Dation in payment (Article 1342-4 of the French Civil Code): discharging a debt against a real estate asset

Dation in payment (dation en paiement) recurs in transaction structures whenever liquidity is lacking. A landowner who refuses to sell his land for cash and prefers to take back units in the development. A bank or institutional creditor which, faced with a debtor with no resources left, prefers to take the building rather than start a real property seizure whose outcome and timetable are beyond its control. In both cases the mechanism is the same and fits in a single sentence of the Civil Code, but the exposure to risk differs radically depending on whether one stands on the side of the party handing over the asset or the party receiving it. This guide covers both uses, the conditions of formalisation and enforceability against third parties, and the point on which a file turns: the nullity incurred when the debtor is in difficulty.

The statutory basis: Article 1342-4 of the French Civil Code

Ordinance No. 2016-131 of 10 February 2016 reforming the law of contract, the general regime and the proof of obligations, which entered into force on 1 October 2016, enshrined dation in payment in Article 1342-4 of the French Civil Code:

“The creditor may agree to receive in payment something other than what is owed to him. He may also agree to partial payment. In both cases, the accessories of the obligation, such as security interests, are carried over to the new performance or maintained only if he expressly consents to it.”

Before this reform, dation in payment was inferred from former Article 1243 of the Civil Code, which prohibited forcing a creditor to receive something other than what is owed to him. The current text reverses the perspective: it expressly authorises the agreement and settles the fate of the accessories.

A payment, not a novation

The characterisation governs the whole regime. Dation in payment is a means of extinguishing an obligation by performance of something different from what was originally agreed, with the creditor's consent. It is neither a novation by change of subject matter, nor an assignment of a claim, nor a set-off. The original obligation is extinguished by payment; it is not replaced by a new obligation.

The distinction from novation is not theoretical. If the parties intend to create a new obligation to deliver a building, substituted for the obligation to pay a sum of money, they leave the scope of dation in payment and enter that of Articles 1329 et seq. of the Civil Code. The extinguishing effect is then immediate on the day of the agreement, and the creditor loses his original title even before having received the asset. In a dation in payment, by contrast, the debt subsists for as long as the transfer of ownership has not taken place.

The extinguishing effect requires the transfer of ownership

This is the operational rule to remember. In the case of dation in payment of real estate, the debt is extinguished on the day of the actual transfer of ownership, that is on signature of the notarial deed (acte authentique), and not on the day of the promise or protocol providing for it. Until the deed is executed, the creditor keeps his claim, his security and his means of enforcement. A protocol stipulating an immediate waiver of proceedings in exchange for a promise of a future dation in payment exposes the creditor to being left with no asset and no effective recourse.

A corollary of paragraph 2 of Article 1342-4: security interests do not survive extinction. If the dation in payment extinguishes the debt only in part, and the creditor intends to keep his security for the balance, he must expressly stipulate this in the deed. The same applies to suretyship: extinction of the principal debt releases the surety as an accessory consequence. A creditor who accepts a building in dation in payment without limiting the extinguishing effect automatically loses his recourse against the guarantors for the remainder.

A regime borrowed from sale

Dation in payment is a conveyance for consideration. It is accepted that it borrows largely from the regime of sale: warranty against eviction and warranty against latent defects borne by the party handing over the building, application of the mandatory technical diagnostics under Article L. 271-4 of the French Construction and Housing Code, payability of transfer duties on onerous transfers, and taxation of the capital gain in the hands of the transferor. From a tax standpoint, dation in payment is treated as a disposal: it is not a neutral means of extinguishing a debt.

This assimilation produces a perverse effect when the debtor is fragile. The statutory warranties owed by the transferor (eviction, latent defects) are worth something only if he is solvent. A creditor who receives a building from a debtor in difficulty acquires an asset whose warranty is, in practice, of no substance.

First use: land transferred in exchange for units in a development

This is the most widespread use in property development. The landowner does not wish to receive a price in cash, for tax reasons, for estate planning reasons or because of the yield expected. The developer, for its part, reduces its initial financing requirement. The agreement takes the form of a sale of the land whose price is paid, in whole or in part, by handing over units to be built in the scheme to be constructed.

