Emphyteutic Lease and Building Lease: Which Title for Which Asset (Art. L. 451-1 of the Rural Code)

The choice now arises for very different assets: logistics land to be enhanced without committing equity, an office building from the 1980s whose energy upgrade exceeds the owner's investment capacity, a municipal plot intended to host a private facility of general interest. In all three cases, the same question precedes the negotiation of the financial terms: which title gives the tenant a real property right (droit réel immobilier) strong enough to be financed, and which title leaves the landlord in control of its asset at expiry. The choice between an emphyteutic lease (bail emphytéotique), a building lease (bail à construction) and a real estate finance lease (crédit-bail immobilier) is not a question of drafting; it is a question of risk allocation: capex, accession, ranking in the event of default. This guide compares these three instruments from the standpoint of the investor and the lender, starting from the regime of Article L. 451-1 of the French Rural and Maritime Fisheries Code, and sets out what the emphyteutic tenant (emphytéote) actually acquires beyond the right to occupy.

Three titles, three economic logics

The emphyteutic lease: a long real right with no obligation to build

The regime is set out in Articles L. 451-1 to L. 451-13 of the French Rural and Maritime Fisheries Code, applicable to any immovable property, urban as well as rural, despite where the text is located.

An emphyteutic lease of immovable property confers on the tenant a real right capable of being mortgaged; that right may be assigned and attached in the forms prescribed for enforcement against real property. The lease must be granted for more than eighteen years and may not exceed ninety-nine years; it may not be extended by tacit renewal. (Art. L. 451-1 of the Rural Code)

Three features structure the transaction. First, a real property right, not a personal right of occupation: the emphyteutic tenant holds a temporary dismemberment of ownership that can be assigned, attached and mortgaged, and is enforceable erga omnes once published at the land registry (service de la publicité foncière). Second, a minimum term of eighteen years and a ceiling of ninety-nine years, with no possibility of tacit renewal, which means the exit must be dealt with contractually from signing. Third, an emphyteutic rent (redevance emphytéotique) that is traditionally modest, the price of the contract lying less in the rental flow than in the value of the improvements that will revert to the landlord.

The emphyteutic tenant is not required to build. It must improve the land, or at the very least not reduce its value. That freedom gives the title its flexibility: it suits an existing asset to be restructured, a photovoltaic operation, a car park, a hotel asset taken over in a distressed situation. It is also what makes the title difficult for the landlord, who must specify precisely the programme of works expected if it intends to obtain a building in good condition at expiry.

The building lease: the obligation to build as the cause of the contract

The building lease is defined in Article L. 251-1 of the French Construction and Housing Code: the tenant undertakes, as its principal obligation, to build structures on the landlord's land and to keep them in good repair throughout the term of the lease. The term is identical to that of the emphyteutic lease, from eighteen to ninety-nine years, with no tacit renewal. The tenant holds a real property right that can be mortgaged, assigned and contributed to a company.

The difference lies in the cause. The building lease is an operation contract: the undertaking to build is its principal obligation, enforced by termination. It also allows the parties to organise by agreement the ownership of the structures during the lease, which opens up deferred or progressive accession structures that are impossible under the Rural Code regime alone.

The characterisation does not depend on the title chosen by the parties. The courts look at the real economics of the contract: a lease described as emphyteutic whose main object is an obligation to build a specified programme is exposed to requalification as a building lease, with knock-on consequences for the regime applying to the works, for accession and for the tax treatment of the transaction. That risk is a reason not to treat the choice of title as mere packaging.

The real estate finance lease: a personal right backed by a promise of sale

The real estate finance lease falls under Articles L. 313-7 et seq. of the French Monetary and Financial Code. The economics are the reverse: the lessor acquires or has built the building, makes it available to the lessee in return for rents covering the amortisation of the capital and the remuneration of the financing, and grants a unilateral promise of sale (promesse unilatérale de vente) for an agreed residual value. The lessee's choice between an SCI (French property holding company) and an operating company is detailed in our article on the structuring of a real estate finance lease.

