Lender-of-Money Privilege and the Financier's Ranking: What Enforcement Against Real Property Reveals

A lending institution never measures the value of its security at the time it takes it. It measures it on the day the auction price is paid into court and the distribution opens. That is the moment at which the lender-of-money privilege (privilège de prêteur de deniers), which became a special statutory mortgage (hypothèque légale spéciale) under Ordinance No. 2021-1192 of 15 September 2021, shows whether it was properly created, registered in time, renewed and declared in the proceedings. A first-ranking position on paper can dissolve in a few lines of calculation: the co-ownership association's privilege coming first, court costs, interest not allocated, forfeiture for failure to file a claim. This analysis deals exclusively with the financier's security: its post-reform regime, its conditions of registration at the land registry (service de la publicité foncière), its retroactive ranking, and its real fate in the distribution of the price on enforcement against real property.

From the lender-of-money privilege to the special statutory mortgage: what the reform changed, what it kept

Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests, which entered into force on 1 January 2022, abolished the category of special real property privileges and converted them into special statutory mortgages, now listed in Article 2402 of the French Civil Code. The vendor's privilege over a building and, by subrogation, that of the lender of money, fall within this new category. Article 2403 of the French Civil Code provides for the lender's statutory subrogation to the vendor's rights, subject to two cumulative conditions that practice has known since the nineteenth century and that the reform has not relaxed.

The first relates to the loan agreement: it must be recorded in authentic form that the sum lent was intended for the acquisition of the building. The second relates to the receipt issued by the vendor: it must record that payment was made using the borrowed funds. The absence of either of these statements does not downgrade the ranking; it simply deprives the financier of the statutory security. All it is then left with is the contractual mortgage, if it was prudent enough to take one, or an unsecured claim if it did not.

A change in terminology, unchanged economics

In practice, notarial deeds and registration slips continue to use the expression "lender-of-money privilege" or its French acronym PPD. The change of characterisation nonetheless has real technical consequences. The lender of money's special statutory mortgage is now subject to the general regime of the mortgage as regards its basis, registration, duration and transfer. It retains, however, two features that make it, for a financier, a better security than the contractual mortgage: its retroactive ranking to the date of the sale deed, and a lower registration cost, the registration being exempt from the land registration tax (taxe de publicité foncière) payable on the contractual mortgage, with only the property security contribution (contribution de sécurité immobilière) and fees remaining payable by the borrower.

The reform has not changed the material scope of the security. The PPD special statutory mortgage secures the acquisition price of a building existing on the day of the sale, plus accessories. It does not secure the financing of works, the cost of a future construction, acquisition costs or a restructuring loan taken out afterwards. That limit is not theoretical: it is the leading cause of the late discovery, in the distribution, of security whose basis is lower than the outstanding amount.

Retroactive ranking: the financier's real asset

French law gives mortgages their ranking from the date of their registration. The lender of money's special statutory mortgage is an exception to that rule: registered within two months of the sale deed, it ranks from the date of that deed, and not from the date of registration. That retroactivity is the only reason why a credit institution prefers this security to a first-ranking contractual mortgage.

The benefit is measured over the interim period. Between the signing of the authentic sale deed and the formality at the land registry, several weeks pass. During that time, a creditor of the purchaser may register a provisional judicial mortgage, the Treasury may register its statutory mortgage, a contractor may enforce its own security. Without retroactivity, each of those registrations would rank ahead of the financier. With it, the lender is deemed to be registered from the sale deed and neutralises all interim registrations. The conditions for authorisation and the effects of the provisional judicial mortgage are detailed in our article on that protective security under Article L. 511-1 of the French Code of Civil Enforcement Procedures.

Registration at the land registry: formalities and vigilance

Registration at the land registry for the place where the building is situated requires the filing of a registration slip (bordereau) containing the statutory particulars: identification of the creditor and the debtor, cadastral description of the building, cause and amount of the claim in principal and accessories, due date, and final date of effect of the registration. An incorrect cadastral description, the omission of a lot in a building in co-ownership, a principal amount lower than the actual outstanding amount: each of these inaccuracies is paid for in the distribution, where the creditor can be allocated a ranking only within the limits of its slip.

The final date of effect entered on the slip deserves particular attention. The registration preserves the security only until that date. Once that date has passed, without renewal, the mortgage ceases to be enforceable against third parties and the registered creditor's ranking disappears. On a long-term amortising loan followed by enforcement proceedings lasting several years, the risk of lapse during the proceedings is far from hypothetical. The ranking is then lost not through a defect in creation, but through a failure of administrative monitoring.