The actual chronology of the structure

The standard structure separates two stages. In the first stage, the developer acquires ownership of the land, generally subject to conditions precedent: obtaining a building permit free of third-party challenge and of administrative withdrawal, financing and sometimes pre-sales. In the second stage, it delivers the agreed units, off-plan (en l'état futur d'achèvement) or after completion depending on the drafting adopted. The drafting of this condition and the calculation of the period for the permit to become unchallengeable are detailed in our article on land acquisition subject to a building permit free of challenge.

Between these two stages, the transferor's position objectively deteriorates. He is no longer the owner of the land. He has become the creditor of an obligation to deliver premises that do not yet exist, against a debtor whose balance sheet bears the entire risk of the operation: construction cost overruns, contractor failure, third-party challenges, delays in marketing. The transferor has swapped a tangible asset for a delivery claim.

The transferor's counterparty risk and the security to require

The trade-off turns on the quality of the security attached to the obligation to deliver. Several levers are combined:

• the special statutory mortgage of the vendor of real property (hypothèque légale spéciale du vendeur d'immeuble), which has replaced the vendor's lien (privilège de vendeur) since the entry into force of Ordinance No. 2021-1192 of 15 September 2021 reforming the law of security interests, and which ranks from the date of the deed provided that it is registered within two months;
• the vendor's action for rescission (action résolutoire), together with an express rescission clause in the event of non-delivery by a long-stop date, published at the land registry (service de la publicité foncière);
• a financial completion guarantee issued by a credit institution or an insurer, or an independent first-demand guarantee covering the value of the units owed;
• personal security from the developer's parent company where the operation is housed in a dedicated project company with no financial standing of its own;
• a delivery timetable with liquidated penalties and a substitution mechanism in the event of default by the operator.

The question of the application of the protected sector (secteur protégé) deserves a case-by-case analysis. Article L. 261-10 of the French Construction and Housing Code imposes the form of a sale of a building to be constructed, with a completion guarantee, on contracts transferring ownership of a building for residential use and involving an obligation on the purchaser to pay funds before completion. Whether the contribution of the land amounts to an advance payment is debated. Where the expected units are for residential use, prudence calls for contractually stipulating a completion guarantee rather than relying on the exclusion from the regime.

The tax trade-off is made before signature, not after

A dation in payment of land against premises constitutes a double transfer for consideration. Depending on the status of the parties and the nature of the property, it triggers transfer duties, taxation of the capital gain in the hands of the transferor and, where the operation falls within the scope of VAT on real estate, taxation of each of the crossed deliveries. A transferor who receives no cash may therefore find himself liable to a tax charge with no matching cash, which is the main reason these structures fail. The choice between an outright sale, a partial dation in payment with a cash balancing payment (soulte) calibrated to the tax charge, and a contribution to a company must be made before the promise is signed, on a quantified simulation validated by a tax adviser.

Second use: satisfying a creditor by handing over a building

The second use concerns institutional creditors, banks, landlords and suppliers holding a significant claim against a debtor whose cash position no longer allows repayment, but whose assets include a real estate asset.

The alternative is well known. Either the creditor starts a real property seizure, with a payment order constituting a seizure, a directions hearing (audience d'orientation), a forced sale or an authorised private sale, and proceedings to distribute the price. Or it negotiates the direct handing over of the building in payment. Dation in payment offers a saving of time, control over the attributed value and removal of the uncertainty of the auction. In return, it transfers to the creditor the whole of the risk on the asset: technical condition, letting situation, planning compliance, energy performance, arrears of co-ownership charges. The publication periods and the grounds of lapse that frame the originating act are set out in our article on the payment order constituting a real property seizure.

