SCPI held in joint ownership: management, deadlocks and exit between co-investors

Holding SCPI units jointly with others is nothing unusual. An unmarried couple investing together, heirs who inherit a portfolio of units in an estate, two business partners placing their personal cash: in all these cases, the units belong to a joint ownership (indivision). As long as everyone gets along, the mechanics seem simple. The problem arises the day one wants to sell, another wants to keep, and a third no longer responds. This article sets out the rules governing the management of SCPI units held in joint ownership, the deadlocks that most often arise, the value of a joint ownership agreement (convention d'indivision) for SCPI units in preventing them, and the practical ways of exiting the joint ownership.

How joint ownership of SCPI units arises

An SCPI (société civile de placement immobilier, a French property investment partnership) is a company approved by the AMF (the French financial markets authority), governed by Articles L. 214-86 et seq. of the French Monetary and Financial Code, the purpose of which is the acquisition and management of a portfolio of rental property. The investor does not hold property: he or she holds company units, which are legally movable assets.

Joint ownership of these units arises from several very different situations.

• Joint subscription: two persons, often a couple in a civil partnership (PACS) or cohabiting, subscribe for units together and each contributes a share of the price. They become co-owners in proportion to their respective funding.
• Succession: on the death of the subscriber, his or her units fall into the estate's joint ownership between the heirs, until partition.
• Dissolution of a matrimonial property regime: after divorce, undivided community units remain in post-community joint ownership.
• Gift to several persons: a parent gives units to his or her children in joint ownership.

The distinction from dismemberment of ownership is essential. Where a usufructuary and a bare owner share units, there is no joint ownership but dismemberment: each has a right of a different nature over the same asset. Joint ownership, by contrast, involves rights of the same nature (full ownership) that several persons exercise concurrently over the whole, each for a share. Confusing the two leads to applying the wrong rules of management and exit. The mechanics specific to SCPI units under temporary dismemberment, and the risks they pose for the investor, are set out in our dedicated article.

The management rules for SCPI units held in joint ownership

Two bodies of rules overlap: the ordinary law of joint ownership (Articles 815 et seq. of the French Civil Code) and company law (Article 1844 of the French Civil Code), to which are added the SCPI's articles of association. This overlap is the first source of complexity.

Acts of preservation, administration and disposal

The Civil Code grades decisions according to their seriousness.

Acts of preservation, those intended to safeguard the asset, may be performed alone by any joint owner (Article 815-2 of the French Civil Code). Collecting a dividend at risk of becoming time-barred, or interrupting a limitation period, falls into this category.

Acts of administration, day-to-day management, require a two-thirds majority of the rights in joint ownership since the Act of 23 June 2006. Article 815-3 of the French Civil Code provides:

The joint owner or owners holding at least two thirds of the rights in joint ownership may, by that majority (…) perform the acts of administration relating to the jointly owned property.

Note that this majority is calculated by shares, not by number of persons. Two joint owners each holding one third cannot impose a decision on the one holding the other third, since they do not reach two thirds.

Acts of disposal, foremost among them the sale of the units, require unanimity in principle. Selling the portfolio of SCPI units therefore requires the agreement of all the joint owners. This is precisely where most disputes crystallise.

The joint representative and the management company

Company law adds a constraint that many investors discover too late. Article 1844, paragraph 2 of the French Civil Code provides that the co-owners of an undivided unit are represented by a single representative, chosen from among the joint owners or from outside them. Where there is disagreement on that choice, the representative is appointed by the court at the request of the most diligent joint owner.

In practice, the SCPI's management company has only one point of contact for the exercise of the rights attached to SCPI units held in joint ownership: voting at meetings, receipt of notices to attend, exercise of the right to information. It will not arbitrate internal tensions between joint owners; it applies its articles of association and requires the appointment of a single representative. Until one is appointed, the joint ownership may find itself without a vote at general meetings.

