Asset deal vs share deal in real estate: sell the building or the shares of the holding company?

The question arises on every acquisition of a real estate asset held by a company: should one acquire the building itself or the shares of the company that holds it? For a property investment company (foncière), a fund, a family office or the manager of an SCI (French property holding company, société civile immobilière) or an SPV, this choice is not just a matter of tax optimisation. It determines what the buyer actually receives: an isolated and cleansed asset, or a vehicle with its liabilities, its contracts and its history. This analysis sets out the legal decision grid, leaving tax considerations aside, between the sale of the building (asset deal) and the sale of the shares of the holding vehicle (share deal), focusing on the transfer of leases, the fate of security interests, administrative authorisations, hidden liabilities, the link with the asset and liability warranty and post-closing litigation.

Two legally distinct transactions

The asset deal and the share deal differ not only in their subject matter. They fall under structurally different legal regimes, which governs the whole line of reasoning.

In an asset deal, the buyer purchases the building directly. The transaction is a real estate sale subject to the heaviest formalities in French law: a deed executed in authentic form before a notary, registration with the land registry (service de la publicité foncière), clearance of pre-emption rights, and operation of the statutory warranties of sale. The buyer becomes the owner of an asset whose perimeter is precisely defined by the cadastral description and the chain of title. A sale of a building by a company therefore consists of taking the property out of the assets of the legal entity that held it.

In a share deal, the buyer purchases the securities of the company that holds the building: shares (parts sociales) of an SCI or an SARL, or shares (actions) of an SAS or an SPV. The building does not legally change hands. It remains the property of the company, of which only the shareholding is changed. The sale of SCI shares is an act of transfer of corporate rights, in principle under a private instrument, enforceable against the company and third parties in accordance with the forms specific to company law. The buyer receives here not an asset but a shell: the vehicle with its assets, but also the whole of its liabilities, known or latent.

This initial divide explains everything else. In an asset deal, the buyer controls the perimeter of what it buys. In a share deal, it inherits a legal continuity that it will have to audit and secure by contract.

The fate of leases and operating contracts

The question of the transfer of leases is often what decides between the two structures in rental portfolios.

In an asset deal: the statutory transfer of the lease

The sale of the building carries with it the transfer of the lease to the buyer, who becomes the landlord by operation of law. Article 1743 of the French Civil Code enshrines this continuity:

If a lease has been made by authentic instrument or has a certain date, the purchaser may not evict the farmer, the sharecropper or the tenant who holds a lease by authentic instrument or whose date is certain.

The buyer is therefore bound to respect the leases in progress provided they have a certain date. This transfer has the advantage of simplicity, but it calls for vigilance on several points. The security attached to the lease (security deposit, independent guarantee, surety) does not automatically follow the new landlord with the same degree of security; its transfer must be organised. Amendments, derogating agreements, rent-free periods and landlord commitments granted outside the lease (side letters) are enforceable against the new owner only if they have been disclosed and passed on to it. A rigorous lease audit, covering the actual rent roll and not only the signed lease, is essential. The allocation of lease risks between seller and buyer is set out in our article on the sale of an occupied building and the transfer of leases.

In addition, where commercial premises are sold on their own, the tenant has a right of first refusal under Article L145-46-1 of the French Commercial Code, compliance with which conditions the validity of the sale.

In a share deal: apparent contractual neutrality

In a share deal, the company remains the landlord. No lease is transferred, no amendment is required, and the rental relationship continues without interruption. This continuity is a major asset for portfolios containing many leases or contracts sensitive to a change of party.

This neutrality must nonetheless be checked contract by contract. Many of the company's contracts contain change of control clauses, which allow the counterparty to terminate or renegotiate if the shareholding changes. They are frequently found in financing agreements, leases with a strategic rent roll, property management contracts and insurance contracts. The share deal, reputed to be neutral, may thus trigger exit or renegotiation rights that an asset deal would not have activated. The audit must systematically list these clauses.

Security interests, mortgages and the fate of financing

The treatment of real security perfectly illustrates the logic of the two structures.

