Security over a third party's assets (Art. 2325 Civil Code): is a mortgage granted by an SCI for the operator's debt a reliable lever for the lender?

The structure is commonplace in the financing of asset-holding SMEs: an operating company borrows, and an SCI (French property holding company, société civile immobilière) held by the same shareholders charges the operating premises as security. For the lender, a mortgage granted by an SCI has an immediate appeal: a tangible asset, often the only asset of value in the group, and a mechanism free of the disproportion litigation that undermines guarantees given by managers. The high level of business failures seen since the end of crisis support measures has mechanically increased the number of enforcements of these securities, and with them the number of challenges raised against the creditor at the property seizure stage. This guide examines security over a third party's assets (sûreté réelle pour autrui) under Article 2325 of the French Civil Code from the standpoint of the institutional creditor: what trading it off against a personal guarantee gains, what it costs in terms of the asset base, and above all what the point of weakness is that must be audited before any release of funds, namely whether the security complies with the SCI's corporate purpose and corporate interest.

What Article 2325 of the Civil Code enshrines, and what it leaves aside

Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests, which came into force on 1 January 2022, ended twenty years of uncertainty by writing security over a third party's assets into the French Civil Code.

A contractual real security may be created by the debtor or by a third party. Where it is created by a third party, the creditor has recourse only against the property charged as security. (Article 2325 of the French Civil Code)

The text endorses the solution reached by the Mixed Chamber of the Cour de cassation in December 2005: a person who charges an asset as security for another's debt gives no personal undertaking. It is not a surety. It is not a debtor. Its contribution is limited to the realisation value of the property charged.

The practical consequence is twofold and must be factored in from the start of the credit appraisal. On the one hand, no action for payment lies against the SCI that granted the security: if the auction price does not cover the claim, the balance remains the responsibility of the principal debtor alone, with no further recourse against the other assets of the SCI. On the other hand, since the SCI is not liable for a company debt within the meaning of Article 1857 of the French Civil Code, the shareholders' unlimited and several liability for company debts cannot be called on to make good the shortfall. The lender's exposure is therefore entirely tied to the market value of the property and its registration ranking.

The exact scope of the cross-reference to the law of suretyship

The second paragraph of Article 2325 makes Articles 2299, 2302 to 2305-1, 2308 to 2312 and 2314 of the French Civil Code applicable to security over a third party's assets. This cross-reference is selective, and the reading a contrario directly concerns the lender.

The list does not include Article 2297, on the required mention that an individual surety must add, or Article 2300, which penalises the manifest disproportion of an undertaking by reducing it to the amount up to which the surety could commit itself. The absence of any proportionality review is the central argument in favour of real security: the complaint most often raised against banks in suretyship litigation has, here, no object. The litigation between banks and sureties on that basis is analysed in our article on manifestly disproportionate suretyship.

A second filter, less often noticed: most of the provisions cross-referred to are reserved for individuals. The duty to warn in Article 2299, the annual information before 31 March in Article 2302, and the information on the first payment default in Article 2303 all concern an individual surety. Where the grantor is an SCI, these obligations do not weigh on the professional creditor, and the forfeitures that sanction them cannot be raised against it.

Two blocks remain fully applicable: the grantor's rights of recourse against the principal debtor after payment or enforcement (Articles 2305 and 2305-1, personal recourse and subrogated recourse, completed by Articles 2308 to 2312), and above all the benefit of subrogation in Article 2314. The latter is the lender's real point of operational attention, developed below.

Weighing a personal guarantee against security over a third party's assets

What the lender gains

Compared with a manager's suretyship, a mortgage granted by an SCI eliminates four classic sources of litigation: the formalities of the required mention, disproportion, the duty to warn and the annual information obligations. It also eliminates the protection that insolvency law reserves for individual guarantors. The halting of interest, the suspension of proceedings during the observation period and the benefit of the plan's time limits and reductions are for the benefit of individual co-obligors who have given a personal security or who have charged or assigned an asset as security. An SCI is a legal person: it does not benefit. The lender can therefore, in principle, begin enforcing the mortgage even though the operator is in insolvency proceedings and proceedings against it are paralysed.

This is a considerable difference in timing. Faced with a reorganisation that drags on, a creditor holding a mortgage granted by a third-party legal person has an immediate lever, whereas a creditor holding a manager's suretyship will often wait several financial years.