The distribution of income follows a similar logic. The property income and any capital gains distributed by the SCPI belong to the joint ownership and are shared between the joint owners in proportion to their shares. Each joint owner declares his or her share of the income for tax purposes, irrespective of who actually received it. The management company often pays into a single account, which then requires a rigorous allocation between those concerned in order to avoid accounting disputes.

Frequent deadlocks between joint owners

Joint ownership is by nature an unstable regime. The Civil Code itself acknowledges this: no one may be compelled to remain in joint ownership (Article 815). Several situations recur regularly in disputes concerning SCPI units.

Disagreement over resale. One of the joint owners needs liquidity and wishes to sell, while the other wishes to keep an investment that distributes regularly. As a sale is an act of disposal subject to unanimity, a single refusal is enough to freeze everything. The joint owner in a hurry finds himself or herself trapped in an asset that cannot be sold.

The silent or untraceable joint owner. In a joint ownership arising on succession between several heirs, it is not unusual for a co-heir to be living abroad, to stop responding, or to refuse any decision on principle. Without his or her agreement or signature, no act of disposal is possible, and even the appointment of the joint representative seizes up.

Dispute over the allocation of income and costs. A joint owner collects the distributions without paying them over, or alone funds certain costs and then claims compensation. Article 815-13 of the French Civil Code governs these accounts between joint owners: the joint owner who has improved or preserved the asset is entitled to compensation, and the one who has had exclusive enjoyment of the asset may owe an occupation indemnity, but these settlements most often take place at the time of partition, long after the events. The treatment of expenses incurred by a joint owner acting alone is examined in our article on works carried out without the agreement of the other joint owners.

Paralysis of meetings. Without agreement on the joint representative, the joint ownership no longer votes. In SCPIs where the meetings decide on the investment strategy, the distribution or a change of management company, this forced abstention may work against the interests of the joint owners.

The particular case of the indebted joint owner. A personal creditor of a joint owner cannot directly seize the jointly owned units, but may, on the basis of Article 815-17 of the French Civil Code, bring about partition in the name of the debtor in order to be paid out of the debtor's share. The other joint owners then undergo an exit they did not choose. The conditions under which a joint owner's creditor may bring about partition are detailed in our analysis of that remedy.

In the face of these risks, two approaches coexist: organising in advance by means of an agreement, or resolving matters afterwards through exit from the joint ownership.

The joint ownership agreement for SCPI units: organising to avoid deadlock

The Civil Code provides a tool that is too often overlooked: the joint ownership agreement, governed by Articles 1873-1 to 1873-18. It allows the joint owners to set the rules for managing their units themselves, rather than being subject to a statutory regime regarded as impractical.

What the agreement can provide for

A well-drafted joint ownership agreement for SCPI units deals with several key points.

• The appointment of a manager of the joint ownership (Article 1873-5 of the French Civil Code), with a precise definition of the manager's powers. That manager will naturally be the single representative vis-à-vis the management company, which immediately resolves the question of representation at meetings.
• The arrangements for allocating the income distributed by the SCPI, the time limits for paying it over and the method of substantiation, to head off accounting disputes.
• The decision-making rules, in particular on the choice between keeping and selling, possibly with enhanced majorities or specific thresholds.
• The regulation of transfers of units between joint owners, for example a contractual right of preference allowing a joint owner to buy the departing owner's share in priority.

One major advantage deserves emphasis: Article 1873-3 of the French Civil Code allows an agreement to be concluded for a fixed term, up to a limit of five years, renewable. During that period, no joint owner may bring about partition, save for good cause assessed by the court. The agreement therefore temporarily neutralises the unilateral right of exit, which stabilises the investment. Conversely, an agreement of indefinite duration leaves each joint owner free to request partition at any time, provided that he or she does not act in bad faith or at an inopportune moment.

