Immobilisation indemnity: amount, escrow and litigation over return

The immobilisation indemnity is rarely the sticking point in a property negotiation. It always becomes one when the transaction goes wrong: a planning permission is challenged, financing is withdrawn, or an asset turns out after signing to be unusable for its intended purpose. At that point, the investor discovers that the escrowed sum will be returned neither spontaneously nor quickly, because the escrow holder cannot release anything without the agreement of both parties or a court decision. This guide deals with the immobilisation indemnity from the beneficiary's standpoint: how to calibrate its amount against the period of exclusivity actually granted, how to structure the escrow so that release is automatic and not discretionary, how to coordinate the indemnity with the conditions precedent, and which procedural route to take when its return is refused.

Legal characterisation: the price of exclusivity, not a deposit

The unilateral promise to sell (promesse unilatérale de vente) is defined in Article 1124 of the French Civil Code, which results from Ordinance No. 2016-131 of 10 February 2016. The promisor grants the beneficiary an option over a property whose essential terms are determined: only the beneficiary's consent is missing for the contract to be formed. During the option period, the promisor is tied down. The promisor can neither sell to a third party nor usefully negotiate with another candidate.

The immobilisation indemnity is the consideration for that immobilisation. It is not a deposit on the price, even though it is set against the price if the option is exercised. Nor is it a penalty clause within the meaning of Article 1231-5 of the French Civil Code: the case law has long held that the sum pays for a service rendered, exclusivity, and is not a sanction for non-performance. The consequence for the investor is direct: the judge does not, in principle, have the power to moderate it that the judge exercises over manifestly excessive penalties. A beneficiary who walks away loses the whole indemnity, with no serious prospect of a reduction by the court.

Two qualifications are worth knowing. First, where the promise places on the beneficiary a genuine obligation to act (carrying out due diligence, filing a permit application, setting up an acquisition vehicle) and the indemnity penalises a breach of that obligation, a recharacterisation as a penalty clause remains arguable, with the power of moderation that follows from it. Second, an amount so high that it deprives the beneficiary of any real freedom not to buy exposes the promise to recharacterisation as a bilateral sale agreement, with the well-known effects in terms of specific performance and transfer of ownership. The promisor's trade-off is therefore bounded: the heavier the indemnity, the more it secures exclusivity in economic terms, and the more it weakens the legal characterisation of the instrument. The differences between a bilateral promise and a unilateral promise, and their financial consequences, are detailed in our article on these two preliminary agreements.

The registration formality, a classic trap in private agreements

Article 1589-2 of the French Civil Code renders void any unilateral promise to sell relating to real property that is not recorded in a notarial deed or in a private agreement registered within ten days of its acceptance by the beneficiary.

"Any unilateral promise to sell relating to a building, to a real property right (…) is null and of no effect if it is not recorded in a notarial deed, or in a private agreement registered within ten days of the date of its acceptance by the beneficiary."

Nullity entails full return of the indemnity paid. A beneficiary who wishes to withdraw will therefore first examine the formal validity of the instrument. Conversely, an investor-buyer who is committed to the transaction has every interest in a notarial deed, which escapes this requirement and costs a fixed registration duty under Article 680 of the French General Tax Code.

Calibrating the amount to the period of exclusivity and the risk borne

No provision caps the immobilisation indemnity under a promise to sell under the general law. Market practice places it at around five to ten per cent of the price for a short-term promise over an existing asset. That practice has no normative force and should not simply be accepted: the amount is negotiated according to what the promisor actually ties up, and for how long.

Short promise over an existing asset

Where the option is open for two to three months, the property has already been delivered and the only unknown is financing, the promisor ties up almost nothing: the asset remains in operation, rents continue to accrue, and the market does not turn within a quarter. An indemnity of five per cent is defensible, or even less on a high-value asset where the percentage produces a sum unrelated to the loss caused by immobilisation. The argument to put forward is economic, not legal: what loss of earnings does the promisor actually suffer if it has to put the property back on the market in ninety days.

