Transfer of SCI Shares Between Investors: Approval, Price and Liability Warranty

An investor who holds shares in a French property holding company (société civile immobilière, SCI) and wishes to dispose of them is quickly confronted with a little-known reality: the transfer of SCI shares is not governed by the same rules as the sale of an apartment or a transfer of shares in a company limited by shares. The purchaser does not become the owner of a property, but a partner in a structure that carries debts, leases, sometimes an outstanding loan and tax relations with the authorities. Between the approval (agrément) of the other partners, the setting of a price that reflects the real net asset value and protection against hidden liabilities, each step carries a litigation risk. This guide sets out the legal mechanics of the transaction, offers an operational checklist and dwells on the asset and liability warranty (garantie d'actif-passif) suited to an asset-holding SCI.

What is actually transferred in a transfer of SCI shares

The sale of SCI shares transfers a fraction of the share capital, not a direct right over the buildings owned by the company. The purchaser receives the rights attached to the shares: voting at meetings, a share in the profits, a share in the liquidation surplus. The purchaser also inherits, correspondingly, the liability position of the company.

This distinction governs the whole analysis. In an ordinary property sale, the buyer acquires a property that is, in principle, cleared of the seller's personal debts. In a transfer of shares, the buyer enters a legal entity that keeps its liabilities: an unpaid bank loan, a latent tax reassessment, a dispute with a tenant, works voted but not paid for. The transferor therefore hands over a shell whose contents must be audited rigorously. The legal and tax consequences of the choice between selling the building and selling the shares are compared in our article on asset deals and share deals in real estate.

SCI partners are also liable without limit for the company's debts, in proportion to their share in the capital, under Article 1857 of the French Civil Code:

As regards third parties, partners are liable without limit for the company's debts in proportion to their share in the share capital on the date the debt falls due or on the day of cessation of payments.

A purchaser who takes over 40% of the shares is therefore exposed to answering for 40% of the company's debts out of personal assets, once proceedings against the company itself have proved fruitless (subsidiary obligation). This unlimited liability alone justifies the requirement of a solid contractual warranty.

Shares and the partner's current account

A technical point often escapes the parties: the partner's current account (compte courant d'associé) is not transferred with the shares. If the transferor has advanced funds to the SCI (to finance works or to cover a cash shortfall), these sums constitute a personal claim against the company, distinct from the capital. The transfer of the shares does not automatically transfer this claim to the purchaser.

Two situations must be dealt with expressly in the deed: either the transferor has the current account repaid before the transfer, or the transferor also assigns the current account claim to the purchaser, for a separate price. Omitting this point leads to frequent disputes, the transferor claiming after the event repayment of a current account that the purchaser believed to be included in the price of the shares. On the due date of this claim and the remedies available where the company refuses to pay, see our analysis of the repayment of a partner's current account.

Approval: the lock on the entry of a new partner

The transfer of SCI shares is subject to an approval procedure whose purpose is to preserve the intuitu personae specific to civil companies. A partner cannot impose on the others a third party they would not have chosen.

The statutory approval regime

Article 1861 of the French Civil Code lays down the principle: shares may be transferred only with the approval of all the partners. The text nevertheless reserves some freedom to the articles of association.

Shares may be transferred only with the approval of all the partners. The articles of association may provide that this approval is obtained by a majority that they determine, or that it may be granted by the managers.

The same article provides an exemption from approval for transfers to ascendants, descendants or the spouse, unless the articles stipulate otherwise. The articles must therefore always be read before any transaction: they may tighten the statutory regime (approval required even between existing partners) or relax it (approval by majority, approval given by the manager).

The question of an SCI share transfer requiring approval arises differently depending on the identity of the purchaser. A transfer between two partners already in the company is not necessarily exempt from approval: everything depends on the drafting of the articles. Some articles require approval only for the entry of a third party, others require it for any transfer, including between partners, in order to control rebalancing of power.

The notification and response procedure

Where approval is required, the proposed transfer must be notified to the company and to each of the partners. This notification starts a response period. If no refusal is notified within the period set by the articles or by law, approval is deemed given, which protects the transferor against the inertia of the other partners.