Not to be confused: voluntary dation in payment and forfeiture clause

The distinction is essential and often missed. Dation in payment is a payment agreement concluded at the time of payment, freely negotiated. The forfeiture clause (pacte commissoire) is the clause stipulated from the creation of the security, under which the creditor will become owner of the mortgaged building in the event of non-payment. Article 2459 of the Civil Code permits it in respect of mortgages, excluding the debtor's main residence, and Article 2458 opens the way to judicial allocation within the same limits. Article 2460 requires, in these cases, that the value of the building be estimated by an expert appointed by agreement or by the court, and that the difference between that value and the amount of the secured debt be paid to the debtor or deposited for the benefit of the registered creditors.

A clause inserted in the loan agreement providing for automatic handing over of the building in the event of default is therefore not a dation in payment: it is a forfeiture clause, subject to its conditions of validity. The converse is also true: a dation in payment freely agreed on the day of default escapes the formalities of Articles 2459 and 2460, but the creditor has every interest in having an adversarial valuation report prepared, for two reasons developed below.

Limiting the extinguishing effect, balancing payment and security

Three clauses structure the deed on the creditor's side.

The first fixes the attributed value of the building and determines whether the debt is extinguished in full or only up to that value. Absent a clear stipulation, a dispute will arise as to whether the creditor intended to give a full discharge. Where the value of the building exceeds the claim, a balancing payment (soulte) is owed to the debtor, and it must be dealt with having regard to the rights of the other registered creditors.

The second organises the maintenance of the security for the balance, in accordance with paragraph 2 of Article 1342-4. The creditor's express consent to the maintenance must appear in the deed, failing which the suretyship, the pledge or the mortgage attached to the claim falls with it.

The third deals with the registrations encumbering the transferred building. The first-ranking mortgage creditor who receives the building in dation in payment receives it together with the later registrations, whose holders retain their right to follow the property (droit de suite). Clearing of the registrations within the meaning of Articles 2475 et seq. of the Civil Code, or obtaining prior consensual releases (mainlevées), conditions the economic interest of the operation. The mortgage status report (état hypothécaire hors formalité) must be requested and updated up to the day of signature.

The creditor's prior audit

Before accepting a dation in payment, the creditor must investigate two sets of points. On the asset: title deed and thirty-year chain of title, mortgage status, letting situation and current leases, planning regularity and compliant completion, diagnostics, co-ownership charges and minutes of general meetings, works voted but not yet called for payment, energy performance rating and the timetable of bans on letting. On the debtor: filed annual accounts, registrations of liens of the Treasury (Trésor public) and social security bodies published at the registry of the commercial court, pledges, publications in the BODACC (French official gazette of civil and commercial announcements), the existence of an ad hoc mandate or of ongoing conciliation proceedings.

This second aspect is not incidental. It conditions the soundness of the title that the creditor is going to receive.

Formalisation and enforceability against third parties

A dation in payment relating to a building is a conveyance subject to the formalities of land registration (publicité foncière). It must be executed in notarial form and published at the land registry in accordance with Decree No. 55-22 of 4 January 1955 and its implementing decree of 14 October 1955. Until the deed is published, the transfer cannot be enforced against third parties who derive their rights from the same person and who have published before.

Two sets of pre-emption and preference rights must be cleared or excluded by a written analysis. First, town planning pre-emption rights, since the dation in payment is analysed as a disposal for consideration: a declaration of intention to sell (déclaration d'intention d'aliéner) is in principle required, and the declared valuation must correspond to the real value adopted by the parties. Second, the tenant's preference rights, in particular the commercial tenant's right of first refusal provided for in Article L. 145-46-1 of the French Commercial Code, whose scope and exclusions call for a careful reading, as well as the rights of a residential tenant. Failure to clear them exposes the deed received in dation in payment to an action by the right-holder, several months after signature.

In addition, depending on the case, there are the internal authorisations on the debtor's side: spousal consent where the building is the family home, agreement of the joint owners (indivision), decision of the shareholders where the building represents an essential asset of the company or where the articles of association so provide, the related-party agreements procedure (conventions réglementées) where the creditor is a manager or a shareholder. A dation in payment granted by a manager in favour of a creditor who is also his co-shareholder in itself concentrates several grounds for challenge.

