Property Developer in Judicial Reorganisation: Rights of VEFA Purchasers and Subcontractors

A purchaser signs an off-plan sale contract (vente en l'état futur d'achèvement, VEFA), pays the staged instalments as the works progress, and then learns that the developer is the subject of judicial reorganisation proceedings (redressement judiciaire). A subcontractor on the structural works delivers its services, issues its invoices, and ends up a creditor of a company in insolvency proceedings. These two situations, distinct but linked by the same stalled site, raise specific legal questions that the Civil Code, the French Construction and Housing Code and Book VI of the French Commercial Code each deal with in their own way. This analysis sets out the fate of the VEFA contract, the role of the financial completion guarantee (garantie financière d'achèvement, GFA) and the recovery mechanisms open to unpaid construction subcontractors and suppliers when the developer is in difficulty.

Judicial reorganisation of the property developer: framework and immediate effects

Judicial reorganisation is governed by Articles L631-1 et seq. of the French Commercial Code. It applies to a business in a state of cessation of payments, that is, unable to meet its due liabilities with its available assets, but whose recovery appears possible. The court then opens an observation period intended to draw up an economic and social assessment and to prepare a plan.

Distinguishing safeguard, reorganisation and liquidation

Three insolvency procedures coexist, with very different consequences for the VEFA purchaser and the subcontractor. Safeguard (Articles L620-1 et seq.) opens before cessation of payments, at the request of the debtor alone. Judicial reorganisation presupposes an established cessation of payments but a hope of continuation. Judicial liquidation (Articles L640-1 et seq.) occurs where recovery is manifestly impossible: it entails the end of the business and the realisation of the assets.

This distinction governs each party's strategy. In reorganisation, the site may restart and the contract may continue. In liquidation, the GFA takes on decisive importance for the purchaser, because the developer will not bring the works to completion.

The observation period and the fate of ongoing contracts

The opening of the proceedings freezes pre-existing liabilities. The opening judgment prohibits payment of debts arising before it (Article L622-7, applicable to reorganisation by reference to Article L631-14) and suspends individual enforcement actions. A supplier unpaid on the day of the judgment can therefore no longer sue for payment by the ordinary routes: it must file its claim.

During the observation period, the court-appointed administrator has the power to require ongoing contracts to continue under Article L622-13 (made applicable to reorganisation by Article L631-14). It is this mechanism, applied to the VEFA contract and to the works contracts, that structures everything that follows.

The VEFA contract and the developer's judicial reorganisation

The nature of the VEFA contract and the progressive transfer of ownership

The off-plan sale is defined in Article 1601-3 of the French Civil Code:

“A sale of a building to be completed is the contract by which the seller immediately transfers to the buyer his rights over the ground as well as the ownership of existing constructions. Future works become the property of the buyer as they are carried out; the buyer is bound to pay the price as the works progress.”

This rule of progressive transfer is essential in insolvency proceedings. The purchaser already owns the land and what has been built. The portion of the works carried out does not enter the developer's assets and therefore escapes the creditors' common pledge. The unit under construction is not property that can be seized for the benefit of the creditors of the defaulting developer.

Staged payments follow the regulatory schedule of Article R261-14 of the French Construction and Housing Code: a maximum of 35% of the price on completion of the foundations, 70% when the building is weathertight (mise hors d'eau) and 95% on completion of the building, the balance falling due on delivery. A purchaser whose programme stops at an intermediate stage has therefore already paid out a substantial part of the price.

Continuation or termination of the contract by the administrator

The VEFA contract is an ongoing contract within the meaning of Article L622-13. The court-appointed administrator may choose to require its performance or to renounce it. If it opts for continuation, it must provide the promised performance, that is, complete the building, and the purchaser remains bound to pay the future instalments, which then constitute post-opening claims.

