Do you own a plot of land that you do not wish to sell but would like to generate income from? The building lease in France is a legal mechanism that is still too little known, allowing the use of a plot of land to be granted to a third party so that they can erect a construction on it, without the owner ever losing ownership of the land. Governed by the Construction and Housing Code, this original contract combines the advantages of a lease with those of the division of property rights. This article explains how it works, its tax consequences, and the essential precautions to take before entering into one.
In summary
- A building lease is a contract by which a landowner (the lessor) grants a tenant a real property right, for a term of between 18 and 99 years, in exchange for the construction of one or more buildings.
- The rent, known as the canon, may be paid in money, in kind (by handing over constructions), or according to a mixed formula, and benefits from a specific tax regime.
- At the expiry of the lease, the constructions in principle revert free of charge to the landowner, unless a clause provides otherwise, granting the tenant compensation.
- This arrangement allows the lessor to enhance the value of a plot of land without selling it and to eventually recover a built property, while the tenant gains access to land without bearing the cost of acquiring it.
Definition and duration of the building lease
A contract that creates a real property right
The building lease differs from an ordinary lease in its legal nature: it grants the tenant a genuine real property right over the land, rather than a mere personal right of enjoyment. In practice, the landowner (the lessor) authorises the tenant to occupy and build on their land, with the tenant being responsible for erecting constructions and maintaining them in good condition throughout the term of the contract. This mechanism is governed by Articles L251-1 et seq. of the Construction and Housing Code, resulting from the law of 16 December 1964.
This real right is of major interest to the tenant: it can be transferred, contributed to a company, or even mortgaged, making it a genuine financing tool for construction operations.
A legal term of between 18 and 99 years
Article L251-1 of the Construction and Housing Code imposes a minimum term of 18 years and a maximum term of 99 years. This wide range allows the contract to be adapted to very different projects: a short lease for a commercial operation, or a very long lease for a collective housing project or a public facility. Below 18 years, the contract cannot be classified as a building lease; it would then fall under a different legal regime, with different tax and property consequences.
The rent mechanism (canon)
A rent known as the "canon", taking various forms
The consideration paid by the tenant to the lessor has a specific name: the canon. Its great flexibility is one of the major advantages of the building lease, since the parties are free to choose between several payment arrangements.
Payment in cash
The canon may be paid in the form of a cash rent, periodic (annual, quarterly) or sometimes in a single payment as a lump sum. This rent may be fixed, indexed, or progressive depending on how the operation of the constructed property develops over time.
Payment in kind
Another frequent possibility is payment in kind, through the handover to the lessor, during the lease or at its end, of all or part of the constructions or premises erected. The landowner thus becomes, without spending a penny, the owner of built surfaces that they may dispose of freely (for housing, letting, or resale).
Mixed formula
Finally, the parties may combine both approaches: a modest cash rent during the term of the lease, supplemented by the handover of constructed premises at its expiry. This mixed formula makes it possible to balance the interests of the lessor, who receives a regular income while preparing to recover a built asset, and those of the tenant, who limits their initial cash outlay.
The fate of the constructions at the end of the lease
Upon expiry of the building lease (bail à construction), the legal principle is clear: the constructions erected by the lessee become the property of the lessor, without compensation. This mechanism of free accession constitutes one of the major benefits of the arrangement for the landowner, who ultimately recovers a complete property without having had to finance the construction.
This principle is not, however, a matter of public policy: the contract may provide for a clause to the contrary, for example the payment of compensation to the lessee corresponding to the residual value of the constructions, or conversely the demolition of the buildings before the land is returned. This is why the precise drafting of this clause is essential from the signing of the contract, well before the lease's expiry date.
The advantages for the lessor (landowner)
For the owner of a plot of land, the building lease offers several asset-related advantages that are worth knowing before considering an outright sale.
- Enhancing the value of land without selling it: the lessor retains ownership of the land throughout the contract, which preserves their land assets over the long term.
- Receiving a regular income: the ground rent (canon), paid in cash, provides a stable cash flow, often more predictable than a traditional rental operation.
- Recovering a built property at the end of the lease: at the end of the lease, the owner gets back a built-on plot, enhanced by constructions financed and maintained by the lessee over decades.
Before entering into this type of arrangement, it is strongly advisable to obtain a free property valuation of the plot concerned, in order to negotiate ground rent terms consistent with its actual value and its building potential.
The advantages for the lessee
On the lessee's side, the building lease addresses a common issue for developers, investors or companies: obtaining land without bearing its acquisition cost, which is often very high in high-demand areas.
- Access to land without purchase: the lessee avoids tying up significant capital in buying land, and can focus their financing on the construction itself.
- A transferable and mortgageable real right: unlike a simple rental lease, the lessee's right can be sold, transferred or pledged as security with a bank to finance the project.
- Long-term operation: the term of the lease, which can run up to 99 years, secures the economic operation of the built property over the very long term.
Taxation of the building lease
The tax regime applicable to the building lease is specific and deserves particular attention, both for the lessor and for the lessee.
