France: Legal Considerations For Real Estate Lenders In France (1/4): French Banking Monopoly

This is the first of a series of four articles examining the legal considerations that non-French real estate lenders should examine when financing commercial real estate in France in a non-distressed context.

The considerations examined in this series of articles are those peculiar to France; those common to all countries (or at least all EU countries) are not examined, such as the rules stemming from EU directives or regulations pertaining to derivative contracts (EMIR), anti-money laundering KYC (know your customer) requirements, data privacy, Basel III and Solvency II prudential ratios, bail-in provisions and American extraterritorial laws (Dodd-Frank Act regarding derivatives, Foreign Account Tax Compliance Act (FATCA), Office of Foreign Assets Control (OFAC) sanctions...). 

This introductory article examines the French banking monopoly rules, which may be relevant to foreign lenders that are not licensed as credit institutions in the European Union. The three next articles examine, respectively, key structuring, drafting and execution (and post-closing) considerations.

The notion of "banking monopoly" refers to the prohibition saddling persons that are not licensed as credit institutions in France or another European Union country (or French sociétés de financement or insurers and certain other entities) from carrying out, in France and on a usual basis, "banking transactions" such as "credit transactions".

Credit transactions are defined at article L. 311-1 of the French Code monétaire et financier as: "any act whereby a person, acting in return for payment, makes, or promises to make, funds available to another person or issues, in the interest of the latter, a signatory undertaking such as a commercial paper aval, a suretyship or a guarantee. The finance lease, and in general all rental transactions with a purchase option, are assimilated into credit transactions." 

The acquisition of a participation in a loan that is not yet due (or, according to some authors, not in default) is also assimilated into a credit transaction between the assignor and the assignee.

The violation of this prohibition, set out in article L.511-5 of the French Code monétaire et financier as regards credit transactions, is an offence pursuant to article L.571-3 of the same code. Accomplices can also be prosecuted. The Cour de Cassation (France's Supreme Court), however, held that a contract entered in violation of this prohibition is nevertheless valid (though certain authors question whether this case law applies only where the offender is a foreign credit institution, or whether it applies to other entities as well). 

In order not to be in violation of the French banking monopoly, lenders who are not authorised to carry out banking transactions in France must either (1) avail themselves of one of the specific exceptions to the prohibition set out in the law, (2) make sure the transaction cannot be considered as being entered "on a usual basis" or (3) make sure their transactions are realised outside France.


The main exceptions available to professional lenders are:

  • subscribing (or purchasing) bonds, which may be secured by a mortgage; 
  • using a securitisation fund to acquire loan receivables or an ELTIF (European long term investment fund) to acquire the same or even grant loans.

Other exceptions less relevant to professional lenders are "deferred payment terms or advances in the normal course of [one's] business dealings", intra-group lending, direct minority shareholder loans (with a minimum 5% shareholding in case of a stock company), intercompany loans of less than two years granted by French stock companies and SARLs on an incidental basis to small or medium businesses with whom they have an economic link, and crowdfunding loans.


As a general rule, one carries out credit transactions on a usual basis as of the second credit transaction that he, she or it enters with a different borrower. In case of a lender having carried out credit transactions outside France and considering a single transaction inside France, it is not clear, however, if only credit transactions in France should be considered. 

In practice, we see this exclusion being relied on when an SPV is created (albeit often by a EU bank) for the specific purpose of a single credit transaction, such as a specific finance lease.


The law is not entirely clear on what it takes for a credit transaction to take place outside France and certain lenders will have different sensibilities about this topic.

According to the Cour de Cassation (20 February 1984), the offence of illegal exercise of the activity of a banker is a "complex offence that can be prosecuted and judged anywhere where has been accomplished one of the facts that characterise it", it being noted that the three key elements identified by case law in case of a loan are (i) where the sums are put at the disposal, (ii) where the documentation is signed and (iii) where the funds are repaid. 

In practice, in order to realise banking transactions in respect of French commercial real estate "outside France", one should either:

  • lend to a non-French parent company that on-lends to its French property-owning subsidiary, which may grant a mortgage (and other security interests) to its parent as security to the mirror loan, the parent granting to the main lender (among other security interests) a pledge over the mirror loan receivable (the downside with this structure is that it is not necessarily the most tax efficient because of the thin tax capitalisation rules briefly discussed in the second article of this series); 
  • purchase a participation in a loan granted to a property company by a EU credit institution located outside France (or a branch of a French credit institution located in another EU country), assuming the participation is only in risk (the new lender should not have to make available funds to the French borrower under a loan facility not yet fully drawn) and more generally that the transaction documentation is executed outside France and the participation price paid outside France;
  • invest by way of a sub-participation agreement with a lender of record (preferably located outside France in order to avoid debating whether a sub-participation agreement is a credit transaction or not). 

Notwithstanding the foregoing, one cannot fully exclude the risk of a court ruling that a transaction was realised in France after finding that it was arranged in France or because of some other contact with France, and some lenders are reluctant to take that residual risk. 

In our next article, which is probably the most key of the series, we will examine the legal considerations relevant to the structuring of a commercial real estate loan in France.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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