Two structural limits must be taken into account at the outset. The transaction is a credit operation: it may be granted only by an approved credit institution or financing company, by virtue of the banking monopoly of Article L. 511-5 of the French Monetary and Financial Code. A landowner therefore cannot use it to enhance its own land. Above all, the lessee holds no real right over the building: it holds a right of enjoyment and a purchase option, that is, personal rights. The whole difference in treatment in insolvency proceedings follows from this.

Who bears the capex, and in particular the energy capex

The default regime of the Rural Code places the emphyteutic tenant in the position of economic owner: it bears the taxes and charges of the building, it cannot release itself from the emphyteutic rent by abandoning the land, and it cannot claim a reduction in the event of partial loss. The building lease follows the same logic, reinforced by the statutory obligation to maintain the structures throughout the term of the lease.

This allocation is not neutral for tax purposes. Article 1400, II of the French General Tax Code expressly designates the emphyteutic tenant and the building lease tenant as liable for the property tax (taxe foncière), in place of the owner. In a finance lease, the lessor remains the owner and therefore the person legally liable, the cost being recharged by contract.

The critical point today concerns regulatory capex. The Éco Énergie Tertiaire scheme, arising from Decree No. 2019-771 of 23 July 2019 and codified in Articles R. 174-22 et seq. of the French Construction and Housing Code, requires tertiary-use buildings of at least 1,000 m² to reduce final energy consumption by 40% in 2030, 50% in 2040 and 60% in 2050 compared with a reference year. The obligation falls jointly on owners and tenants, who must allocate it between them. For residential property, Law No. 2021-1104 of 22 August 2021, known as the Climate and Resilience Law, phases in the ban on letting the most energy-intensive dwellings: class G from 1 January 2025, class F from 1 January 2028, class E from 1 January 2034. On the allocation of these obligations between landlord and tenant in a commercial lease, see our analysis of the energy performance certificate (DPE) and the tertiary decree in commercial leases.

For a lease of sixty or eighty years, the question is not who pays for the works identified today, but who will pay for those required by regulation not yet written. Three clauses deserve separate treatment in the negotiation:

• the contractual definition of the scope of works for which the tenant is responsible, distinguishing maintenance, renewal of components and compliance required by a standard post-dating signature
• the fate of works required in the last years of the lease, when the tenant no longer has an amortisation horizon and the landlord has not yet recovered the asset
• the interaction with the obligation not to reduce the value of the land, which prevents the emphyteutic tenant from letting the asset deteriorate on the ground that the standard does not yet compel it to act

On this point, the building lease gives the landlord a stronger lever: the obligation to keep the structures in good repair is statutory, not merely contractual, and its breach gives rise to termination.

Who recovers the structures at the end of the lease

This is the central economic axis of the choice, because it determines the residual value and therefore the level of the rent.

For emphyteutic leases, the regime of Articles L. 451-1 et seq. of the Rural Code leads to accession by the landlord at the end of the lease, over improvements as well as structures, without compensation. The emphyteutic tenant cannot remove what it has built either. This regime is largely a default one: the parties may provide for end-of-lease compensation, a residual value mechanism or a right of demolition. In practice, the absence of compensation is the accepted counterpart of a low rent.

In a building lease, the parties determine their respective rights of ownership over the structures, existing and to be built. Failing a stipulation, the landlord becomes the owner on expiry of the lease and benefits from the improvements. The flexibility here is contractual and should be exploited: accession at the end of the lease, deferred accession on an agreed date, or allocation by volumes in a complex property development.

In a finance lease, the transfer of ownership is in no way automatic: it requires the exercise of the purchase option, at an agreed residual price, within the stipulated period. A lessee that does not exercise the option returns the building without recovering anything of the amortisation paid.

The choice can then be put simply. An investor seeking ultimate ownership of the asset favours the finance lease. An investor seeking to operate an asset over a long period without paying for the land favours the building lease or the emphyteutic lease, setting the horizon of the lease by reference to the economic operating life of the structure and not the statutory maximum term.

Financing a temporary real right: mortgage, residual term, tripartite agreement

The real right of the emphyteutic tenant and that of the building lease tenant can be mortgaged. That is what makes these titles financeable, unlike a commercial lease. But the lender must take two features into account.