Long promise subject to a permit free of challenge

The equation reverses for a promise of eighteen to thirty months, typical of a land acquisition subject to obtaining a building permit that is free of any challenge and any withdrawal. The promisor bears a real cost: capital tied up, property taxes, the risk of a market reversal, and the impossibility of arbitrage. It will legitimately demand more.

The technical answer is not to give way on the overall percentage, but to split it. The staged indemnity is the standard tool in the development and distressed markets: a first instalment paid on signing, refundable if the conditions precedent fail; a second instalment released at an intermediate deadline, definitively acquired by the promisor whatever the outcome; a third instalment if the option is extended. Each stage corresponds to an additional period of immobilisation and buys an identified period of time. The beneficiary thus keeps control of its exposure: at each deadline, it decides whether to pay to continue or to exit while limiting its loss.

What the beneficiary is buying, and what it must refuse

A high indemnity is not discussed in the abstract. It is discussed against drafting counterparts:

• an option period long enough to clear all the administrative uncertainties, and not a theoretical period that will force the beneficiary to negotiate an extension from a position of weakness;
• a broad substitution clause, allowing a project company still to be set up to be substituted without the promisor's discretionary consent;
• effective access to the property and to the documents in order to carry out technical, environmental and lease audits;
• the promisor's undertaking not to change the letting position, not to grant any new lease or amendment, and not to create any security over the asset during the option;
• a clause releasing the escrow on production of documents, a point developed below.

Conversely, three provisions must be resisted: an indemnity fully acquired by the promisor from signing, which turns the option into a gamble; wording that makes return conditional on the promisor's written consent, which creates a de facto right of veto; and a clause treating failure to exercise the option as a fault of the beneficiary, which opens the way to a damages claim in addition to the promisor keeping the indemnity.

The escrow: holder, timing of payment, release clause

The escrow under a promise to sell falls under Articles 1956 et seq. of the French Civil Code. The holder receives a disputed asset and undertakes to hand it over to the person who is adjudged entitled to it. That definition says the essential point: the escrow holder is not an arbitrator, but a custodian. The holder does not decide the dispute, but waits for the parties' agreement or the judgment.

Choice of escrow holder

The notary who drafts the instrument is the natural holder, subject to the supervision of the notaries' chamber and covered by the profession's collective guarantee. An estate agent holding the professional card may also receive the funds, subject to the financial guarantee required by Law No. 70-9 of 2 January 1970, known as the Hoguet Law, and its implementing Decree No. 72-678 of 20 July 1972. Payment to a lawyer's CARPA account (the French lawyers' client funds account) is an alternative in structured transactions. Direct payment to the promisor is to be avoided: it turns a question of releasing funds into an action for recovery against a party who may be insolvent or based abroad.

Timing of payment and cooling-off period

For a non-professional buyer of residential property, Article L. 271-1 of the French Construction and Housing Code gives a cooling-off period of ten days from notification of the instrument. Article L. 271-2 correspondingly regulates the payment of funds before that period expires, which requires the involvement of a notary or of a professional holding a financial guarantee earmarked for reimbursement. In an off-plan sale (VEFA, vente en l'état futur d'achèvement), the security deposit under the preliminary contract is subject to a separate regime capped by Article R. 261-28 of the same code at five per cent of the price where the sale is to be concluded within the year and two per cent where it is to be concluded within two years, no payment being allowed beyond that.

The investor must realise that these protections largely do not apply to it. A civil or commercial company acquiring an investment asset, and a fortiori a commercial asset, does not fall within the scope of Article L. 271-1. No cooling-off period, no safety net. The indemnity is committed from signing.

The release-on-documents clause

This is the decisive drafting point. A clause providing for return "if the conditions precedent are not met" without specifying what establishes this guarantees a deadlock. The escrow holder, out of caution, will refuse to release the funds as soon as the promisor objects, and the beneficiary will have to go to court.

