. 86-1290 of 23 December 1986 and bind the institutional landlords of the rental sectors that it defines.

The provision with the greatest structural impact on the exit decision remains Article 10-1 of the Act of 31 December 1975, introduced by the Act of 13 June 2006. Where a building of more than five dwellings is sold as a block, the landlord must in principle notify each tenant of an offer of sale of that tenant's dwelling, unless the buyer undertakes in the deed to extend the current leases for the six-year period set by the text. In other words, a block sale avoids the tenant's pre-emption right only at the price of an undertaking to allow the tenants to remain in occupation, which neutralises any rapid break-up by the buyer.

The economic effect is clear. A buyer that gives this undertaking acquires an asset whose vacant possession is deferred, and prices it accordingly. A buyer that refuses the undertaking triggers the individual notifications and turns the block sale into a break-up operation, with its own timetable and uncertainty. This alternative is the real dial in the price negotiation on a multi-tenant residential asset.

Protection of elderly occupants: a near-absolute barrier for the corporate landlord

Article 15-III of the Act of 6 July 1989 prohibits the landlord from opposing renewal of the lease, without an offer of rehousing that corresponds to the tenant's needs and means, where the tenant is more than sixty-five years old on the date the lease expires and the tenant's annual resources are below the resource ceiling in force for the allocation of subsidised rental housing. The same protection benefits a tenant who supports a person over sixty-five years old ordinarily living in the household and who satisfies the resource condition. Age is assessed at the date the lease expires, resources at the date the notice is served.

The text provides for an exception where the landlord is itself over sixty-five years old or has resources below the same ceiling. This exception is by its nature unavailable to an insurance company, a property company, a real estate investment company (société civile de placement immobilier) or a fund. The protection of elderly occupants therefore applies, against an institutional landlord, with no possible counterpart, unless the landlord offers rehousing that corresponds to the tenant's needs and means, within the geographical limits set by reference to Article 13 bis of Act No. 48-1360 of 1 September 1948.

In practice, an offer of rehousing is rarely a solution. It presupposes having available housing within the statutory perimeter, at a rent level compatible with the resources of the protected tenant, and it can be challenged on each of its terms. In an older Parisian building, the presence of several tenants who meet the age and resource conditions is enough to condemn some of the lots to be sold with sitting tenants, at the corresponding discount, or to be retained until they are vacated naturally.

A simple rule of method follows: the mapping of the tenant population, lot by lot, identifying age, declared resource level, length of occupation and lease expiry date, must be carried out before the decision to break up the building. This mapping is not an administrative exercise. It determines the percentage of lots that can be vacated within the business plan horizon, and therefore the price at which the block must be bought or sold.

Discounted block sale or lot-by-lot break-up: the trade-off

A break-up captures a real difference in value. The sum of the values of vacant lots structurally exceeds the value of a let building sold as a block. This difference is, however, secured only on three conditions: that the lots are vacated, that they are vacated within the timeframe of the financing plan, and that the cost of carry does not consume the margin.

On the cost side, the operation bears the division and creation of the co-ownership, the global technical diagnosis, the technical diagnostics required on sale, the fees for marketing the lots individually, residual rental management, the co-ownership charges on unsold lots, the cost of the property manager (syndic) and, above all, the works. Act No. 2021-1104 of 22 August 2021 on combating climate change set a timetable for banning the letting of the least efficient dwellings: dwellings rated G since 1 January 2025, dwellings rated F from 1 January 2028 and dwellings rated E from 1 January 2034. A lot rated F or G is not sold to a landlord-investor at the price of a good-quality vacant lot: it is sold at the price of the lot less the cost of the works, itself made more expensive by the need for a collective decision in the co-ownership. A break-up does not make it possible to pass on the energy capex without a corresponding reduction in price.

On the timetable side, the statutory lease extensions, the three-year bar in Article 15-I for a landlord that has acquired with sitting tenants, the six-month notice period and the pre-emption periods of two to four months all add up. Time is the real cost of a break-up, and it is precisely what a block sale buys: immediate liquidity in exchange for giving up the difference in value.

Two risks complete the equation. The first is fiscal: the multiplication of lot sales by an asset-holding structure may amount to a habitual activity of buying and reselling and lead to taxation as industrial and commercial profits, with loss of the regime applicable to the real estate capital gains of private individuals. The analysis must be carried out before the division, not after the fifth sale. The second is political and reputational: break-up operations on entire buildings in high-demand areas mobilise tenants' associations, local elected officials and, where applicable, the municipality's enhanced urban pre-emption right. For an institutional investor, reputational exposure is part of the cost of the operation. On the criteria for the status of property dealer (marchand de biens) and the risk of requalification, see our analysis of that regime and of VAT on the margin.

Recurring litigation and procedural strategy

Break-up sale litigation is concentrated in three areas. First, the nullity of the notice, for failure to reproduce the mandatory statements, for incomplete notification of joint tenants, for an incorrect notice period or for insufficiently precise price and terms. An annulled notice results in renewal of the lease and postponement of the entire timetable of the operation.

Second, the nullity of the sale, where the tenant's pre-emption right has been disregarded, either through absence of notification under Article 10 of the 1975 Act or through a sale on more favourable terms without notarial notification. This action concerns the buyer, who must assess the risk during the audit, and in practice leads the buyer to require the seller to produce all the notifications and acknowledgements of receipt.