Late registration: downgraded ranking, not extinction of the security

Exceeding the two-month period does not extinguish the security. It causes it to lose its retroactive effect: the statutory mortgage remains but ranks from the date of its actual registration. The distinction is decisive in assessing the financier's exposure. A registration made in the fourth month remains useful if no third-party registration has intervened in the meantime; it destroys value if a protective judicial mortgage was published in the third month. Checking the registration date, compared with the date of the sale deed and the complete mortgage status report (état hypothécaire), is therefore the first step in a ranking audit.

The scope of the security: mixed financings and off-plan sales (VEFA)

An acquisition financing with works almost always results in a two-tier structure: the lender of money's special statutory mortgage for the portion corresponding to the sale price, a contractual mortgage for the portion corresponding to works, costs or additional cash. These two security interests are subject to different ranking regimes. The first is retroactive to the sale; the second ranks from its registration date. The same institution may therefore find itself first-ranking for one part of its outstanding amount and third-ranking for the other, with a very different recovery rate depending on the portion concerned.

In a sale of property off plan (vente en l'état futur d'achèvement, VEFA), notarial practice limits the basis of the statutory security to the share of the price corresponding to the land and the structures existing on the day of the sale, the balance called as the works progress being secured by a contractual mortgage. The financier of a VEFA transaction must take into account that the share of its outstanding amount covered by a retroactive ranking is a minority. This reading ties in with a broader issue of the usability and securing of the asset over time, which our analyses on VEFA and construction defects develop elsewhere.

Competition with other creditors: the real hierarchy of the price

The ranking of the registered creditor cannot be read from the mortgage status report alone. It is read after applying the claims that rank ahead of registrations or are exempt from them.

Claims that rank ahead of any registered creditor

Court costs incurred in the common interest of the creditors for the realisation of the property and the distribution of its price are deducted first. They include in particular the enforcing creditor's costs of proceedings, fees and the costs of publicising the sale. Super-priority wage claims, where the debtor is a business, also rank ahead of security interests over real property. On a low-value or heavily discounted asset, these first-ranking deductions are sometimes enough to absorb a substantial share of the price.

The co-ownership association's privilege

The Ordinance of 15 September 2021 maintained, as an exception to the general abolition of special real property privileges, the privilege of the co-ownership association (syndicat des copropriétaires) provided for in Article 19-1 of Law No. 65-557 of 10 July 1965. That privilege is exempt from registration and attaches to the lot sold for claims for charges of the current year and of previous years that have fallen due, within the limit set by the text. It ranks ahead of registered creditors, including the holder of the lender of money's special statutory mortgage.

For older claims, the association has the statutory mortgage of Article 19 of the same law, which must be registered and ranks from its date. The distinction is structuring for the financier: on a co-ownership lot heavily in arrears on charges, in particular after a vote on energy renovation works, the first registered creditor may see its allocation reduced by a significant amount without any registration having warned of it. The dated statement (état daté) and an enquiry to the property manager (syndic) on arrears of charges form part of the ranking due diligence, just as much as the mortgage status report. The basis, the claims secured and the registration of this security are covered in our analysis of the special statutory mortgage of the co-ownership association.

Competition with the contractual mortgage

As between the lender of money's special statutory mortgage and the contractual mortgage, the conflict is resolved by the date of ranking, not by the nature of the security. A PPD registered within two months ranks from the day of the sale and ranks ahead of any contractual mortgage registered after that date, even if the latter was published before it. Conversely, a contractual mortgage granted by the vendor and registered before the sale, if it has not been discharged by payment of the price into the hands of the notary, keeps its priority.

Where several institutions finance the same acquisition, the practice of a ranking agreement or contractual subordination makes it possible to organise by agreement the distribution of the price between them. Such an agreement is enforceable between the parties but does not change the statutory ranking as regards third parties: in the distribution it takes the form of an assignment of ranking or a pay-over agreement, the drafting of which must be checked before it is relied upon.

The Treasury and social security bodies

The public Treasury has, for the recovery of taxes, a statutory mortgage provided for in Article 1929 ter of the French General Tax Code. That mortgage must be registered and ranks from the date of its registration. It benefits from no retroactivity comparable to that of the lender of money. A financier duly registered within two months of the sale therefore ranks ahead of the tax authorities for all registrations after the deed. The reasoning is identical for social security collection bodies, whose general privilege attaches to movable property and whose security over real property requires a dated registration.

Enforcement against real property: the moment when ranking is tested

Enforcement against real property (saisie immobilière) is what reveals ranking because it requires the registered creditor to take a series of positive steps within short time limits. Registration is not enough: it opens a right that is lost if the procedure is not followed.