Formalities and limits

The agreement must be in writing and specify the assets to which it relates and the share of each (Article 1873-2 of the French Civil Code). An important point for SCPIs: as the units are movable assets, the agreement does not have to be registered with the land registry, unlike a joint ownership relating to real property. A carefully drafted private agreement (acte sous seing privé) is sufficient, although the involvement of a legal professional secures the drafting.

The agreement does, however, have limits. It cannot permanently deprive a joint owner of the right of exit beyond the statutory periods, nor displace mandatory rules. It binds only the signatories: an heir who joins the joint ownership later is not automatically bound. Hence the value of drafting it from the outset, at the time of the joint subscription, rather than in the urgency of a dispute that has already set in.

Exiting the joint ownership: ways of exit for the units

Where the disagreement is complete or a joint owner simply wishes to recover his or her investment, several mechanisms allow exit from the joint ownership of the units. They differ in cost, timing and consequences.

Transfer of one's share and the pre-emption right

A joint owner may transfer his or her undivided share alone to a third party, without needing the agreement of the others, since he or she has a right of his or her own. But this freedom is regulated by the pre-emption right under Articles 815-14 et seq. of the French Civil Code. Before selling to an outsider, the joint owner must notify the other joint owners of the price and conditions of the proposed transfer. Each then has one month in which to declare that he or she exercises the pre-emption right and takes the place of the purchaser.

This mechanism protects the joint ownership against the entry of an unwelcome third party. In practice, for SCPI units, finding a purchaser interested in a mere undivided share, less liquid and less clear than a unit in full ownership, often proves difficult. An internal transfer, to another joint owner, remains the most realistic route.

Buy-out between joint owners and withdrawal from the SCPI

The most common solution is for one or more joint owners to buy out the departing owner's share. The transaction ends the joint ownership for that owner, without affecting the others. The price is negotiated by reference to the withdrawal value or the realisation value of the units, as communicated by the management company.

A distinction must be drawn here according to the type of SCPI. In a variable-capital SCPI, the member may request withdrawal of his or her units, the management company making the reimbursement when subscriptions offset the withdrawal. But this withdrawal relates to the units held by the joint ownership: it is an act of disposal that requires the agreement of all. A single joint owner cannot unilaterally withdraw the whole. In a fixed-capital SCPI, exit is by transfer on the secondary market organised by the management company, with the same requirement of unanimity to sell all the jointly owned units.

Amicable or judicial partition

Partition is the ordinary-law method of exit. Each joint owner receives a lot corresponding to his or her share, and the joint ownership ceases. Partition may be amicable where all agree: the units are then divided, or sold and the price shared. This is the quickest and least costly route.

In the event of deadlock, partition becomes judicial. Any joint owner may apply to the tribunal judiciaire (the judicial court) on the basis of Article 815 of the French Civil Code, since no one may be compelled to remain in joint ownership. The judge may order partition in kind where the units can conveniently be divided, or, where that is not possible, sale by auction (licitation), with the price shared. Partition has declaratory effect: under Article 883 of the French Civil Code, each co-partitioner is deemed to have always been the sole owner of the assets comprised in his or her lot, as if the joint ownership had never existed.

Since the Act of 12 May 2009, Article 815-5-1 of the French Civil Code opens an intermediate route: joint owners holding at least two thirds of the rights in joint ownership may, before a notary, express their intention to sell the jointly owned asset and then, in the event of opposition or silence from the others, have the sale authorised by the court. This mechanism makes it possible to unblock a joint ownership in which a minority opposes any transfer, but it does not apply to a joint ownership arising from a dismemberment and requires a regulated procedure. It nevertheless provides a useful lever against a minority joint owner who blocks on principle.

Taxation and points of caution

Exit from the joint ownership has tax consequences that must be anticipated. The transfer of SCPI units falls under the property capital gains regime, with an allowance for length of ownership and an exemption after a certain number of years of ownership. Each joint owner is taxed on the gain relating to his or her share.