First, the mortgage is based on a temporary right. It cannot outlive the extinction of the lease: the end of the real right brings with it the end of the security that encumbers it. The amortisation schedule must therefore end with a substantial safety margin before expiry, and the lease must be published before the mortgage is registered, under the regime of Decree No. 55-22 of 4 January 1955, which makes publication mandatory for the creation of real property rights and for leases of more than twelve years. Financing secured on other dismembered rights, bare ownership (nue-propriété) or usufruct, is dealt with separately in our article on mortgages and the dismemberment of ownership.

Second, early termination of the lease destroys the basis of the security. The statutory regime for emphyteutic leases allows the landlord to seek judicial termination only in the event of non-payment of two consecutive annual instalments of rent, breach of the terms of the contract or serious damage to the land, but that protection is not enough for a lender. Practice requires a tripartite agreement between the landlord, the tenant and the lender, providing for:

• prior notification to the lender of any default by the tenant and of any intention to terminate
• a remedy period allowing the lender to cure the default in place of the tenant
• a right of substitution or of nominating an approved replacement, with the lease maintained on its original terms
• limits on approval clauses on assignment, so that they do not block enforcement of the security

Without this arrangement, the value of a mortgage over a real right is theoretical. It is the first point to check in a financing due diligence.

Insolvency proceedings: the real test of the title

Default by the tenant

The emphyteutic lease, the building lease and the finance lease are ongoing contracts within the meaning of Article L. 622-13 of the French Commercial Code. The opening of proceedings cannot result in their termination by operation of law: any clause to that effect is deemed unwritten. The administrator has an option to continue, and the counterparty that wishes to be rid of the uncertainty must give it formal notice to decide. The landlord cannot rely on a payment default prior to the judgment opening the proceedings in order to terminate, the stay of individual actions and the prohibition on paying prior debts preventing it.

In a sale plan (plan de cession), Article L. 642-7 of the French Commercial Code allows the court to order the transfer of the contracts necessary to maintain the business, notwithstanding approval clauses. An institutional landlord that cares about the quality of its tenant must draw the consequences: the selection of its counterparty will not be guaranteed to the end of the term.

For the finance lessor, the position is different but not unfavourable: as owner of the building, it benefits from the publication of its contract, which spares it an action to reclaim the property (action en revendication) and allows it to seek return of the asset on a valid termination. The burden of an asset returned nonetheless remains in full, in particular for a single-user building that is difficult to re-let.

Default by the landlord

This is where the gap between a real right and a personal right becomes decisive, and where the choice has to be made.

The emphyteutic tenant and the building lease tenant hold a published real right. That right is enforceable against the landlord's creditors, against the purchaser at auction on enforcement against real property and against the liquidator. The sale of the building, whether by agreement or forced, takes place subject to the lease: the purchaser is bound to respect it. The real right survives the owner's default, on the imperative condition that the land publication formalities have been properly completed, as to date and ranking. A late publication, after the registration of a mortgage or the publication of a payment order operating as attachment (commandement valant saisie), weakens the whole.

The finance lessee does not have this protection. Its contract is an ongoing contract whose fate depends on the liquidator's option, and its unilateral promise of sale is a personal right. The exposure relates less to occupation, if the contract is published, than to the ability to acquire: a lessee that has amortised most of the capital and sees its option disappear loses the economic substance of the transaction. Publication of the real estate finance lease, required on pain of unenforceability against third parties, is therefore the first step in securing the position, and checking it must form part of any portfolio review.

What the emphyteutic tenant actually inherits

Acquiring a long real right over a discounted asset, or taking over by assignment the position of a defaulting emphyteutic tenant, requires an audit of what is transferred with the title. Six points recur systematically.

First, charges and taxes. The emphyteutic tenant bears the charges of the building and the property tax, without being able to release itself by abandoning the land. On a deteriorated asset, the tax burden and the current co-ownership charges can absorb a significant share of operating cash flow.

Second, the debt encumbering the real right. The assigned right may be mortgaged, pledged or attached. A mortgage status report must be requested on the real right itself, separately from the landlord's ownership.

Third, co-ownership liabilities, where the asset is in co-ownership. The emphyteutic tenant exercises the prerogatives of a co-owner and is exposed to voted calls for funds, including for structural works decided before its entry. An audit of the minutes of general meetings and of voted works not yet called is essential.

Fourth, environmental and regulatory liabilities, which weigh on the operator: classified installations, asbestos, decontamination obligations at the end of operation, fire safety and accessibility compliance.