In an asset deal, the building must in principle be transferred free of any registered charge. The existence of a mortgage or of a lender's lien (privilège de prêteur de deniers) requires a release or a clearance, the mechanism for which is dealt with in the notarial deed and financed by the sale price held in escrow by the notary. The buyer receives an asset cleansed of its security interests, which provides strong certainty. The buyer's own financing, for its part, is put in place on the asset thus cleansed.

In a share deal, the security interests encumbering the building do not disappear: they remain registered on the property, since the owning company remains unchanged. The buyer therefore inherits the building with its mortgages and the debts they secure. Two consequences follow. First, the existing bank debt must be audited and its early repayment, or its maintenance, negotiated with the lender, often under a change of control clause. Second, pledges over shares granted as security for earlier financings must be released before closing to allow the transfer of the securities. The mapping of security interests, both in rem and personal, conditions the very feasibility of the transaction.

Authorisations, pre-emption and formalities

The regime of authorisations and pre-emption rights clearly separates the two routes.

Pre-emption rights

The asset deal, being a real estate transfer, triggers the operation of pre-emption rights. The urban pre-emption right of the municipality (droit de préemption urbain), provided for by Articles L211-1 et seq. and L213-1 of the French Town Planning Code, requires a declaration of intention to sell (déclaration d'intention d'aliéner) and a non-compressible examination period. To this are added, depending on the case, the commercial tenant's right of first refusal, the pre-emption right of the SAFER (rural land agency) in agricultural areas, or specific pre-emption rights. These clearances lengthen the timetable and introduce uncertainty as to completion.

The share deal in principle escapes these pre-emption rights, which concern real estate transfers and not sales of corporate rights. This is one of the legal arguments, and not only tax arguments, often put forward in favour of the share deal: speed and certainty of the timetable, without a declaration of intention to sell or prior clearance. This absence of pre-emption must nevertheless be checked against particular regimes that may apply to sales of control of predominantly real estate companies.

The corporate formalities of a share transfer

The sale of SCI shares is subject to its own constraints. Article 1861 of the French Civil Code makes the transfer of shares subject to the approval (agrément) of the partners, unless the articles of association provide otherwise, which requires checking the articles and, where applicable, organising the approval decision. Enforceability of the transfer against the company and third parties follows the forms provided for by the French Civil Code for civil companies, in particular service on the company or the deposit of an original at the registered office, followed by publication in the commercial and companies register. A defect in this chain of formalities weakens the enforceability of the transfer and is a classic source of litigation. On approval, price setting and enforceability formalities, see our analysis of the sale of SCI shares between investors.

Administrative authorisations and operation

Where the building supports a regulated activity (classified installation for the protection of the environment, commercial operating authorisation, establishment open to the public), the asset deal may require the transfer or renewal of administrative authorisations attached to the operator or to the site. The share deal, by keeping the holder legal entity in place, in principle preserves these authorisations, but also transfers the attached environmental obligations and liabilities, in particular as regards the restoration of an industrial site.

Hidden liabilities: the real divide

This is where the fundamental difference lies, and the most decisive legal reason for the choice.

In an asset deal, the buyer purchases an isolated asset. It does not take on the liabilities of the selling company. The company's tax, employment, environmental or litigation debts remain with the company. The buyer also benefits from the statutory warranties of sale: the latent defects warranty of Article 1641 of the French Civil Code and the warranty against eviction. The perimeter of the risk is confined to the building and its condition.

In a share deal, the buyer receives the whole company, with its full liabilities, including liabilities that are latent or unknown on the date of the sale. A tax reassessment covering prior years, an employment dispute in the making, a debt for works, a lease dispute, historic soil pollution, an administrative non-compliance: all of this stays in the company and now weighs on the buyer, without the statutory warranty on corporate rights offering effective protection. Under French law, the statutory warranty of the seller of shares is notoriously inadequate: it covers in principle only the existence and ownership of the securities sold, not the consistency or the real value of the underlying net assets. A defect affecting the building is not necessarily a defect affecting the shares. The remedies under ordinary law open to the buyer in the absence of a contractual clause are dealt with separately in our article on the sale of shares without a liability warranty.