What the lender loses

The advantage is paid for in the asset base. Real security given by a manager, meaning the charging by the manager of a personal asset, or security granted by the asset-holding SCI, is worth only what the property is worth, at the date of enforcement and not at the date it was granted. Three parameters erode that value over time and must be modelled:

• ranking: prior registrations, lender's privilege (privilège de prêteur de deniers), statutory mortgages of the Treasury and of social security bodies that may be registered during the life of the facility;
• usability of the asset: the building's energy rating, compliance with the renovation obligations applicable to commercial property, co-ownership status, works voted but not yet called for payment;
• liquidity: operating premises configured for a single use and occupied by a defaulting tenant sell poorly at auction.

To this is added the limitation in Article 2325: no recourse against any remainder. A joint and several suretyship, even if reduced for disproportion, captures by contrast the whole of the surety's present and future estate.

Good practice: combine, do not substitute

In an operating finance facility backed by a property held in an SCI, the robust structure combines three tiers: a first-ranking mortgage granted by the SCI, a pledge of the SCI's shares (nantissement des parts sociales), which secures control of the owning entity and neutralises the risk of a covert transfer of control, and the manager's suretyship, calibrated to remain proportionate. Each security covers the blind spot of the other. The interplay between a mortgage registration and a pledge of SCI shares should be settled when the loan agreement is drafted, particularly with regard to the approval clauses in the articles of association, which determine whether the pledge is effective. The advantage of pledging the holding company rather than mortgaging the property is examined in our article on pledging SCI shares.

The breaking point: the manager's powers, the corporate purpose and the SCI's corporate interest

This is where the real reliability of the structure is decided. Nearly all litigation seeking the nullity of a mortgage granted by an SCI crystallises around two cumulative grounds, raised at the time of the property seizure, that is, at the worst moment for the lender.

Article 1849 of the Civil Code does not protect a third party in good faith

In commercial companies, the company is bound by the acts of the manager even where they exceed the corporate purpose, unless it is proved that the third party knew or could not have been unaware of the excess. The regime for the société civile is the opposite. Article 1849 of the French Civil Code provides that, in dealings with third parties, the manager binds the company by acts falling within the corporate purpose. An excess of the corporate purpose is not cured by the good faith of the counterparty.

Yet the statutory purpose of a standard SCI, acquisition, administration and management of buildings, does not of itself authorise charging a company asset as security for a third party's debt, even where that third party is the group's operating company. The absence of an express provision in the articles is the first ground for annulment. A lender that has not read the articles as far as the purpose clause bears the whole risk.

The requirement of compliance with the corporate interest

An enabling clause in the articles is not enough. The courts make the validity of security granted by a société civile for a third party's debt subject to its compliance with the grantor's corporate interest. The test is substantive, not formal: the question asked is that of the real consideration obtained by the SCI and of the risk that the undertaking places on its very existence.

The complaint is formidable where the mortgaged property is the SCI's only asset and the amount secured approaches or exceeds its market value. In that situation, enforcement of the security results in the economic disappearance of the société civile. Conflict with the SCI's corporate interest (intérêt social) is then hard to rule out, even with a perfectly drafted purpose clause.

What constitutes consideration, and what does not

The mere identity of shareholders between the SCI and the operating company, or the existence of a de facto group, is not enough to establish corporate interest. The lender must document an identifiable economic flow for the benefit of the SCI. The following are regularly accepted as elements of consideration:

• the secured financing was used, directly or indirectly, for the acquisition, construction or renovation of the property owned by the SCI;
• the SCI derives most of its income from the commercial lease granted to the operator, so that the operator's continuity determines receipt of the rent;
• the secured facility refinances a debt of which the SCI was itself a co-debtor, or releases a prior security burdening the property;
• continuing the business preserves the rental value and market value of an asset configured for that use.

These elements are worth something only if they are recorded. Minutes of a meeting that merely authorise the manager to grant a mortgage, without setting out the economic logic of the transaction, are a weak defence document. Minutes that state the amount of the facility, its purpose, the lease in force, the annual rent and the share it represents in the SCI's income are, by contrast, serious evidence.

The limited effect of the shareholders' unanimity

Obtaining a unanimous decision of the shareholders is indispensable, but it does not cure the defect. The nullity arising from conflict with the corporate interest protects the company itself, and behind it its own creditors and its future shareholders. It may be raised by a court-appointed insolvency practitioner appointed in respect of the SCI, by a transferee of shares, or by the company under a new management. Unanimity reduces the litigation risk; it does not eliminate it.