Fifth, the state of the title itself: residual term, termination conditions, approval clauses on assignment, end-of-lease compensation, sanctions attached to the works programme. A ninety-nine-year lease concluded seventy years ago does not have the same value as a new lease, nor the same financing profile.

Finally, the fate of the lease in the event of liquidation: the real right withstands the landlord's default, but the lease may be terminated after the opening of proceedings against the tenant itself, for non-payment of rent falling due after the judgment opening the proceedings. A buyer acquiring the real right of an emphyteutic tenant in difficulty must check that rent falling due after that date has been settled before any assignment.

As regards registration duties, the emphyteutic lease falls under the regime for fixed-term leases in Article 742 of the French General Tax Code, whereas Article 743 exempts the building lease and the rehabilitation lease (bail à réhabilitation) from land registration tax (taxe de publicité foncière). The difference in entry cost is not marginal over a long capitalised rent and deserves to be built into the model.

The administrative emphyteutic lease: a separate regime

The administrative emphyteutic lease (bail emphytéotique administratif, BEA) is governed by its own texts. For local authorities, Article L. 1311-2 of the French General Local Authorities Code authorises the conclusion of a BEA over dependencies of the public or private domain, for the purpose of carrying out a public service mission, carrying out an operation of general interest, or for specific purposes exhaustively listed. For the State, Article L. 2341-1 of the French General Code on the Property of Public Bodies (CG3P) allows an emphyteutic lease to be concluded over assets of its private domain. On the public domain, occupation authorisations creating real rights fall under Articles L. 2122-6 et seq. of the same code.

Four constraints distinguish this title from the emphyteutic lease under private law:

• the term and purpose are limited by the enabling text, and a BEA concluded outside the cases provided for is exposed to annulment
• the grant of titles over the public domain has been subject, since Ordinance No. 2017-562 of 19 April 2017, to a prior selection procedure offering guarantees of impartiality and transparency (Art. L. 2122-1-1 CG3P), a regime whose conditions of application differ depending on whether the asset belongs to the public domain or the private domain
• the mortgage of real rights created over the public domain is confined to financing the works, and assignment is subject to the approval of the public body
• the precariousness inherent in public ownership remains: termination on grounds of general interest remains possible, subject to compensation, which makes it necessary to secure contractually the compensation formula and its assignment to the lender

For a fund financing a facility on public land, these compensation provisions are the real collateral, more so than the mortgage.

Choosing: the title follows the operating horizon, not the other way round

The hierarchy is clear. If the objective is ultimate ownership of the asset and the operator meets the conditions for access to bank financing, the real estate finance lease remains the appropriate instrument, with the publication of the contract and the fate of the purchase option on the lessor's default as the absolute point of vigilance. If the transaction consists in having a new programme carried by a third party on land that the owner wishes to keep, the building lease is the natural choice: the obligation to build is statutory, accession is freely negotiated, and Article 743 of the French General Tax Code reduces the entry cost. If the asset already exists and the aim is to transfer a long operation and its capex without selling the land, the emphyteutic lease offers the greatest flexibility, at the price of demanding drafting on the works programme and on the condition in which the asset is returned.

In all three cases, the title is worth only as much as its land publication and the architecture of security that surrounds it. Before settling on the structure, have three things checked by an adviser independent of the arranger of the transaction: the date and ranking of publication of the lease against the registrations encumbering the landlord's property, the existence of a tripartite agreement giving the lender a right of remedy and substitution before any termination, and the clause allocating regulatory compliance works post-dating signature. These three points determine the real value of the real right acquired, well before the level of the rent.

Frequently asked questions

What is the minimum and maximum term of an emphyteutic lease?

Article L. 451-1 of the French Rural and Maritime Fisheries Code requires a term of more than eighteen years and not more than ninety-nine years. The lease cannot be extended by tacit renewal, which rules out relying on automatic continuation at expiry. A lease granted for eighteen years or less is not an emphyteutic lease and does not confer the real right attached to that title. The building lease follows a similar range, under Article L. 251-1 of the French Construction and Housing Code: it is concluded for a term of between eighteen and ninety-nine years and likewise cannot be extended by tacit renewal.