This imbalance calls for two inseparable reflexes: thorough due diligence (legal, technical, environmental, planning, lease, employment and tax) and the negotiation of an asset and liability warranty commensurate with the risks identified.

The asset and liability warranty, the pivot of the share deal

The real estate asset and liability warranty is the instrument that restores, by contract, the balance that the share deal breaks by requiring the buyer to take over the company's liabilities.

Purpose and mechanics of the warranty

The asset and liability warranty (garantie d'actif-passif, GAP) is an agreement by which the seller undertakes to indemnify the buyer for any reduction in assets or increase in liabilities whose cause predates the sale but which is revealed afterwards. It rests on representations by the seller (representations and warranties) concerning the situation of the company: accounting regularity, tax and employment position, state of the leases and of the rent roll, absence of undeclared disputes, planning and environmental compliance of the building, existence and validity of security interests, absence of off-balance-sheet commitments. The falsity or inaccuracy of a representation gives rise to a right to compensation.

In real estate matters, the GAP must be calibrated to the risks specific to the asset: it includes specific representations on the rent roll, the validity of the leases, the works and technical compliance of the building, the diagnostics, the environmental situation of the site and the absence of construction disputes or of residual ten-year liability.

Negotiation parameters

The effectiveness of the warranty depends on its parameters, which are the subject of tight negotiation:

• the warranty cap, often expressed as a percentage of the price, which limits the seller's commitment
• the triggering threshold (de minimis and deductible), below which claims are not compensable
• the duration of the warranty, generally longer for tax and employment risks, aligned with the applicable limitation and reassessment periods
• the terms of enforcement: notification period, adversarial procedure, handling of third-party claims
• the guarantee of the warranty, that is, securing the seller's obligation itself

The guarantee of the warranty

A GAP is worth only as much as the solvency of its debtor. Where the seller is a structure due to be dissolved after the sale, or whose financial standing is uncertain (an SPV, a holding company emptied of its substance after distribution of the price), the warranty must be backed by security. The classic mechanisms are the escrow of a fraction of the price, a first-demand bank guarantee, or a guarantee from a parent company. This point is decisive for acquiring funds and family offices: a GAP with no guarantee against an insolvent seller is an illusory warranty. Conversely, the asset deal makes this question largely moot, since the buyer does not take on the liabilities.

Post-closing litigation

The chosen structure determines the shape of the litigation that may arise after completion of the transaction.

In an asset deal, post-closing litigation concentrates on the building: enforcement of the latent defects warranty, defects revealed, disputes with the transferred tenants, challenges to service charges or works, claims against builders on the basis of their liability. The perimeter of the dispute is confined and its legal basis is well mapped out by the law of real estate sales.

In a share deal, the litigation shifts to the asset and liability warranty. Disputes then concern the interpretation of the seller's representations, the assessment of the originating event and of its antecedence, compliance with notification periods and procedures, the calculation of compensation and the application of caps and deductibles. This litigation is technical, often lengthy, and frequently subject to an arbitration clause or a designated court. Controlling it depends on the quality of the drafting of the GAP upstream: an ambiguous representation, an imprecise enforcement procedure, a defective articulation between threshold, deductible and cap, are all weaknesses exploited at the litigation stage. The quality of the prior audit also plays a part: a risk identified in due diligence and built in as an exception to the warranty, or dealt with by a price adjustment or a specific indemnity mechanism, can no longer be invoked after closing.

The price revision clause, the earn-out or the deferred price add a layer of litigation specific to the share deal, absent from the asset deal, where the price is in principle final on signature of the authentic deed.

Building the decision grid

The choice between a real estate asset deal and share deal cannot be settled in the abstract. It results from a weighing of concrete legal criteria specific to each transaction.

