Sale of an occupied building: transfer of leases and asset and liability warranty

The sale of a let building is never just a transfer of walls. An investor acquiring an investment building, a property investment company (foncière) taking over a rental portfolio, or an individual buying an occupied flat inherits a contractual reality that they did not negotiate: existing leases, tenants in place, sometimes concealed rent arrears and promised works. The central question is not whether the leases survive the sale, since French law provides for this, but who bears the risks arising before, during and after the transfer. This article analyses the fate of leases on the sale of an occupied building, the allocation of rental risks between seller and buyer, and the role of warranty clauses on rents and arrears, distinguishing the direct sale of the building from the sale of the company that holds it.

The principle: the sale does not terminate the lease

The starting point is laid down by Article 1743 of the French Civil Code. The sale of the building does not terminate existing leases, provided that they meet a requirement as to date.

"If the lessor sells the thing let, the purchaser cannot evict the farmer, the sharecropper or the tenant who has an authentic lease or a lease whose date is certain, unless the right to do so was reserved in the lease." (Article 1743 of the French Civil Code)

In practical terms, the buyer of an occupied building takes the seller's place in the rental relationship by operation of law. It becomes landlord without any amendment being needed, and the tenant does not have to give its agreement. This transfer of the lease takes place by the sole effect of the sale: the buyer acquires the rights (to collect the rents, to require compliance with the tenant's obligations) and the obligations (delivery, peaceful enjoyment, maintenance) attached to the position of landlord.

The requirement of a certain date

The protective mechanism applies only if the lease is enforceable against the buyer. A lease executed before a notary, known as an authentic lease, necessarily is. A private lease must have acquired a certain date (date certaine) within the meaning of Article 1377 of the French Civil Code, by registration, by the death of a signatory, or by its mention in a notarised deed (acte authentique). Failing that, the buyer could in theory not be bound by the lease. In practice, this possibility is tightly restricted for residential and commercial leases, which are governed by public-policy statutes that largely neutralise the argument that there is no certain date.

For leases subject to Law No. 89-462 of 6 July 1989 (main residence) and for commercial leases governed by Articles L.145-1 et seq. of the French Commercial Code, the protection of the tenant prevails: the buyer takes over the lease on its terms, its remaining duration and its rent, without being able to alter its economics unilaterally.

The fate of the security deposit

The security deposit paid by the tenant follows the lease. The buyer, having become landlord, becomes the party liable to the tenant for its return at the end of the tenancy, even if it never received it from the seller. This is a major point of vigilance, often overlooked in sales of rental portfolios. If the deed of sale does not provide for the return or deduction of the security deposits held by the seller, the buyer will have to repay them to the tenants out of its own pocket. The practice is to account, on the day of the sale, for the total amount of the security deposits and to deduct it from the price or to arrange for it to be paid to the buyer.

Residential, commercial and professional leases: distinct regimes

The fate of leases depends closely on their nature, and the allocation of risks is not the same depending on the applicable statute.

For a residential lease subject to the 1989 Law, the buyer takes over a contract whose duration and conditions for notice are strictly regulated. If it wishes to give notice to terminate for sale or for repossession, it may do so only at the expiry of the lease and within extended periods where it has just acquired the property: Article 15 of the 1989 Law imposes, on the acquisition of an occupied dwelling, specific rules delaying the possibility of giving notice for repossession or for sale where the end of the lease is close to the date of acquisition.

For a commercial lease, the buyer inherits the right to renewal and the right to eviction compensation (indemnité d'éviction). It can evict the commercial tenant only by complying with the protective statute: a reasoned refusal of renewal and payment of eviction compensation that is often considerable. The value of an occupied commercial building is therefore assessed taking this potential liability into account. The continuity of the commercial lease and what changes for the tenant on the transfer are set out in our article devoted to the sale of the let premises.

The sale may also trigger pre-emption rights. In the case of a commercial lease, the tenant has a right of first refusal if the premises it occupies are sold, provided for by Article L.145-46-1 of the French Commercial Code, introduced by the Pinel Law of 18 June 2014, subject to the statutory exclusions, in particular the global sale of a building comprising commercial premises. This exception explains why a block sale of a rental portfolio frequently escapes this right of first refusal, whereas a sale unit by unit could trigger it.

The allocation of rental risks between seller and buyer

The transfer of the lease settles the continuity of the rental relationship, but it says nothing about the economic allocation between the former and the new landlord. This is the heart of the negotiation in the sale of an occupied property.

Rents and service charges apportioned

Rents accrue to the landlord in place on the day they fall due. The practice is to apportion them prorata temporis at the date of signature of the notarised deed (acte authentique): the seller keeps the rents relating to the earlier period, and the buyer receives those for the later period. Where a quarterly rent has been collected in advance by the seller, a share must be paid over to the buyer for the portion corresponding to the period after the sale. The same reasoning applies to service charge provisions and to their annual reconciliation, which must be apportioned between the two periods.