In case of refusal of approval, Article 1862 of the French Civil Code opens a way out for the transferor: the partners are required, within a certain period, either to acquire or have a third party acquire the shares, or to consent to the transfer. The transferor is therefore not a prisoner of the investment. If no solution is found at the end of the period, approval may be deemed given, unless otherwise provided.

The steps of the approval procedure

• Checking the articles to identify the competent body (meeting, manager) and the majority required
• Notification of the proposed transfer to the company and to each partner, stating the transferee, the number of shares and the price
• Approval decision recorded in the minutes of a meeting or in a decision of the manager
• In case of refusal, implementation of the buy-out mechanism provided for in Article 1862
• Keeping the proof of approval, an item indispensable for the enforceability of the transfer

A lack of approval is not trivial: a transfer made in breach of the clause in the articles is liable to be declared void. A purchaser who neglects this check risks having the acquisition annulled at the request of another partner.

Setting the price of the shares

The price of the shares of an asset-holding SCI is not the same as the value of the buildings held. It corresponds to the fraction of the company's net assets, that is, the value of the assets less the liabilities, multiplied by the percentage of shares transferred.

The revalued net asset method

For an SCI that holds one or more income-producing buildings, the most suitable method is the revalued net asset method. It consists of taking the current market value of the buildings, and not their historical book value, which is often much lower, then deducting all liabilities: outstanding principal on loans, tax debts, supplier debts, partners' current accounts to be repaid.

Take the reasoning for an SCI holding a let building whose market value has been appraised, encumbered by a loan on which principal remains to be repaid, and showing a cash balance. Net assets are obtained by adding the value of the building and the cash, then deducting the outstanding principal and any current accounts. The value of a share is that amount divided by the total number of shares. The transferor of 50% of the shares then receives half of those net assets, and not half of the gross value of the building.

Neglecting to revalue the buildings leads to massive undervaluation of the shares, since the book value of a depreciated building may be close to zero while its market value is high. Conversely, forgetting to deduct the outstanding principal of a loan leads to overvaluation of the shares to the purchaser's detriment.

Applicable discounts

The mathematical value obtained by the revalued net asset method may be subject to discounts reflecting constraints specific to company shares. A minority discount may be applied where the purchaser takes only a minority holding, without control. An illiquidity discount takes account of the difficulty of reselling SCI shares, which have no organised market. A latent tax discount may be negotiated where the future resale of the buildings will generate a taxable capital gain that the purchaser will ultimately bear.

These discounts are not automatic: they are a matter of negotiation and must be justified. Their relevance depends on the asset-holding nature of the SCI, the distribution of the capital and the purchaser's holding horizon.

The question of expert valuation

In case of disagreement on the price, notably in the context of a buy-out following a refusal of approval, Article 1843-4 of the French Civil Code allows the appointment of an expert to determine the value of the company rights. The expert's decision is then binding on the parties. Using an amicable expert valuation beforehand, even without litigation, secures the setting of the price and limits later challenges.

Enforceability of the transfer: indispensable formalities

A transfer validly concluded between the transferor and the purchaser does not take effect immediately as regards the company and third parties. Three sets of formalities determine the enforceability and legal certainty of the transaction.

Enforceability against the company

The transfer of shares is enforceable against the SCI only once the formalities of Article 1865 of the French Civil Code have been completed: service on the company by a bailiff (now a commissaire de justice), or acceptance by the company in an authentic instrument, or transfer in the company's registers in the manner provided by the articles. Practice often favours depositing an original copy of the transfer deed at the registered office against a certificate issued by the manager.

As long as this formality has not been completed, the company continues to regard the former partner as holder of the shares. Notices of meetings, distributions and votes remain addressed to the transferor, a source of disorder in governance.

Enforceability against third parties

Enforceability against third parties requires publicity in the Trade and Companies Register (RCS). The transfer must be recorded by filing two copies of the transfer deed and by updating the articles, followed by an amending entry at the court registry (greffe). Failing this, third parties, including the tax authorities, may continue to regard the transferor as a partner.

Tax registration

The transfer deed must be registered with the tax office within one month. The transfer of SCI shares is subject to a proportional registration duty. For transfers of shares in property-rich companies, the applicable rate is 5%, calculated on the transfer price or the real value of the shares. This tax cost must be anticipated in the purchaser's financing plan, as it is added to the price of the shares.