Effective drafting designates, for each condition, the supporting document whose production alone obliges the holder to release within a short period: letters of refusal of a loan from institutions matching the stipulated characteristics, a certificate of no challenge and no withdrawal issued by the registry of the administrative court and by the competent authority, a certificate of pre-emption from the local authority, a notarial certificate that the option has not been exercised on expiry of the period. It is useful to add an irrevocable instruction given jointly to the escrow holder on signing, and an adversarial notification mechanism with a short period for a reasoned objection, after which release takes place automatically.

Coordination with the conditions precedent

The return of the immobilisation indemnity almost always turns on the conditions precedent: their drafting, their scope, and the beneficiary's diligence in satisfying them.

Financing

For a non-professional buyer, Articles L. 313-40 et seq. of the French Consumer Code require the insertion of a condition precedent of obtaining a loan, with a minimum duration of one month from signing. A buyer who states that it is financing the purchase from its own funds must include the handwritten statement required by the provision, failing which the condition is deemed to have been stipulated.

For the professional investor, there is nothing of the kind. The financing condition is purely contractual and its scope is closely negotiated: minimum amount, maximum rate, duration, number of institutions to approach, nature of the facility (conventional bank loan, senior debt, bond financing). A condition drafted too broadly will be held to be potestative or, more often, unenforceable for want of proof of diligence. A condition drafted too narrowly will leave the beneficiary with no way out if the financing structure changes.

Building permit free of any challenge and any withdrawal

On a land acquisition or a major restructuring operation, the condition must cover three distinct risks, which are often confused. First, the third-party court challenge, which is time-barred two months from the first day of continuous display on the land under the conditions of Article R. 600-2 of the French Town Planning Code, the challenge having to be notified to the author of the decision and to its beneficiary in accordance with Article R. 600-1. Second, administrative withdrawal, which Article L. 424-5 of the same code allows within three months of the decision if the permit is unlawful. Third, the prefect's referral to the administrative court (déféré préfectoral), the period for which runs from transmission to the legality review.

A condition precedent drafted as "subject to obtaining a building permit" protects against nothing: a permit that is obtained and then annulled leaves the beneficiary owning land that cannot be built on. The useful wording refers to a final permit, that is to say one that is free of third-party challenge, administrative withdrawal and referral by the prefect, evidenced by the corresponding certificates, and requires the promisor to allow the display to take place and to have its continuity recorded by a bailiff (commissaire de justice). On the drafting of the condition of a building permit free of challenge in a land acquisition, see our dedicated analysis.

Pre-emption, planning, letting position

Several conditions are regularly overlooked and then generate restitution litigation. The local authority's waiver of its urban pre-emption right, silence amounting to waiver at the end of the two-month period provided for by Article L. 213-2 of the French Town Planning Code. The commercial tenant's right of first refusal under Article L. 145-46-1 of the French Commercial Code, failure to respect which weakens the sale. The absence of any easement, administrative requirement or pollution revealed by the audits. And, increasingly, the energy performance of the asset: Law No. 2021-1104 of 22 August 2021, known as the Climate and Resilience Law, phased in the ban on letting the most energy-intensive dwellings, while Decree No. 2019-771 of 23 July 2019, known as the tertiary decree, imposes a trajectory for reducing energy consumption. A prudent investor makes the acquisition conditional on the result of the energy audit and on the costing of the works, failing which it will discover after exercising the option an unfunded capex.

The condition prevented by the beneficiary

Article 1304-3 of the French Civil Code sets out the rule that every promisor will invoke:

"A condition precedent is deemed fulfilled if the party who had an interest in it has prevented its fulfilment."

A beneficiary who applies for a loan on deliberately unacceptable terms, who files a permit application that does not match the stipulated project, or who fails to chase the authorities, will see the condition deemed fulfilled and will lose its indemnity. The burden of proving diligence falls on it in practice. Hence an operational recommendation: build up as you go along a dated file of all the steps taken, complete financing applications, exchanges with the departments handling the file, and reminders. This file makes the difference before the judge.

The beneficiary's decision timeline

The immobilisation indemnity is managed as a timetable, not as a clause.

