SCI’s and Tontine Clauses
Thousands of couples, including many foreign owners of French property, have used Sociétés Civiles Immobilières (SCIs) as a flexible way of buying and holding real estate. The owners hold shares in the company rather than owning the property in their own names.
The structure is particularly attractive for unmarried couples, those in a civil partnership and people buying property with others because it can simplify the management of jointly owned property, facilitate the gradual transfer of wealth to children and avoid some of the practical difficulties that arise when property is owned directly by several people.
Many have also relied on tontine clauses to ensure that, on the death of one partner, the survivor becomes the owner without the deceased's interest passing through the normal rules of succession.
Sometimes also described as a clause d'accroissement, a tontine provides that where two people acquire property together, the survivor is treated as having owned the relevant property or shares from the outset. The effect is therefore retroactive: when one party dies, the survivor is treated as having been the owner from the beginning.
For unmarried couples and PACS partners, who do not have the same automatic inheritance rights as married spouses, a tontine has long been regarded as an effective way of ensuring that the surviving partner acquires the property outside the normal rules of succession.
Now, however, France's highest civil court, the Cour de cassation, has ruled that a tontine clause covering all the shares in a two-person SCI is incompatible with the legal requirement that a civil company must be established by at least two people.
The Court went further than simply striking down the clause. It held that where the clause covers all the shares, it makes the SCI itself void because the retroactive effect of the clause means that the company is treated as having had only one shareholder from the outset.
The case arose from what initially appeared to be a fairly typical property arrangement.
In 2010, an unmarried couple established an SCI to purchase a residential property. Each owned half of the company's shares.
The SCI then leased the property to the couple, who lived there themselves.
The company's articles of association contained a tontine clause stating that, on the death of the first shareholder, the survivor would be deemed to have been the sole owner of all the shares since the company's creation.
Seven years later, the relationship broke down. One partner brought legal proceedings seeking both the dissolution of the SCI and a declaration that the tontine clause should be treated as ineffective.
The Rennes Court of Appeal considered that the SCI had been validly established because it had two shareholders when it was created. If one shareholder later died and the other became the sole shareholder, that would not invalidate the company. French law already provides a mechanism for dealing with a company whose shares subsequently come into one person's hands.
The Cour de cassation disagreed.
Its reasoning turned on the retroactive effect of the tontine. Ordinarily, if all the shares in a company later come into the hands of one shareholder, that does not mean the company was invalid when it was created. The change occurs during the company's life and can be dealt with under the Civil Code.
A tontine covering all the shares works differently. It treats the surviving shareholder as having owned all the shares from the moment the company was created.
The Court held that this conflicts with the Civil Code, which provides that a company must, except where the law provides otherwise, be established by two or more people.
Because the tontine applied to all the shares, the Court concluded that the SCI did not satisfy that requirement. The result was not simply that the tontine clause was ineffective: the SCI itself was void from the date of its incorporation.
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