Taxation of rent received by the lessor
Where the lessor is an individual, the rent and benefits of any kind received as ground rent are taxed under the category of property income (revenus fonciers), in accordance with Article 33 bis of the French General Tax Code (Code général des impôts). Where the ground rent is paid in kind, through the free transfer of constructions at the end of the lease, the value of these constructions, assessed at their cost price, also constitutes taxable property income in the year they are transferred. A mitigating measure exists, however: the lessor may request to spread this taxation over a period of 15 years (the year of allocation and the following 14 years), which avoids a sudden tax charge in a single year.
VAT and other taxes
Depending on the nature of the transactions and the status of the parties (whether the lessor is subject to VAT or not, building land, professional or personal activity), the building lease may also have consequences in terms of property VAT, registration duties or property tax. This technical point systematically warrants support from a notary or a tax lawyer, as arrangements can vary considerably from one situation to another.
Precautions when drafting the contract
As the building lease commits the parties for a very long period, its drafting must leave nothing to chance. Several points deserve particular attention:
- The precise definition of the constructions expected (nature, surface area, use), in order to avoid any dispute over the lessee's compliance with their commitments.
- The exact terms of the ground rent (amount, indexation, frequency, possible portion paid in kind) and the consequences of non-payment.
- The fate of the constructions at the end of the lease: free accession, compensation, or an obligation to demolish, a point that must be negotiated beforehand and not discovered upon expiry.
- The conditions for the transfer of the real right by the lessee, particularly if the lessor wishes to regulate or approve successive transfers.
- The obligations regarding maintenance and insurance of the constructions throughout the term of the lease.
Given the technical nature of this arrangement, it is recommended to seek the assistance of a local Capifrance estate agent, in addition to a notaire, in order to secure the structuring of the deal and verify the project's consistency with the local market.
Typical use cases
The building lease is not a tool reserved for large property groups, even though it remains mainly used by certain specialised players.
- Local authorities use it to make public land available to private operators, while retaining control over the land and ultimately recovering facilities or housing.
- Property companies and institutional investors make use of it to develop commercial or office schemes without tying up capital in the purchase of the land.
- Private landowners wishing to pass on an enhanced-value asset to their heirs may also find it of interest: keeping a family plot of land while receiving an income, in order to subsequently pass it on built and income-generating.
If, on the other hand, you are considering a conventional sale of land or a built property, you can now browse our property listings to compare the prices in your area.
Conclusion
The building lease remains a legal tool little known to the general public, even though it offers a relevant alternative to the outright sale of land. For the landowner, it makes it possible to retain control over the land while receiving an income and preparing for the eventual recovery of a built property. For the lessee, it provides access to land without tying up significant acquisition capital. However, its implementation requires rigorous contract drafting and professional support, given how structuring the legal and tax issues are over a term that can run up to 99 years.
FAQ
What is the difference between a building lease (bail à construction) and a long lease (bail emphytéotique)?
Both contracts grant a long-term real property right, but their purpose differs: the building lease requires the lessee to erect constructions, whereas the long lease has no such requirement and may simply organise the making available of land or an existing property. Their legal and tax regimes also present certain nuances, particularly regarding the minimum term and the fate of the property at the end of the contract.
Can a building lease be terminated before its term?
In principle, a building lease is entered into for a fixed term of between 18 and 99 years, and cannot be unilaterally terminated outside the cases provided for by law or the contract. Early termination remains possible in the event of agreement between the parties or serious failure by the lessee to meet its obligations, in particular failure to build or non-payment of the ground rent (canon). These scenarios must imperatively be anticipated in the contract's clauses.
Who pays the property tax (taxe foncière) during the term of the lease?
Unless otherwise stipulated, it is generally the lessee who bears the property tax during the term of the building lease, insofar as it is the one operating the built property. It is nevertheless recommended to explicitly specify this allocation in the contract, as it is not mandatorily set by law. This clause avoids any subsequent dispute between the lessor and the lessee.
Can the ground rent (canon) be revised during the lease?
Yes, the parties may provide for an indexation or periodic revision clause for the ground rent, for example based on a recognised economic index. This revision makes it possible to adapt the rent to changes in the market or inflation over a contractual term that may extend over several decades. In the absence of a specific clause, the initial amount in principle remains fixed for the entire term of the lease.
Is the building lease suitable for an individual who owns a simple plot of land?
Yes, this arrangement is not reserved for professionals: an individual owning a buildable plot of land can make use of it in order to receive a regular income while retaining ownership of the property, before passing it on, enhanced in value, to their heirs. This solution does, however, require suitable legal and tax guidance, given the length of the commitment and the complexity of the contract. Professional advice makes it possible to verify that this arrangement genuinely matches the owner's estate planning objectives.
Does a building lease need to be concluded by a notarial deed?
Yes, due to its nature as a real property right and its term, which is often longer than 12 years, the building lease (bail à construction) must be registered with the land registry office (service de la publicité foncière), which requires the involvement of a notarised deed. This formality ensures that the lessee's right is enforceable against third parties and legally secures the entire arrangement. It represents an important safeguard for both the lessor and the lessee.
Author
Frédéric Rémy – Director of Sales Performance
A real estate professional with several years of experience within the Capifrance network, I would like to share essential advice with you to help you successfully complete your property project with our advisors.
