You bought a new home off plan, for letting and for tax reasons, and its resale a few years later shows a heavy loss. Can the sale be cancelled on the ground that the price was overvalued or that the promised yield was not achieved? A ruling of the Paris Court of Appeal of 16 November 2018 gives a nuanced answer: the claim is not necessarily time-barred, but proof of overvaluation must be provided by a valuation report, and a loss on resale is not enough.
The facts
In 2006, Mr and Mrs Y. bought a flat off plan (vente en l’état futur d’achèvement, or VEFA) in LIMOGES, through a consultancy firm, for €175,600 including VAT. The aim was a buy-to-let investment under the “de Robien” tax scheme, which required the property to be let for at least nine years.
The flat was delivered in August 2008 and let at €600 per month. By 2013, the rent had to be lowered to €489 to find a new tenant. In 2017, the property was resold for €83,000.
In the meantime, in 2013, the buyers sued the developer, the consultancy firm and the bank: they sought cancellation of the sale and alleged a breach of the duty to advise.
The time limit for bringing a claim
The Paris regional court (tribunal de grande instance) held that the claim for nullity of the reservation contract was time-barred: the contract dated from May 2006 and the ordinary limitation period is five years (article 2224 of the French Civil Code).
The Court of Appeal was more favourable to the buyers on this point. The limitation period for a liability claim runs from the occurrence of the loss, or from the date on which the victim became aware of it. It was in December 2012, when they had their property valued, that Mr and Mrs Y. suspected a loss. Their liability claim was therefore not time-barred. The same reasoning applies to nullity based on mistake or fraud (dol), where time runs from the day they are discovered (article 1144 of the Civil Code).
On the merits, however, the Court did not find in their favour.
Proof of overvaluation
The buyers argued that they had been misled about the value of the flat when they signed. The Court recalled that a resale at a loss nine years later does not prove, in law, that the purchase price was excessive.
The reasoning deserves to be followed step by step, because it is the one any expert would apply:
- The comparison is made net of VAT. The price of €175,600 including VAT corresponds to €146,822 excluding VAT. In new-build, the VAT, deed costs and marketing costs are lost on resale unless a rise in the market makes up for them.
- The gap must be significant. The valuation produced gave a value of €134,083, a gap of around 9 % from the price excluding VAT. The Court held that figure to be “close” to the price paid.
To succeed, Mr and Mrs Y. would have had to show, by a valuation report established as at the date of the sale, a substantial gap between the price excluding VAT and market value. The law does not sanction a mistake as to value as such (article 1136 of the Civil Code); it sanctions deceit or false information, provided they are proved.
Location, the primary cause of the loss
The price paid was probably somewhat high. But the loss is explained above all by the local market. LIMOGES lost inhabitants from the 1970s onwards; the population then stabilised, with a slight recovery in the 2000s, before the 2008 crisis.
The consequence is a high vacancy rate: 8.9 % of homes vacant in 2015, close to the national average of 8.4 %, but in a city where the supply of new homes kept growing. By contrast, some coastal municipalities in Finistère have almost no vacancy: L’ÎLE-TUDY had at the same date a single vacant home out of 1,417, or 0.1 %.
A property deteriorates a little every year and maintenance grows with time. If the local market does not rise, or at least keep pace with inflation, the capital invested erodes. The operation only stays profitable if the yield allows it to be amortised within a few years.
The buyers criticised the developer for not informing them of the “unfavourable situation of the local property market, marked by an increase in the number of homes and a fall in the number of inhabitants”. The Court found no evidence of a contractual guarantee or of incorrect information from the developer. Everything alleged must be proved.
The tax advantage limited the loss
The flat, bought for €175,600, was let at €7,200 per year, a gross capitalisation rate of 4.10 %. The “de Robien recentré” scheme allowed a depreciation of 50 % of the price over nine years, or €87,800, that is €9,756 per year, to be deducted from rental income.
In the original commentary, I had treated that depreciation as a tax saving to obtain a theoretical yield close to 9.6 %. That is a simplification: the actual saving depends on the taxpayer’s marginal rate and social contributions. The order of magnitude remains telling, however, and the Court noted that “none of the documents produced establishes that they were unable to benefit from the expected tax advantages”.
Simplified balance of the operation:
- capital loss: €175,600 − €83,000 = €92,600;
- tax advantage, on the most favourable assumption: €87,800;
- gross rent received over nine years: around €59,500;
- to be deducted: management charges, loan interest and cash advanced when the monthly instalment exceeded the rent.
The operation comes close to breaking even for a property resold at 47 % of its price. That result is due solely to the tax leverage, whose strength explains why it supported schemes in towns with no real housing need. The later schemes, Scellier then Pinel, introduced zoning by market tension and reduced the advantage.
Securing an investment project
The ruling confirms a consistent line: the buyer is expected to inform themselves about the value of the property they are buying. Before signing, a few checks are within reach:
- demographics and housing vacancy in the municipality (INSEE data);
- the rents actually charged in the neighbourhood, not the projected rent;
- resale prices of schemes delivered a few years earlier in the same area;
- whether or not there is a contractual guarantee on the figures put forward.
A valuation report prepared before the purchase compares the price excluding VAT with market value and documents these points. It is also, if a dispute arises, the document the judges expect. In court, the buyer must prove misleading information, rental vacancy or loss of the tax advantage, and overvaluation of the property by a valuation report. Taken together, such evidence has enabled other investors to obtain judgment against the seller.
Further reading
The Property loss of value page describes the valuation of a loss linked to an overvalued price. Two related decisions are commented on this site: property tax incentives and the real value of the property bought and can a sale be cancelled because you were misled.
What next
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Neighbouring construction, hidden defect, wrong floor area, overpayment at purchase: the loss of value and the loss of enjoyment quantified with the method accepted by French courts.
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