• On signing: check the form of the instrument (notarial, or private and registered within ten days, Article 1589-2 of the French Civil Code), the appointment of the escrow holder, the release-on-documents clause, the substitution clause, and the exact starting point of the option period.
• In the first weeks: file complete financing applications, launch the audits, have the declaration of intention to sell served, and clear the pre-emption rights.
• At the halfway point: review each condition precedent. This is the time to decide, while renegotiation is still possible, between continuing, requesting an extension in return for an additional stage payment, and an orderly exit.
• Thirty to forty-five days before the deadline: notify the promisor and the escrow holder, by extrajudicial act or registered letter, of the established failure of a condition, with the supporting documents. Never wait for the period to expire before revealing the difficulty.
• At the deadline: exercise the option by a formal act, or record that the condition has not been met. The beneficiary's silence amounts to waiver and results in the promisor keeping the indemnity.
• After the deadline: if return is refused, commence proceedings without delay. The five-year limitation period under Article 2224 of the French Civil Code leaves time, but the promisor's solvency may deteriorate.

Default by the beneficiary: retention of the indemnity

On the promisor's side, retention requires the default to be characterised precisely. Three situations must be distinguished.

Outright failure to exercise the option within the period, when all the conditions precedent had been satisfied, permits full retention. The promisor is entitled to the price of the exclusivity it has sold. Notarial practice is to have a record of default drawn up, noting the beneficiary's failure to appear on the date set for completion, preceded by a formal demand.

Exercise of the option followed by a refusal to sign the notarial deed follows a different logic: the sale contract is formed by the exercise of the option. The promisor may then seek specific performance and claim damages, and the question of the indemnity shifts to whether it is set against the price or to the penalty clause contractually stipulated for failure to complete.

Finally, failure of a condition precedent attributable to the beneficiary calls for the application of Article 1304-3. The promisor must prove the prevention, which is not a formality: the absence of diligence can be proved, and a documented file of loan refusals generally holds up.

One point deserves emphasis in favour of the investor-buyer: Article 1124, paragraph 2 of the French Civil Code deprives the promisor's retraction of any effect. Revocation of the promise during the option period does not prevent the promised contract from being formed. A promisor who wants to resell to a third party at a higher price therefore cannot simply return the indemnity; it is exposed to specific performance in kind, and a sale concluded with a third party acting in bad faith is liable to be declared void.

Litigation over return: which route, within what time

The typical deadlock is well known: the beneficiary considers the condition to have failed, the promisor maintains the opposite, and the escrow holder keeps the funds. The holder has no duty to arbitrate and would incur liability by releasing without authority. The question is therefore purely procedural.

Summary proceedings (référé) are the first option. Before the president of the judicial court, Article 835, paragraph 2 of the French Code of Civil Procedure allows an interim payment to be awarded where the obligation is not seriously contestable; Article 834 allows any measure justified by urgency in the absence of a serious dispute. Before the commercial court, Articles 872 and 873 provide an equivalent mechanism. The route is appropriate where the failure of the condition results from objective documents that are not open to interpretation: a pre-emption certificate, a loan refusal that complies with the stipulations, or annulment of the permit. It fails as soon as the promisor puts forward a serious argument based on the beneficiary's lack of diligence, because the assessment of that diligence is a matter for the merits. The conditions for an interim payment in summary proceedings and their interplay with the payment order procedure and proceedings on the merits are covered separately in our article on that procedure.

Proceedings on the merits are then necessary, where appropriate on a fixed-date basis or under the accelerated procedure on the merits if the applicable rule allows. The claim seeks a declaration that the promise has lapsed, an order that the escrow holder release the funds, and an order that the promisor pay default interest at the statutory rate from the formal notice, under Article 1231-6 of the French Civil Code, with capitalisation under Article 1343-2.

Two further reflexes deserve to be made systematic. First, where the funds have been wrongly released to the promisor and its solvency is in doubt, a protective attachment under Article L. 511-1 of the French Code of Civil Enforcement Procedures is obtained with the authorisation of the enforcement judge, the claim having to appear well founded in principle and recovery being under threat. Second, where the promisor is itself in difficulty, the proof of claim in the insolvency must be lodged within the statutory time limits, the opening of collective proceedings suspending individual actions and radically changing the recovery strategy.