Third, statutory protection, where the tenant relies on Article 15-III and challenges the adequacy of the offer of rehousing. The debate then turns on whether the offer corresponds to the tenant's needs and means and on its geographical perimeter.

Actions arising from the lease are subject to the three-year limitation period in Article 7-1 of the Act of 6 July 1989, which makes it necessary to date each notification precisely and to keep proof of it. The judge responsible for protection disputes (juge des contentieux de la protection) hears disputes relating to residential leases, including the validity of the notice and the resulting eviction. For a whole building, the strategy is to handle the cases in homogeneous cohorts rather than lot by lot, in order to avoid inconsistent decisions on identical notices, and to secure the template notice in advance, since it will be duplicated dozens of times and any defect in it will therefore be replicated identically.

Conclusion

A break-up sale is not a legal transaction, it is a timetable transaction subject to protective legislation. The difference in value between the occupied block and the sum of the vacant lots is real, but it can be realised only to the extent that the tenant population allows. Three parameters are enough to settle the trade-off: the number of tenants meeting the conditions of Article 15-III, the expiry date of each lease in light of the statutory extensions, and the energy rating of the lots in light of the timetable of the Climate and Resilience Act. A portfolio with a high proportion of protected occupants and of lots rated F or G should be sold as a block, with an accepted discount, rather than broken up in the hope of a vacating of the units that will not occur.

Before any decision, have a lot-by-lot matrix drawn up that cross-references the age and resources of the occupants, the contractual expiry date, the energy performance rating and the estimated cost of works, and have the template notice and notification audited by external counsel before the first wave of mailings. A formal defect replicated across forty notices costs an entire year of the business plan.

Frequently asked questions

Can a corporate landlord give notice to terminate for its own occupation in a break-up operation? No. The notice to terminate for the landlord's own occupation under Article 15-I of the Act of 6 July 1989 presupposes that the landlord, or an exhaustively listed beneficiary, occupies the dwelling, which is ruled out for an insurance company, a property company or a fund. The institutional landlord has available only the notice to terminate for sale, which operates as an offer of sale to the tenant, and the notice to terminate on legitimate and serious grounds, the use of which presupposes a breach by the tenant. This asymmetry is structural and must be built into the plan from the acquisition of the asset.

Does the pre-emption right under the 1975 Act clear the one attached to the notice to terminate for sale? No. The two rights are successive and independent. A tenant who did not buy on the first sale following the division, on the basis of Article 10 of the Act of 31 December 1975, keeps the lease and will, when it expires, benefit from the pre-emption right attached to the notice to terminate for sale under Article 15-II of the Act of 6 July 1989. Each notification is subject to its own formalities, and each is sanctioned by the nullity of a sale concluded in disregard of the tenant's right.

Can a tenant over 65 be evicted by a notice to terminate for sale? Only if the tenant's annual resources exceed the resource ceiling applicable to subsidised rental housing, or if an offer of rehousing corresponding to the tenant's needs and means is made within the geographical limits defined by reference to Article 13 bis of the Act of 1 September 1948. The statutory exception relating to the landlord's age or resources can never be invoked by a legal entity. For an institutional landlord, the protection of elderly occupants is therefore a barrier whose only practicable way through is actual rehousing.

What minimum period should be allowed between the acquisition of an occupied building and the giving of notices to terminate for sale? Article 15-I of the Act of 6 July 1989 prohibits a landlord that has acquired an occupied dwelling from giving notice to terminate for sale where the term of the current lease falls less than three years after the acquisition; the notice can then take effect only at the end of the first renewal. To this constraint is added the six-month notice period before the end of the lease of an unfurnished dwelling. The plan for vacating the units must therefore be built on the actual contractual expiry dates, and not on an average turnover assumption.

Does a block sale avoid the tenants' pre-emption right? Not automatically. Article 10-1 of the Act of 31 December 1975, introduced by the Act of 13 June 2006, requires, where a building of more than five dwellings is sold as a block, that each tenant be notified of an offer of sale of that tenant's dwelling, unless the buyer undertakes in the deed to extend the current leases for the six-year period provided for by the text. The exemption from pre-emption is therefore paid for by a deferral of vacant possession that is passed on in full to the sale price.

Does the collective agreement of 16 March 2005 apply to all break-ups? No. Made binding by Decree No. 2005-1615 of 22 December 2005, it covers sales by lots concerning more than ten dwellings in the same building and binds landlords falling within the rental sectors defined in Article 41 ter of Act No. 86-1290 of 23 December 1986. It adds to the statutory obligations prior information for tenants and lease extensions graded according to length of occupation, age and resources. Its scope must be checked building by building before the first notifications are sent.

What is the main ground for annulment of a notice to terminate for a sale by lots? Formalities. Failure to reproduce the first five paragraphs of II of Article 15 of the Act of 6 July 1989, imprecision as to the price or terms of the sale, failure to observe the six-month notice period and incomplete notification of joint tenants, in particular the spouse who is a joint tenant by operation of law under Article 1751 of the French Civil Code, are the most frequent causes. In a large-scale operation, because the template notice is duplicated, a single defect contaminates the entire wave of notifications.