Prior arrears

Arrears arising before the sale remain in principle a claim of the seller: it was the landlord when the rent fell due. The buyer has no title to claim a rent that was not due under its own lease, unless the claim is expressly assigned in the deed. Conversely, a tenant in a situation of chronic arrears is a risk that the buyer bears for the future, with no automatic recourse against the seller. Hence the importance of documenting, before the sale, the state of arrears, the proceedings under way, the commandements de payer (payment demands served by a commissaire de justice (bailiff)) issued and the payment schedules granted.

Works and the landlord's obligations

The buyer takes over the landlord's obligations, including those arising from promises made to the tenant. If the seller undertook, in the lease or by amendment, to carry out compliance works, the buyer becomes liable for them. Likewise, major maintenance expenditure and obligations arising from a technical survey or an administrative injunction fall on the new landlord. An occupied building may thus conceal a liability for works that does not appear in the stated price but weighs heavily on rental yield. The surveys attached to the commercial lease are dealt with separately in our guide to mandatory surveys in commercial leases.

Direct sale of the building or sale of the company: two approaches to warranties

The distinction between the sale of the building itself (asset deal) and the sale of the shares of the company that holds it (share deal) determines the warranty regime. This is where the notion of a property asset and liability warranty (garantie d'actif-passif) takes on its full meaning, and where a frequent confusion must be cleared up. The legal and tax implications of this choice of structure are compared in our analysis of the choice between asset deal and share deal in real estate.

Direct sale: the warranties of sale law

Where an occupied building is sold directly, the buyer has the benefit of the statutory warranties attached to the contract of sale: the warranty against eviction and the warranty against latent defects (vices cachés) under Articles 1625 et seq. of the French Civil Code. But these warranties are ill-suited to rental risk. The warranty against latent defects concerns the physical condition of the property, not the soundness of the leases or the solvency of the tenants. An insolvent tenant or a defective lease is not a latent defect of the building. That is why, in a direct sale, the buyer's protection depends on specific contractual representations and warranties inserted in the deed: representations by the seller on the content of the leases, on the absence of disputes and on the state of arrears, backed by indemnity clauses.

Strictly speaking, the asset and liability warranty is a mechanism specific to sales of corporate rights. Where used in the context of a direct sale of a building, the expression refers by extension to all the contractual warranties relating to the rental position. Legal rigour suggests speaking, for a direct sale, of contractual warranties or of representations and warranties, and reserving the term asset and liability warranty for the sale of the owning company.

Sale of the company: the true asset and liability warranty

Many investment buildings and rental portfolios are held by French property holding companies (sociétés civiles immobilières) or commercial companies. The sale is then carried out by transferring the shares, not the building. The buyer takes over a legal entity with all of its assets and liabilities: tax debts, rental disputes, works commitments, social security adjustments, guarantees. The purpose of the property asset and liability warranty is precisely to cover the emergence, after the sale, of a liability whose origin predates it, or of a shortfall in the declared assets.

In this configuration, the warranty covers in particular the reality of the leases recorded as assets, the accuracy of the rent rolls, the absence of unrecorded security deposits, the absence of employment tribunal disputes if the company employs a caretaker, and the accuracy of the accounts. It is the central instrument for allocating risks in a transaction on a rental portfolio structured as a share deal.

The content of a warranty on rents and arrears

Whether it takes the form of an asset and liability warranty in a sale of shares or of representations and warranties in a direct sale, the buyer's protection on the rental side is built around several stipulations.

The seller's representations are the foundation. The seller states a factual position at a given date: an exhaustive list of the leases, the amount of rents and service charges, the identity of the tenants, the amount of the security deposits, the existence of delays or proceedings, rent-free periods and stepped rents granted, and guarantees given (sureties, independent guarantees). Each inaccurate representation gives rise to a right to compensation.

The warranty clause proper organises the indemnification. It defines the originating event (emergence of a prior rental liability, inaccuracy of a representation), the recoverable loss and the terms of implementation. Several parameters are negotiated:

• the warranty cap, often expressed as a percentage of the price, which limits the seller's commitment
• the trigger threshold and the deductible, below which the warranty does not apply, intended to exclude low-value claims
• the duration of the warranty, generally longer for tax and social security liabilities than for ordinary rental liabilities
• the terms for notifying claims, often on pain of forfeiture if late

The security for the warranty completes the arrangement. A contractual warranty is worth only as much as the solvency of the party giving it. Where the seller is a company that may be liquidated after the sale, the buyer requires security: escrow (séquestre) of a portion of the price, an independent first-demand guarantee from a bank, or a surety. Without this security, the warranty clause remains theoretical.

A clause specific to rent arrears deserves to be negotiated. It may provide that the seller guarantees recovery of existing arrears, or that it indemnifies the buyer if a tenant declared to be up to date proves to be in default within a set period after the sale. It coordinates the fate of prior claims, which remain with the seller, with the risk of vacancy or insolvency that the buyer assumes for the future.