Finally, an application for a judicial escrow under Article 1961 of the French Civil Code makes it possible, at an earlier stage, to remove the funds from a defaulting or suspect holder, and to neutralise the risk of dissipation during the proceedings.

The assessment to make before signing

The immobilisation indemnity is not a closing formality; it is the quantified measure of the risk the investor agrees to bear for the duration of the option. Our view is that the overall amount matters less than three drafting parameters: staging by instalments tied to identified periods of immobilisation, an exhaustive definition of the conditions precedent, in particular full clearance of the permit including third-party challenge, administrative withdrawal and referral by the prefect, and the escrow release clause triggered by the production of objectively identified documents. A beneficiary who obtains these three points can accept a high indemnity without real exposure. A beneficiary who neglects them turns a modest indemnity into a dead loss, preceded by eighteen months of proceedings.

Before any signature, have the escrow clause and the drafting of the conditions precedent audited by an adviser other than the person who drafted the promise, and build from day one the evidence file of your diligence. It is that file, and not the clause, that will carry the decision on the day the return is contested.

Frequently asked questions

Is an immobilisation indemnity mandatory in a unilateral promise to sell? No. No provision requires it and a unilateral promise may be granted free of charge, as is found between companies of the same group or in restructuring protocols. In practice, the promisor demands it because it pays for its immobilisation. Its absence affects neither the validity of the promise, nor the beneficiary's option right, nor the application of Article 1124 of the French Civil Code.

What percentage should be used for the immobilisation indemnity under a promise to sell? No statutory cap exists under the general law, apart from special regimes such as the security deposit in an off-plan sale, capped by Article R. 261-28 of the French Construction and Housing Code. Market practice is between five and ten per cent of the price for a short promise. On a long promise subject to a final permit, reasoning in terms of an overall percentage loses its relevance in favour of staging by instalments, each corresponding to an additional period of exclusivity.

Can the judge reduce an immobilisation indemnity held to be excessive? In principle no, because it is not a penalty clause but the price of the exclusivity granted, which rules out the power of moderation under Article 1231-5, paragraph 2 of the French Civil Code. Reduction becomes arguable where the indemnity in reality penalises a breach of an obligation to act imposed on the beneficiary. In addition, an amount that deprives the beneficiary of any freedom not to buy exposes the promise to recharacterisation as a bilateral promise to sell.

Who must hold the funds, and can the escrow holder release them alone? The holder is in principle the notary who drafts the instrument, sometimes the estate agent who holds the professional card and the financial guarantee required by the Hoguet Law of 2 January 1970, or a lawyer using a CARPA account. In accordance with Articles 1956 et seq. of the French Civil Code, the escrow holder releases the funds only with the agreement of the parties or on a court decision. A clause providing for release on production of precisely defined documents makes it possible to avoid this deadlock without proceedings.

How quickly can the immobilisation indemnity be recovered if the promisor refuses? Summary proceedings before the president of the judicial court under Article 835, paragraph 2 of the French Code of Civil Procedure allow a decision within a few weeks, but only if the obligation to return is not seriously contestable. As soon as the promisor challenges the diligence carried out, the serious dispute sends the matter to the merits, with significantly longer timescales. The action is time-barred after five years under Article 2224 of the French Civil Code.

Is a condition precedent of a building permit that has been "obtained" enough to protect the investor? No. A permit that has been obtained may be withdrawn by the administrative authority within three months under Article L. 424-5 of the French Town Planning Code, challenged by third parties within two months of continuous display under Article R. 600-2, or referred to the court by the prefect. The condition must refer to a final permit, free of third-party challenge, withdrawal and referral by the prefect, and require evidence of the display by a bailiff's report.

Does an investor that is a legal entity benefit from the ten-day cooling-off period? No. Article L. 271-1 of the French Construction and Housing Code reserves this period for the non-professional buyer of residential property. A company acquiring an investment asset, and even more so a commercial or business asset, is excluded. The commitment is firm from signing, which shifts all the protection onto the drafting of the conditions precedent and of the escrow clause.