In practice, continuation by the administrator presupposes cash and works contracts that can be reactivated. Where the developer no longer has the means to carry on the site, the administrator renounces continuation or the proceedings turn into liquidation. This is precisely the scenario in which the financial completion guarantee plays its protective role.

One interaction, often misunderstood, should be stressed. The developer's default under the VEFA and the intervention of the completion guarantor do not depend mechanically on the administrator's choice on continuation of the contract. The completion guarantee has its own logic, based on the Construction and Housing Code, independent of the option opened by the Commercial Code.

The financial completion guarantee: the VEFA purchaser's shield

A mandatory extrinsic guarantee since 2015

Article L261-10-1 of the French Construction and Housing Code makes the conclusion of a VEFA in the protected sector, that of housing, subject to proof of a financial guarantee for completion of the building or for reimbursement of the payments made. The text provides that, on pain of nullity, the sale may not be concluded before this guarantee has been put in place.

Since 1 January 2015, the intrinsic guarantee, which relied on the programme's own progress, has been abolished in favour of the extrinsic guarantee alone, provided by a credit institution, a finance company or an insurer. This reform, resulting from Law No. 2014-366 of 24 March 2014 known as the ALUR Law and its implementing texts, considerably strengthened the purchaser's protection: the guarantor is now a financially sound third party, external to the developer.

The financial completion guarantee is distinct from the reimbursement guarantee. The former ensures the continuation and finishing of the works; the latter, now residual in housing, provides for reimbursement of the sums paid. In the protected sector, it is the completion guarantee that prevails. The distinction between these two mechanisms and the points to watch at signing are discussed in our article on the financial completion guarantee in a VEFA.

Triggering the guarantee

The guarantee is triggered in the event of the developer's financial default, characterised by a stoppage of works. Judicial reorganisation, and still more liquidation, are indications of this default. In practical terms, where the site is interrupted for lack of funding, the purchaser or its co-ownership association (syndicat) calls on the guarantor, which must then fund the completion of the building.

The guarantor bears the cost necessary to bring the works to completion, within the limits of its guarantee. It may appoint a new project manager, contract with new firms and bear the additional costs of restarting the site. The purchaser continues to pay the sale price originally agreed according to the schedule: the guarantee covers the supplement needed for completion, not a full substitution for payment of the price.

A concrete illustration: a purchaser has bought an apartment off plan and paid the instalments up to the weathertight stage, that is, 70% of the price. The developer is placed in reorganisation and then in liquidation. The completion guarantor steps in to fund the finishing works, have the partitions, services and finishes installed, and deliver a dwelling that complies with the contractual specification. The purchaser pays the 30% balance as the works progress, without bearing the additional cost of restarting.

The limits of the financial completion guarantee

The GFA is not an all-risks insurance. It covers completion within the meaning of Article R261-1 of the French Construction and Housing Code, that is, the execution of the works and fittings indispensable to the use of the building. In principle it does not cover defective workmanship, snagging items on delivery or delays in delivery as such.

Defects fall under the statutory construction guarantees: the completion guarantee (garantie de parfait achèvement), the two-year functional guarantee (garantie biennale de bon fonctionnement) and the ten-year guarantee (garantie décennale), the latter drawing on the construction damage insurance (assurance dommages-ouvrage) taken out before the start of the works. A purchaser faced with defective workmanship will therefore turn not to the completion guarantor but to these specific insurances and guarantees.

Likewise, the GFA does not cover late-delivery penalties owed by the developer or loss of enjoyment. These items, which arise from the developer's contractual liability, become claims to be filed in the insolvency.

The VEFA purchaser's remedies against the developer's estate

Filing a claim for sums that are not guaranteed

For everything that the completion guarantee does not cover, the purchaser once again becomes an ordinary creditor. Late-delivery penalties, compensation for loss of enjoyment and any restitution of sums wrongly received must be the subject of a claim filed with the creditors' representative (mandataire judiciaire).