The payment order operating as attachment (commandement de payer valant saisie) must be published at the land registry within the period provided for in Article R. 321-6 of the French Code of Civil Enforcement Procedures, on pain of lapse. Its publication renders the building unavailable within the meaning of Article L. 321-2 of the same code and freezes the situation. The enforcing creditor then notifies the order to the registered creditors and summons them to file their claims. A registered creditor that fails to comply with that summons within the time allowed is forfeited from the benefit of its security for the distribution of the price. A first ranking left unused is worth, at this stage, an unsecured ranking.

This requirement is developed in our analyses of the registered creditor in enforcement against real property and of the order and ranking of payment of creditors, to which readers should refer for the full procedural mechanics. The consequence specific to the financier is to be noted here: the quality of the statutory security does not exempt it from any procedural step, and the retroactive ranking does not survive forfeiture.

Directions hearing and conditions of sale

The directions hearing (audience d'orientation) decides the fate of the procedure: authorised sale by agreement or forced sale. The non-enforcing registered creditor has an interest in appearing, in particular to oppose a request for a sale by agreement at a price manifestly insufficient in relation to its outstanding amount, or to discuss the reserve price. The conditions of sale document (cahier des conditions de vente) conditions the realisation value of the asset: easements, occupation, letting status, diagnostics, state of the co-ownership. An asset occupied by a tenant with a commercial lease in progress will produce an auction price unrelated to its vacant value. Ranking is one thing; the economic basis on which it operates is another.

Clearing of registrations and transfer to the price

Payment of the price or its payment into court, together with payment of the taxed costs, clears the building of all mortgages and privileges, in accordance with Article L. 322-14 of the French Code of Civil Enforcement Procedures. The rights of the registered creditors are transferred to the price. From that moment, the financier's security is no longer a real right over a building: it is a position in a distribution table. The dispute changes in nature and moves to the calculation.

Distribution of the price: from registration to actual payment

The distribution of the price in enforcement against real property is governed by Articles L. 331-1 et seq. and R. 331-1 et seq. of the French Code of Civil Enforcement Procedures. Where the price is sufficient to satisfy all the creditors, the distribution is simplified. Otherwise, the enforcing creditor draws up a draft distribution that it notifies to the creditors and the debtor, who have a short period in which to raise a challenge. Failing that, the draft is approved and the funds are released; if there is a challenge, the enforcement judge (juge de l'exécution) rules. The registered creditor's path when a third party pursues the sale, from notification to distribution of the funds, is set out in our article on the registered creditor in enforcement against real property.

Three items concentrate most of the discussion.

• The basis of the allocation: the creditor cannot be allocated more than the sums entered on its registration slip, principal and accessories. An outstanding amount exceeding the registered amount is unsecured for the difference.
• Interest: the Civil Code limits the allocation of interest at the same ranking as the principal to three years, the remainder ranking from the registration taken for additional interest or as an unsecured claim. On an old file, the gap between the contractual calculation and the amount allocated can be considerable.
• Indemnities and penalties: termination indemnity, increased late-payment interest, bank charges. Their admission requires that they fall within the accessories secured by the registration and that they are not held to be manifestly excessive.

The distribution of the price in enforcement against real property is therefore the only moment at which the security is audited on an adversarial basis. A favourable mortgage status report says nothing about the amount that will actually be paid out. Calculating the financier's net exposure requires deducting from the auction price the court costs, the co-ownership association's privilege, super-priority claims where applicable, and then applying the allocation ceilings.

Where the debtor is in insolvency proceedings

The opening of safeguard, reorganisation or judicial liquidation proceedings changes the framework without removing the security. The financier must file its claim under the conditions of Article L. 622-24 of the French Commercial Code, specifying the privileged nature of the claim and the nature of the security. Article L. 622-30 of the same code prohibits the registration of mortgages after the judgment opening the proceedings: a registration not taken by the date of the judgment is lost, which gives the two-month period additional significance where the purchaser is a company at risk.

In judicial liquidation, Article L. 643-8 of the French Commercial Code sets the order of distribution of the proceeds of the realisation of real property. Creditors holding special security interests over real property occupy a favourable position there, after super-priority wage claims, court costs and the conciliation privilege of Article L. 611-11. The lender of money's security therefore retains its effectiveness, provided it has been declared and has not been affected by a nullity of the suspect period. This dimension ties in with the treatment of the filing of claims: failing a filing within the periods provided for in Article L. 622-24 of the French Commercial Code, the financier is not admitted to distributions and dividends, unless the supervising judge (juge-commissaire) relieves it of the time bar (Article L. 622-26 of the same code).

Conclusion

The value of the lender of money's security depends on a series of steps: the statements in the loan agreement and the receipt, registration within the period that preserves the retroactive ranking, monitoring of the final date of effect, and filing of the claim in the enforcement against real property and, where relevant, in the insolvency proceedings. Ranking is checked against the documents at each of these stages, and not on the basis of the mortgage status report alone.