Partition, for its part, gives rise to partition duty (droit de partage), the rate of which is set by the French General Tax Code and applies to the net assets partitioned. The buy-out of a departing owner's share by a joint owner may, depending on its characterisation, fall under either the transfer regime or partition with an equalisation payment (soulte), with different tax treatment. A transaction that is wrongly characterised can be costly: the assistance of a professional makes it possible to choose the least expensive route.

A final point of caution concerns holding on credit. Where the units were acquired with a loan taken out jointly, the exit of one of the joint owners does not automatically release him or her as regards the bank. Release from joint liability on the loan must be obtained, which the institution grants only after examining the solvency of the one who remains. Neglecting this point amounts to leaving the joint ownership while remaining liable for the debt.

Conclusion

Joint ownership of SCPI units combines two demanding regimes: that of joint ownership, where unanimity governs sale, and that of companies, where a single representative must represent all the joint owners. This double constraint turns the slightest disagreement into a lasting deadlock, all the more so as the real liquidity of an undivided share is low.

The conclusion that emerges is clear: joint ownership should never be endured, it should be organised. A joint ownership agreement drafted at subscription, appointing a manager, regulating the allocation of income and framing transfers by a right of preference, avoids most later disputes. Failing that, exit will be settled at a high price, by judicial partition or sale by auction, in a climate of conflict.

Before any joint subscription for SCPI units, or as soon as a joint ownership on succession opens, have a suitable joint ownership agreement drawn up and have the intended route of exit precisely characterised, because a badly structured buy-out and a loan without release from joint liability can cost more than the investment earns.

Frequently asked questions

Can SCPI units held in joint ownership be sold without the agreement of all? No. The sale of all the jointly owned units is an act of disposal that requires the unanimity of the joint owners. A single joint owner may, however, transfer his or her own share to a third party, subject to the pre-emption right of the others provided for by Article 815-14 of the French Civil Code. Since the Act of 12 May 2009, a two-thirds majority may also have the sale authorised by the court under the procedure in Article 815-5-1.

Who votes at the SCPI's general meetings when the units are held in joint ownership? A single representative, appointed from among the joint owners or from outside them, in application of Article 1844, paragraph 2 of the French Civil Code. The management company accepts only one representative. Where there is disagreement on that choice, the representative is appointed by the judge at the request of the most diligent joint owner.

What is a joint ownership agreement used for in respect of SCPI units? It allows the joint owners to set their own rules of management: appointment of a manager, allocation of income, regulation of transfers, decision-making majorities. Governed by Articles 1873-1 et seq. of the French Civil Code, it may be concluded for a fixed term of five years, renewable, which prevents any request for partition during that period, save for good cause.

Can a joint owner force an exit from the joint ownership? Yes. Article 815 of the French Civil Code provides that no one may be compelled to remain in joint ownership and that partition may always be sought. Failing amicable agreement, the joint owner applies to the tribunal judiciaire, which orders partition in kind or, where that is not possible, sale by auction (licitation) with the price shared.

Must a joint ownership agreement relating to SCPI units be registered? No. SCPI units are movable assets, so the agreement does not have to be registered with the land registry, unlike a joint ownership relating to real property. A written document specifying the assets concerned and the share of each is sufficient, in accordance with Article 1873-2 of the French Civil Code.

How is exit from the joint ownership of SCPI units taxed? The transfer of units falls under the property capital gains regime, with an allowance for length of ownership. Partition gives rise to partition duty assessed on the net assets partitioned. The buy-out of a share by a joint owner may be characterised as a transfer or as a partition with an equalisation payment, with distinct tax consequences that must be weighed before the transaction.

What happens if a joint owner is untraceable or no longer responds? No act of disposal can be completed without that owner, and even the appointment of the joint representative is blocked. The solution lies in legal action: judicial appointment of a representative, judicial authorisation to perform an act on the basis of Article 815-5 of the French Civil Code, or an application for partition. These procedures lengthen the timescale, which argues for anticipating the problem with a joint ownership agreement from the outset.