This filing is governed by Article L622-24 of the French Commercial Code: it must be made within two months of publication of the opening judgment in the BODACC (French official gazette of civil and commercial announcements). This period is extended to four months for creditors domiciled outside metropolitan France. After this period, the creditor is time-barred (forclos), unless it obtains relief from the time bar under Article L622-26.

The interaction between the completion guarantee and the filing of a claim

The purchaser must never set the two mechanisms against each other but combine them. It calls on the guarantor to obtain physical completion of its property and, in parallel, files the uncovered claims in the insolvency. The guarantor that has funded completion has, after payment, its own subrogation claim against the developer, which it will pursue by filing a claim in the insolvency proceedings.

The unpaid subcontractor and construction supplier

The direct action under the 1975 Law against the project owner

A subcontractor working on a development site has a particularly effective instrument: the direct action created by Article 12 of Law No. 75-1334 of 31 December 1975 on subcontracting. This text allows a subcontractor left unpaid by the main contractor to sue directly for payment against the project owner (maître de l'ouvrage), for the sums corresponding to the services it has performed.

The direct action may be brought where the main contractor has not paid the subcontractor one month after a formal notice (mise en demeure). Its value in insolvency proceedings is major: the direct action partly escapes collective discipline, because the subcontractor is paid out of a debt owed by the project owner, and not out of the assets of the defaulting contractor. The project owner may pay the subcontractor only up to the amount it itself owes the main contractor on the day it receives the copy of the formal notice.

The subcontractor must also have been approved and its payment terms accepted by the project owner, in accordance with Article 3 of the 1975 Law. An unapproved subcontractor loses the benefit of the direct action, which illustrates the vital importance of regularising its position before any non-payment. Case law also penalises a project owner that has not served formal notice on the main contractor to comply with its approval and guarantee obligations. The conditions of acceptance and approval, as well as the payment guarantee under Article 14, are set out in our guide to the construction subcontracting contract.

The position of each party must nevertheless be correctly identified. Where the developer in reorganisation is itself the selling project owner, the subcontractor's direct action would be brought against it, which neutralises it in practice since the debtor is in proceedings. By contrast, where the subcontractor works for a general contractor distinct from the developer, the direct action against the developer as project owner retains its full effectiveness.

The subcontractor's payment guarantee

Article 14 of the 1975 Law requires, in building and public works contracts, that the subcontractor be provided with a personal joint and several guarantee or a delegation of payment. A prudent subcontractor that has obtained a bank guarantee thus has a claim against the guarantor, independent of the insolvency proceedings affecting the contractor. This guarantee, often neglected when the subcontract is concluded, proves decisive when default occurs.

Filing a claim in the insolvency proceedings

Whether or not the direct action is available, the unpaid subcontractor and supplier must file their claim in the insolvency within the two-month period of Article L622-24. The filing states the amount of the claim that is due and that is to fall due, the sums secured by a security interest and the nature of that security. A materials supplier that delivered before the opening judgment holds a pre-opening claim subject to this discipline.

Pre-opening claims must be distinguished from privileged post-opening claims. Services properly performed after the opening judgment, for the needs of the conduct of the proceedings or of the observation period, benefit from the favourable treatment of Article L622-17: they are paid when due and, failing that, by priority ahead of most pre-opening claims. A subcontractor asked by the administrator to continue the site after the opening thus finds its new claim better protected than its earlier invoices.

The materials supplier's retention of title

A materials supplier that has stipulated a retention of title clause (clause de réserve de propriété) may reclaim unpaid goods delivered that are still found in kind in the debtor's assets, on the conditions of Articles L624-9 et seq. of the French Commercial Code. The claim must be made within three months of publication of the opening judgment. This option runs, however, into a persistent practical limit: materials incorporated into the works are no longer found in kind and can no longer be reclaimed. Retention of title is therefore effective only for stock not yet installed. On the conditions of validity and exercise of this claim, see our analysis of the retention of title clause in the face of a customer's insolvency proceedings.