Enforceability checklist

• Drafting and signing the transfer deed in a sufficient number of originals
• Collecting and archiving the proof of approval
• Service on the company or deposit of the deed at the registered office against a certificate from the manager
• Registration of the deed with the tax office within one month
• Filing of the deed and the updated articles at the court registry for an amending entry in the RCS
• Notification to the bank where a loan is outstanding, often accompanied by a joint liability clause or an amendment

The asset and liability warranty suited to an asset-holding SCI

The asset and liability warranty is the keystone of the purchaser's protection. Since the purchaser takes over a legal entity with its liabilities, including latent ones, the purchaser must guard against the revelation, after the transfer, of debts whose triggering event predates the transaction. The liability warranty for an SCI differs from that of a commercial company in the nature of its assets and risks.

Purpose of the warranty

The asset and liability warranty is an agreement by which the transferor undertakes to indemnify the purchaser, or the company, in case of an increase in liabilities or a decrease in assets whose origin predates the transfer but which comes to light afterwards. It rests on a snapshot of the company's position at the date of transfer, generally embodied in an accounting statement and a set of representations by the transferor.

The distinction between a liability warranty in the strict sense and an asset and liability warranty deserves to be drawn. The liability warranty covers the appearance of new debts of earlier origin. The asset warranty covers the overvaluation of an asset or its disappearance. The asset and liability warranty combines the two, and it is this complete formula that should be preferred in an asset-holding SCI. The position of the transferee left without any clause of this kind is dealt with separately in our article on the transfer of shares without a liability warranty.

Risks specific to an asset-holding SCI

An asset-holding SCI presents risks distinct from those of a trading company. The transferor's representations and the scope of the warranty must cover the following points as a priority.

• The company's tax position: consistency of property income or profit returns depending on the tax regime (SCI subject to income tax or having opted for corporation tax), absence of VAT reassessment on rents, regularity of earlier capital gains
• The letting position: validity of existing leases, absence of concealed unpaid rent, absence of tenancy disputes, compliance of the security deposits held
• The technical condition of the buildings: compliance with mandatory diagnostics, absence of defects covered by the ten-year guarantee (garantie décennale), regularity of works with regard to planning permissions
• Loans and security: exact amount of outstanding principal, existence of guarantees or mortgages, compliance with bank covenants
• Partners' current accounts: exact amount, absence of a forgotten claim liable to resurface after the transfer
• Co-ownership charges: absence of arrears, absence of works voted but not provisioned, position of calls for funds

The risk of a latent tax reassessment is particularly sensitive in an SCI that has opted for corporation tax, where the calculation of depreciation and of capital gains on the sale of buildings may be challenged by the authorities. The warranty must cover this earlier period until the tax reassessment period expires.

The cap, the deductible and the duration

An effective asset and liability warranty involves several parameters to be negotiated. The cap limits the transferor's commitment, often set by reference to the transfer price. The deductible, or trigger threshold, excludes claims of small amounts. The duration must be calibrated to the limitation periods of the risks covered: the tax reassessment period for tax risks, the limitation period for tenancy claims for tenancy risks, the residual term of the ten-year guarantee for construction defects.

A uniform duration that is too short leaves the purchaser exposed to tax risks, whose reassessment period extends beyond the current financial year. It is preferable to vary the duration according to the nature of the risk, aligning the tax warranty with the authorities' reassessment period.

Security for the warranty

An asset and liability warranty is worth only the solvency of the transferor at the time it is called upon, sometimes several years after the transfer. To secure the commitment, the purchaser may require security for the warranty: a first-demand bank guarantee, escrow (séquestre) of a fraction of the price, or a pledge. Without this mechanism, the purchaser holds a theoretical claim against a transferor who may have arranged their own insolvency.

The role of escrow

Escrow is a security tool that is particularly relevant in the transfer of SCI shares. It consists of depositing all or part of the price with a trusted third party, often the notary or the drafting lawyer, who releases the funds only when specified conditions are met.

Escrow performs two functions. Upstream, it ensures the successful completion of the transaction: the funds are released to the transferor only once approval has been obtained, the enforceability formalities completed and registration carried out. Downstream, a fraction of the price may be held in escrow for the duration of the asset and liability warranty, to be applied as a priority to payment of indemnities due in respect of liabilities that come to light. This retention as security spares the purchaser from having to pursue a transferor who has become insolvent or untraceable.