Exposure to the risk of nullity in the suspect period

This is the point that decides whether the operation is advisable when the debtor is fragile. A creditor who receives a building from a debtor who will be placed in insolvency proceedings in the following months may lose the asset and find himself in a worse position than before.

Automatic nullity under Article L. 632-1 of the French Commercial Code

Article L. 632-1, I, 4° of the French Commercial Code strikes with automatic nullity any payment of matured debts made, during the suspect period (période suspecte), otherwise than in cash, bills of exchange, transfers, assignment schedules of professional receivables or any other means of payment commonly accepted in business relations. Handing over a building in payment of a matured debt is not among the means of payment commonly accepted in business relations. It falls, by construction, within the scope of the nullity.

Two points aggravate its reach. The nullity is automatic: the court has no power of assessment, and the creditor's good faith is irrelevant. And Article L. 632-1, I, 3° additionally strikes any payment of debts not yet matured, whatever the means, which catches an early dation in payment. To this are added 2°, which covers commutative contracts in which the debtor's obligations significantly exceed those of the other party, applicable to a dation in payment whose attributed value is lower than the market value of the building, and 6°, relating to security interests created for previously incurred debts.

The real risk window: up to eighteen months

The suspect period runs from the date of cessation of payments (cessation des paiements) to the judgment opening the proceedings. That date is fixed by the court and may be set back, under Article L. 631-8 of the French Commercial Code, to up to eighteen months before the opening judgment. A creditor who received a building in dation in payment a year ago may therefore see, after the opening of reorganisation or liquidation proceedings, the date of cessation of payments set back to before his deed, and an action for nullity brought by the court-appointed creditors' representative (mandataire judiciaire), the liquidator, the plan supervisor (commissaire à l'exécution du plan) or the public prosecutor under Article L. 632-4.

Apart from automatic nullity, Article L. 632-2 provides for discretionary nullity for payments of matured debts and acts for consideration carried out after the date of cessation of payments, where the counterparty was aware of that state of affairs. A bank creditor with full financial information on its debtor is, on this ground, in an unfavourable position. On the distinction between these nullities and the action available against a fraudulent act, see our analysis of the Pauline action (action paulienne) in insolvency proceedings.

Once the nullity has been declared, the building returns to the debtor's estate and the creditor again becomes an unsecured creditor for his original claim, which he must have filed. Hence an imperative precaution: a creditor who received a building in dation in payment from a debtor subsequently placed in insolvency proceedings must file his claim as a protective measure within the period set by Article L. 622-24 of the French Commercial Code, failing which his claim will be unenforceable against the proceedings and he will have to apply for relief from the bar of the time limit (relevé de forclusion).

The available countermeasures

Three levers limit the exposure.

The first is recourse to conciliation. Where the dation in payment forms part of a conciliation agreement approved by the court (homologué) on the basis of Article L. 611-8, II of the French Commercial Code, the date of cessation of payments cannot, in principle, be set back to a date earlier than the final approval decision. The structure thus falls outside the window for setting back that date. The cost is the loss of confidentiality inherent in court approval, an agreement merely recorded (constaté) offering confidentiality but not the same effect on the setting back of the date.

The second is a valuation report. An adversarial valuation of the building, prepared by an independent expert as at the date of the deed, deprives the argument of significant imbalance of its basis and supports the genuineness of the attributed value.

The third is sequencing. A dation in payment made well in advance, within a sound asset structure, and not on the eve of a cessation of payments, is defensible. A dation in payment signed after the first significant default, when the Treasury and the URSSAF (social security collection body) have already registered their liens, is a high-risk act.

Finally, it should be recalled that after the opening of the proceedings, any dation in payment relating to a prior claim is excluded: Article L. 622-7 of the French Commercial Code prohibits payment of prior claims and strikes with nullity payments made in breach of that prohibition. The disposal of a real estate asset during the observation period is moreover subject to the authorisation of the supervising judge (juge-commissaire).

Conclusion: a restructuring tool, provided its timing is mastered

Dation in payment is not a neutral means of amicable settlement. It is a real estate disposal in its own right, which produces its tax effects, its statutory warranties and its publicity formalities as a sale does, and whose validity depends on a parameter external to the parties' agreement: the debtor's financial health in the eighteen months preceding it.