The share deal is often the right choice where the asset is held in a dedicated and healthy vehicle, where the rental portfolio is dense and continuity of the leases is sought, where speed of the timetable and avoidance of pre-emption rights are priorities, and where the audit makes it possible to circumscribe the liabilities precisely. In return, it requires exhaustive due diligence and an asset and liability warranty that is soundly calibrated and guaranteed.

The asset deal is the right choice where the buyer wants an isolated asset cleansed of any liability, where the holding company is old, operational or carries poorly identified risks, where legal certainty of ownership takes precedence over speed of execution, and where the buyer prefers to rely on the statutory warranties of sale rather than on a negotiated contractual warranty. It has the advantage of a clear risk perimeter and of confined post-closing litigation.

For a property investment company, a fund or a family office, the decision should be taken at the end of the audit, not before. It is the due diligence that reveals whether the holding vehicle is healthy enough to justify a share deal, or whether the weight of latent liabilities requires a return to an asset acquisition. Before any final decision, have an adversarial mapping of employment liabilities and security interests prepared by an independent adviser, and enter into a share deal only if backed by an asset and liability warranty whose debtor's solvency is itself secured.

Frequently asked questions

What is the fundamental difference between an asset deal and a share deal in real estate?

In an asset deal, the buyer purchases the building itself, by notarial deed registered with the land registry, and does not take on the liabilities of the selling company. In a share deal, it purchases the shares of the company that holds the building and inherits the whole of the company's liabilities, known or latent. The first isolates the asset, the second transfers a complete shell. This difference in the perimeter of the risk governs the rest of the structure.

Does the sale of SCI shares transfer the existing leases?

No, and this is an advantage of the structure. In a sale of SCI shares, the company remains owner and landlord; the leases continue without transfer or amendment. Conversely, the sale of the building transfers the lease to the buyer under Article 1743 of the French Civil Code, provided the lease has a certain date. It is nevertheless necessary to check that there is no change of control clause in the company's contracts.

Do pre-emption rights apply to a share deal?

In principle no. The urban pre-emption right of Articles L211-1 and L213-1 of the French Town Planning Code, like the commercial tenant's right of first refusal under Article L145-46-1 of the French Commercial Code, concern real estate transfers, not sales of corporate rights. This is a legal argument in favour of the share deal, which secures the timetable. Particular regimes may nevertheless apply to certain sales of control of predominantly real estate companies.

Why is an asset and liability warranty essential in a share deal?

Because the statutory warranty of the seller of shares covers in principle only the existence and ownership of the securities, not the consistency of the underlying net assets. A defect affecting the building does not necessarily give rise to a remedy against the seller of the shares. The real estate asset and liability warranty restores this balance by requiring the seller to indemnify any reduction in assets or increase in liabilities whose cause predates the sale. Without it, the buyer alone bears the latent liabilities.

What is the guarantee of the warranty and why is it decisive?

It is the mechanism that secures the seller's indemnification obligation itself: escrow of part of the price, a first-demand bank guarantee, or a guarantee from a parent company. It is decisive where the seller is an SPV or a holding company due to distribute the price and then be dissolved. An asset and liability warranty granted by an insolvent debtor is an illusory warranty. Funds and family offices should make it a condition of their commitment.

Does the share deal avoid notarial formalities?

The sale of corporate rights can be carried out under a private instrument, without a notarial deed or land registration, unlike the sale of a building by a company, which requires an authentic deed. The sale of SCI shares nevertheless remains subject to its own corporate formalities: approval of the partners under Article 1861 of the French Civil Code unless otherwise provided, followed by enforceability formalities against the company and third parties. A defect in this chain weakens the enforceability of the transfer.

What risks does post-closing litigation concern depending on the structure?

In an asset deal, it concentrates on the building: latent defects, defects, transferred lease disputes, liability of builders. In a share deal, it shifts to the asset and liability warranty: interpretation of the seller's representations, antecedence of the originating event, compliance with notification periods, calculation of compensation within the limits of the cap and deductible. The quality of the due diligence and of the drafting of the warranty directly determines the scale of this litigation.