Conclusion: treat the transfer as a business acquisition, not as a property sale

The transfer of SCI shares between investors is too often treated with the lightness of an apartment sale, whereas legally it is akin to the acquisition of a company. The purchaser does not receive a cleared property, but enters a structure whose liabilities the purchaser assumes in proportion to the holding, with unlimited liability on personal assets. Three errors account for most of the litigation: neglecting approval and exposing the transfer to nullity, setting the price on the gross value of the buildings without revaluation or account of the liabilities, and omitting an asset and liability warranty calibrated to the real risks of an asset-holding SCI.

The position of this guide is clear: a transfer of SCI shares is not secured by a standard form, but by a prior audit and a tailor-made contractual architecture. Before signing, have the company's tax, letting and technical position audited, require an asset and liability warranty whose duration is aligned with the tax reassessment period, and back that warranty with escrow of a fraction of the price. It is this combination, and not mere trust between partners, that durably protects the incoming investor.

Frequently asked questions

Does the transfer of SCI shares between existing partners require approval?

It depends exclusively on the drafting of the articles of association. Article 1861 of the French Civil Code lays down the principle of approval by all partners, but allows the articles to adapt it. Some articles exempt transfers between partners already in the company from approval, others require it for any transfer in order to control rebalancing of power. The articles must therefore be read before any transaction, because a transfer made in breach of the approval clause is liable to be declared void.

What is the rate of registration duty on a sale of SCI shares?

The transfer of shares in a property-rich SCI is subject to registration duty of 5%, calculated on the transfer price or the real value of the shares. This duty must be paid when the deed is registered with the tax office, within one month of the transfer. It is added to the price of the shares and must be anticipated by the purchaser in the financing plan.

How is the price of the shares of an asset-holding SCI calculated?

The price is determined by the revalued net asset method: the current market value of the buildings is taken, the cash and other assets are added, then all liabilities are deducted, notably the outstanding principal on loans and partners' current accounts. The value of a share corresponds to those net assets divided by the total number of shares. Minority, illiquidity or latent tax discounts may be negotiated. In case of disagreement, Article 1843-4 of the French Civil Code allows recourse to an expert whose valuation is binding on the parties.

Is a liability warranty mandatory in a transfer of SCI shares?

No, the asset and liability warranty is not mandatory, but it is strongly recommended. Since the purchaser takes over the company with its liabilities, including latent ones, the purchaser is exposed to seeing debts of earlier origin appear after the transfer: tax reassessment, concealed unpaid rent, co-ownership arrears. Without a contractual warranty, the purchaser has only ordinary-law remedies, often difficult to enforce. The warranty must cover as a priority the tax, tenancy and technical risks specific to the SCI.

What does the partner's current account cover in a transfer of shares?

The partner's current account corresponds to sums advanced by a partner to the company, for example to finance works or to cover a cash shortfall. It constitutes a personal claim against the SCI, distinct from the capital, and is therefore not transferred automatically with the shares. The transfer deed must deal with this point expressly: either the transferor is repaid before the transfer, or the transferor assigns the claim to the purchaser for a separate price. Omitting this question generates frequent disputes.

How long does the procedure for transferring SCI shares take?

The duration depends on the approval regime. Where approval is required, the period for notifying the partners and the response period set by the articles or by law must be respected, which can amount to several weeks. To this are added the time for the prior audit, the negotiation of the asset and liability warranty, then the enforceability formalities: service or deposit with the company, tax registration within the month, and the amending entry at the court registry. A secured transaction generally spreads over several weeks to a few months depending on the complexity of the portfolio.

What is the benefit of escrow in a transfer of SCI shares?

Escrow consists of depositing all or part of the price with a trusted third party, often the drafter of the deed, who releases the funds only when specified conditions are met. It first ensures the successful completion of the transaction, by making payment of the price subject to obtaining approval and completing the formalities. It can then serve as a retention as security for the duration of the asset and liability warranty, so that the funds are applied as a priority to payment of liabilities that come to light. This mechanism protects the purchaser against a transferor who has become insolvent.