Conclusion: anticipating default rather than enduring it

The intersection of real estate law and insolvency proceedings produces two protective logics of unequal scope. The VEFA purchaser in the protected sector is solidly protected by the extrinsic financial completion guarantee, which ensures delivery of the property regardless of the developer's fate. This security, in place since the abolition of the intrinsic guarantee in 2015, does not relieve the purchaser of the need to file in the insolvency the claims that the guarantee does not cover, foremost among them late-delivery penalties and loss of enjoyment.

The subcontractor and the supplier, for their part, are better armed when they have anticipated: a direct action based on a proper approval, a guarantee or delegation of payment under Article 14 of the 1975 Law, an enforceable retention of title. Without these safeguards, they are merely unsecured creditors subject to the law of the collective procedure and exposed to a dividend that is often modest.

The position is clear: in this type of dispute, the outcome is decided before the default. A purchaser must check, from signing, the existence and identity of the completion guarantor named in the deed. A subcontractor must insist on its approval and its payment guarantee when contracting, and not when the non-payment occurs. Where proceedings have been opened, the first step is the same for everyone: file the claim within two months of the judgment published in the BODACC, on pain of being time-barred.

Frequently asked questions

What happens to my VEFA contract if the developer is placed in judicial reorganisation?

The VEFA contract is an ongoing contract that the court-appointed administrator may decide to continue or abandon, under Article L622-13 of the French Commercial Code. Thanks to the progressive transfer of ownership under Article 1601-3 of the Civil Code, the portion of the works already built belongs to you and does not form part of the developer's seizable assets. If the site stops, the financial completion guarantee takes over to fund the finishing of the building.

Does the financial completion guarantee reimburse the sums already paid?

In the protected housing sector, the guarantee required since 1 January 2015 is a completion guarantee, not a reimbursement guarantee. It funds the continuation and finishing of the works through to completion within the meaning of Article R261-1 of the French Construction and Housing Code. You are therefore not reimbursed for your payments: you obtain delivery of your property, while continuing to pay the contractual price according to the schedule.

Does the completion guarantee cover defective workmanship and delivery delays?

No. The financial completion guarantee covers only the physical completion of the building. Defective workmanship falls under the completion, two-year and ten-year guarantees, as well as the construction damage insurance. Late-delivery penalties and loss of enjoyment, which engage the developer's contractual liability, must be filed in the insolvency proceedings as ordinary claims.

Can an unpaid subcontractor be paid by the project owner?

Yes, subject to conditions. Article 12 of Law No. 75-1334 of 31 December 1975 gives a direct action against the project owner where the main contractor has not paid the subcontractor one month after formal notice. This action requires that the subcontractor has been approved by the project owner and that its payment terms have been accepted. It applies, however, only up to the sums still owed by the project owner to the main contractor.

Within what period must a claim be filed in the developer's insolvency?

The claim must be filed within two months of publication of the opening judgment in the BODACC, under Article L622-24 of the French Commercial Code. This period is extended to four months for creditors domiciled outside metropolitan France. After that, the creditor is time-barred and loses the right to share in distributions, unless relief from the time bar is granted under Article L622-26.

Can a materials supplier recover its unpaid deliveries?

A supplier that has stipulated a retention of title clause may reclaim unpaid goods delivered that are found in kind, within three months of publication of the opening judgment, under Articles L624-9 et seq. of the French Commercial Code. This claim fails, however, for materials already incorporated into the works, which are no longer found in kind. Only stock not yet installed can effectively be recovered.

Does the developer's insolvency permanently block my site?

Not necessarily. In judicial reorganisation, the administrator may decide to continue the contract and restart the site during the observation period. Even if the works stop, the financial completion guarantee allows an external guarantor to fund the resumption of works and the delivery of the dwellings. Judicial liquidation of the developer therefore does not mean abandonment of the programme where this guarantee has been properly put in place.