Our reading is as follows. On the side of the transferor of land against units, the matter is won on the quality of the security attached to the obligation to deliver and on the calibration of a cash balancing payment covering the immediate tax charge. On the creditor's side, the choice between dation in payment and real property seizure must not be made on the sole criterion of time: a dation in payment that is annulled costs infinitely more than a late auction.

Before any signature, two checks condition the decision. Have an updated mortgage status report and an adversarial valuation report dated the day of the deed prepared. And have the debtor's financial situation investigated, including published registrations of liens: if the doubt over cessation of payments is not removed, the dation in payment must be placed within an approved conciliation agreement, or abandoned in favour of a real security interest and enforcement.

Frequently asked questions

Must a dation in payment necessarily be executed before a notary? Where it relates to a building, yes. The transfer of ownership must be recorded in a notarial deed in order to be published at the land registry, pursuant to Decree No. 55-22 of 4 January 1955. Failing publication, the dation in payment cannot be enforced against third parties who derive their rights from the same person and have published before. A simple private protocol providing for a future dation in payment effects no transfer and extinguishes no debt.

At what point is the debt extinguished in a dation in payment of real estate? On the day of the actual transfer of ownership, that is on signature of the notarial deed, and not on the day of the agreement providing for the dation in payment. Until the deed is executed, the creditor keeps his claim, his security and his means of enforcement. This is the fundamental difference from novation, which extinguishes the original obligation on agreement and substitutes a new obligation.

Can a dation in payment be annulled if the debtor is placed in reorganisation proceedings (redressement judiciaire)? Yes, and the nullity is automatic. Article L. 632-1, I, 4° of the French Commercial Code strikes with nullity any payment of a matured debt made during the suspect period otherwise than by the means of payment commonly accepted in business relations, which covers the handing over of a building. The court has no power of assessment and the creditor's good faith has no effect. As the date of cessation of payments may be set back to up to eighteen months before the opening judgment under Article L. 631-8, the risk window is long.

Are sureties released by a dation in payment? Extinction of the principal debt entails, as an accessory consequence, extinction of the suretyship. Paragraph 2 of Article 1342-4 of the French Civil Code provides that the accessories of the obligation, including security interests, are carried over or maintained only if the creditor expressly consents. A creditor who accepts a building in partial settlement and intends to keep his recourse against the surety for the balance must expressly stipulate the limitation of the extinguishing effect and the maintenance of the guarantees.

Is a dation in payment subject to transfer duties and capital gains tax? Yes. Dation in payment is a conveyance for consideration, treated for tax purposes as a disposal: transfer duties on onerous transfers, taxation of the capital gain in the hands of the party handing over the building and, where the operation falls within the scope of VAT on real estate, taxation of the crossed deliveries. In a dation in payment of land against units, the transferor may therefore be liable to a tax charge without receiving any cash, which requires calibrating a cash balancing payment or choosing between dation in payment and a conventional sale before the promise is signed.

What is the difference between dation in payment and a mortgage forfeiture clause (pacte commissoire)? Dation in payment is agreed at the time of payment, freely, between a creditor and his debtor. The forfeiture clause is stipulated from the creation of the mortgage and provides that the creditor will become owner of the building in the event of non-payment: it is permitted by Article 2459 of the French Civil Code, but excluded where the building is the debtor's main residence, and subject to the expert valuation provided for in Article 2460. A clause for automatic handing over inserted in the loan agreement falls under the forfeiture clause, not under dation in payment.

How can a dation in payment with a fragile debtor be secured? The most effective lever consists in placing the dation in payment within a conciliation agreement approved by the court on the basis of Article L. 611-8, II of the French Commercial Code: the date of cessation of payments can then, in principle, not be set back to a date earlier than the final approval decision, which neutralises the window for setting back that date. To this are added an adversarial valuation report dated the day of the deed and, in the event of proceedings later being opened, a protective claim filing within the period set by Article L. 622-24.