The relationship with due diligence

The contractual warranty and the prior audit form an inseparable pair. Due diligence identifies the risks; the warranty allocates them. A well-drafted property asset and liability warranty relies on the findings of the rental audit: it is because the audit revealed a dispute, an arrear or an irregular lease that the clause can either exclude that known risk or cover it specifically.

The rental audit covers in particular the verification of the leases and their amendments, the reconciliation of rent rolls with actual receipts, the analysis of arrears and recovery proceedings, the checking of the security deposits recorded, the examination of notices given or received, and the review of works commitments. Each anomaly detected feeds the negotiation: a price reduction, a specific representation, a targeted warranty, or a condition precedent of regularisation before the sale.

The logic of allocation follows a simple principle: a known and quantified risk is dealt with in the price, a known but uncertain risk is dealt with by a dedicated warranty, and an unknown risk falls under the general asset and liability warranty. A buyer that neglects the audit deprives itself of the ability to negotiate these clauses, and a warranty that is not based on any audit exposes the seller to claims that it could have excluded by a precise representation.

Conclusion

The sale of an occupied building transfers far more than walls: it passes on a set of living rental relationships, with their rights, their burdens and their risks. French law ensures the continuity of leases through Article 1743 of the French Civil Code, but leaves it to the parties to organise the economic allocation of risks. This allocation cannot be improvised. It requires identifying the regime of each lease, apportioning rents, service charges and security deposits, and choosing the warranty instrument suited to the structure of the transaction.

The position that should guide every buyer is as follows: never separate the warranty from the audit. An asset and liability warranty, however well capped, protects effectively only if it is based on a rigorous rental due diligence and on a solvent security for the warranty. Conversely, a prudent seller secures its position through exhaustive, dated representations, which limit the extent of its commitment to the risks that were genuinely concealed. Before any signature, have the complete rental position audited and require, depending on the structure chosen, a quantified warranty clause backed by security over the price: this is the only way to turn a promise into protection.

Frequently asked questions

Does the sale of a building terminate existing leases?

No. Under Article 1743 of the French Civil Code, the sale does not terminate leases that have a certain date or are authentic. The buyer takes the seller's place as landlord and takes over the contract on its duration, its rent and its terms. For residential leases subject to the Law of 6 July 1989 and commercial leases under Articles L.145-1 et seq. of the French Commercial Code, this continuity is reinforced by public-policy statutes.

Who receives rent arrears from before the sale?

Rents that fell due before the sale remain a claim of the seller, which was landlord on the day they fell due. The buyer can claim these arrears only if the deed expressly assigns the claim to it. The practice is to apportion rents prorata temporis at the date of the notarised deed (acte authentique) and to deal with prior arrears by a specific warranty clause or an assignment of claims.

Must the new owner return the security deposit?

Yes. The security deposit follows the transferred lease: the buyer, having become landlord, becomes liable to the tenant for it at the end of the tenancy, even if it did not receive it from the seller. It is essential that the deed of sale provide for the transfer or deduction of the total amount of the security deposits held by the seller, failing which the buyer will repay them from its own funds.

What is the difference between an asset and liability warranty and the warranties in a direct sale?

The asset and liability warranty is a mechanism specific to the sale of the shares of a company holding the building: it covers the emergence of a prior liability or a shortfall in assets. In a direct sale of the building, the buyer has the benefit of the statutory warranties (latent defects, eviction) and of contractual representations and warranties on the rental position. The statutory warranties of sale cover neither the solvency of the tenants nor the validity of the leases, hence the usefulness of specific clauses.

Can a commercial tenant exercise pre-emption if the building is sold?

The commercial tenant has a right of first refusal over the premises it occupies, provided for by Article L.145-46-1 of the French Commercial Code, introduced by the Pinel Law of 18 June 2014. This right is, however, subject to exceptions, in particular the global sale of a building comprising commercial premises and certain sales between relatives or within the same group. A block sale of a rental portfolio frequently escapes this right, whereas a sale unit by unit may trigger it.

How can a warranty on arrears be secured in the sale of a rental portfolio?

The warranty must define precisely the originating event, a cap, a trigger threshold and a duration, and then be backed by security guaranteeing the seller's solvency. Escrow of a portion of the price or an independent first-demand guarantee turns a theoretical clause into real protection. The warranty benefits from distinguishing existing arrears, which remain with the seller, from the future risk of vacancy and insolvency, borne by the buyer.

Is an audit needed before buying an occupied building?

Yes, the rental audit determines the effectiveness of any warranty. It verifies the leases and amendments, reconciles the rent rolls with actual receipts, analyses arrears and proceedings, checks the security deposits recorded and lists the works commitments. Each anomaly detected is then dealt with in the price, by a specific representation, by a targeted warranty or by a condition precedent of regularisation before the sale.