Auditing the security before releasing the funds

Security over a third party's assets is made safe beforehand, never in litigation. The following steps are first-level checks and should be a condition of making the funds available, not follow it.

On the grantor:

• up-to-date articles of association, with a purpose clause expressly covering the power to grant real security, including as security for the commitments of third parties;
• verification of the company's term and, where applicable, of its regular extension, an SCI whose term has not been extended being dissolved by operation of law;
• Kbis extract, identity of the manager in office, extent of the manager's powers under the articles, absence of a monetary limit;
• unanimous collective decision, prior to the deed, reasoned in fact and in law as to the consideration obtained by the SCI;
• accounts for the last two financial years, equity, shareholders' current account, the company's own debt.

On the asset and on the debt:

• a recent mortgage statement excluding pending formalities, analysis of ranking and of registrations liable to take priority;
• title deed, absence of dismemberment of ownership or of joint ownership not cleared, co-ownership status and works voted;
• commercial lease in force, rent, expiry, termination clauses, and consistency between the term of the facility and that of the lease;
• energy performance certificate and the renovation constraints applicable to the asset, which determine its resale value;
• consistency between the amount secured, in principal, interest and ancillary sums, and the valuation of the property.

On the deed: a contractual mortgage can be granted only by notarial deed (Article 2409 of the French Civil Code), which gives the lender an enforceable title. The final effective date of the registration must be set by reference to the maturity of the facility plus the statutory period, and be tracked for renewal in the creditor's management systems. A registration that has expired is a security lost, with no possibility of restoring the ranking.

Insolvency proceedings and the suspect period: the two scenarios to model

The operator, as debtor, is in proceedings

The SCI that granted the security, a legal person, benefits neither from the suspension of proceedings, nor from the halting of interest, nor from the time limits of the plan. The lender therefore retains the ability to enforce the mortgage. It files its claim in the operator's insolvency within the time limits of Article L. 622-24 of the French Commercial Code, this filing remaining indispensable to preserving its rights against the principal debtor and, as a consequence, to the accessory nature of the security.

The SCI itself is drawn in

The unfavourable scenario is that of extension of the proceedings to the SCI for commingling of assets or sham, under Article L. 621-2 of the French Commercial Code. Disorderly intra-group flows, rents not invoiced, shareholder current accounts not repaid and the absence of a written lease feed that risk. The mortgage creditor then retains its ranking in the distribution, but loses control of the enforcement timetable.

The risk of nullity under the suspect period must also be assessed. If the SCI is placed in insolvency proceedings and the date of cessation of payments is moved back, a mortgage granted without consideration for the benefit of a third party is exposed to the nullities in Article L. 632-1 of the French Commercial Code, in particular as acts that are unbalanced or granted without consideration, and to the discretionary nullity in Article L. 632-2 where the creditor knew of the state of cessation of payments. The Paulian action (action paulienne) under Article 1341-2 of the French Civil Code completes this arsenal for the benefit of the SCI's own creditors. As the suspect period may go back as much as eighteen months before the opening judgment, a security taken late, when the business is faltering, is structurally fragile.

Enforcement and the pitfalls of Article 2314

Enforcement is carried out mainly by property seizure, on the basis of the notarial deed creating the security, provided the claim is liquid and due within the meaning of Article L. 111-2 of the French Code of Civil Enforcement Procedures. The payment order serving as a property seizure must name the third-party grantor in its capacity as owner of the property charged, and not as debtor. Judicial allocation of the property and the forfeiture clause (pacte commissoire) remain available, subject to the reservations in the French Civil Code, in particular the exclusion applicable to the main residence. The rules on registration of that instrument, its time limits and the risk of lapse are set out in our article on the payment order serving as a property seizure.

The real procedural trap lies elsewhere. Article 2314 of the French Civil Code, made applicable by Article 2325, discharges the guarantor to the extent of the harm suffered where subrogation into the creditor's rights can no longer take effect in its favour because of that creditor's act. The SCI that granted the security can therefore raise against the lender the culpable loss of another security: release of a pledge, failure to renew a registration, failure to take a security that was nonetheless stipulated in the loan agreement, abandonment of a surety. The creditor's internal discipline across its whole pool of securities thus becomes a condition of the effectiveness of the mortgage granted by the SCI. It should be noted, conversely, that the guarantor cannot criticise the creditor's choice of the way a security is enforced.

Finally, the SCI that suffers enforcement has a personal right of recourse and a subrogated right of recourse against the operator (Articles 2305 and 2305-1). That recourse is most often theoretical, but it feeds the challenge: the SCI will argue that the creditor, by enforcing against the property first, has emptied that recourse of its substance.

Conclusion: a powerful lever, provided it is audited as a corporate act

Security over a third party's assets is, on paper, the best security available to an institutional lender facing an SME group made up of a property company and an operating company: no disproportion, no information obligations where the grantor is a legal person, no protection arising from insolvency law, and a tangible asset. Its weakness is not in the law of security interests, it is in company law. A mortgage that is beyond reproach as regards land registration falls if the SCI's purpose clause did not authorise it, or if no economic consideration was documented for the benefit of the grantor.

The approach is therefore as follows: treat a mortgage granted by an SCI not as a notarial formality but as a corporate act in its own right, examined to the same standard as a transfer of control. Before any release of funds, require three documents and refuse to do without them: up-to-date articles of association containing an express clause allowing assets to be charged as security for the commitments of third parties, minutes of a unanimous meeting prior to the deed and reasoned as to the consideration obtained by the SCI, and a recent mortgage statement establishing the effective ranking. Failing that, the rational course is to reinforce the structure with a pledge of the SCI's shares and a personal guarantee from the manager, rather than resting the whole recovery on a security whose nullity will be argued on the day of the orientation hearing.

Frequently asked questions

Can an SCI validly mortgage its property to secure a loan to the operating company? Yes, Article 2325 of the French Civil Code expressly allows a third party to create a contractual real security. But validity requires two cumulative conditions specific to the law of sociétés civiles: that the act fall within the corporate purpose, Article 1849 of the French Civil Code not protecting a third party in good faith in the event of an excess, and that it comply with the SCI's corporate interest. An express clause in the articles and a unanimous decision of the shareholders reasoned on the economic consideration are the two documents to require.

Is security over a third party's assets subject to the proportionality review applied to suretyship? No. Article 2325 of the French Civil Code cross-refers exhaustively to Articles 2299, 2302 to 2305-1, 2308 to 2312 and 2314. Article 2300, which penalises the manifest disproportion of a suretyship given by an individual to a professional creditor, is not among them, nor is Article 2297 on the surety's required mention. A complaint of disproportion is therefore ineffective against a mortgage granted by an SCI.

Can the creditor pursue the SCI beyond the mortgaged property? No. Article 2325 of the French Civil Code states that, where the security is created by a third party, the creditor has recourse only against the property charged as security. The balance of the claim not covered by the auction price cannot be claimed from the SCI's other assets, nor from the shareholders under Article 1857 of the French Civil Code, the SCI not being the debtor of a company debt.

Does an SCI that granted the security benefit from the halt to proceedings when the operator is in reorganisation proceedings? No. The protective provisions of Book VI of the French Commercial Code on the suspension of proceedings, the halting of interest and the benefit of the plan's time limits concern individual co-obligors who have given a personal security or who have charged or assigned an asset as security. A société civile is a legal person and is excluded. The lender may begin the property seizure during the operator's observation period, provided it has filed its claim in its insolvency.

What elements establish the consideration justifying the security in terms of corporate interest? Identity of shareholders or membership of the same de facto group is not enough. The following are accepted: use of the secured facility to finance the SCI's property, dependence of the SCI's rental income on the continuity of the operating tenant, refinancing of a debt of which the SCI was a co-debtor, or release of a prior security. These elements must be stated in the minutes of the meeting and not reconstructed after the event.

Within what period can the SCI invoke the nullity of the mortgage? The period depends on the ground invoked. Lack of authority of the manager and conflict with the corporate interest are in principle subject to the ordinary five-year limitation period in Article 2224 of the French Civil Code, whereas a challenge to a company decision is subject to the specific period in Article 1844-14 of the French Civil Code. In practice, the challenge arises at the orientation hearing in the property seizure, several years after the security was created, which makes it necessary to keep the whole of the lending file.

Can a mortgage granted by an SCI be annulled under the suspect period? Yes, if the SCI itself is placed in insolvency proceedings. Article L. 632-1 of the French Commercial Code strikes down certain acts carried out since the date of cessation of payments, in particular acts without consideration and unbalanced contracts, and Article L. 632-2 provides for a discretionary nullity where the creditor knew of that state. As the date of cessation of payments may be moved back up to eighteen months before the opening judgment, a security taken late remains exposed.