Building Lease Terminated: A Transfer of Real Property Subject to Registration Duties

You own a plot of land in Dax, and you have signed a building lease with a property developer. The developer has erected a three-storey building on your land. But then, a few years later, financial difficulties arise, and you mutually decide to terminate the lease early. You think everything is settled: you get your land back, and the developer leaves. But the tax authorities knock on your door: they demand registration duties on the value of the building, as if it were a sale. Surprising, isn't it? Yet, that is exactly what the Court of Cassation ruled in a judgment of 24 June 1997 (No. 95-13.038).

This decision, handed down in a case between the company Teissonnière and the tax authorities, clarified a thorny issue: does the early termination of a building lease constitute a transfer of real property subject to registration duties? The answer is yes, and it has significant financial consequences for the parties. But what exactly does that mean for you, as owner or lessee?

In short, the Court of Cassation held that the lessee, during the lease, is the temporary owner of the buildings. When the lease is terminated early, this temporary ownership right is extinguished, and the lessor immediately becomes the owner of the buildings. This early transfer of ownership is fiscally assimilated to a transfer for valuable consideration, taxable as a sale. In other words, you cannot escape it.

The facts: a story that happens every day

Let's imagine Mr. Dupont, owner of a large plot of land in Parentis-en-Born, in the Landes region. In 1990, he signs a building lease with the company "Bâtir & Co" for a term of 50 years. The company builds a housing complex on the land. But in 1995, disagreements arise: the company does not achieve the expected profitability targets, and Mr. Dupont wishes to recover his land for a personal project. Both parties therefore agree to terminate the lease early, in return for compensation paid by the lessor to the lessee.

The parties sign a termination deed, and Mr. Dupont thinks the matter is closed. But the tax authorities, during an audit, reclassify the termination as a transfer of real property and demand registration duties on the value of the buildings, approximately €150,000. Mr. Dupont contests: according to him, he is merely recovering his land, the buildings being already on his property. The dispute goes to court, then on appeal, and finally to the Court of Cassation.

In the actual case, the company Teissonnière was the lessee, and the lessor was a private individual. The court ruled in favour of the tax authorities, and the Court of Cassation confirmed. The reasoning is inexorable: in a building lease, the lessee has a real property right over the land and a temporary ownership right over the buildings. Early termination extinguishes this temporary ownership right, and the lessor becomes the owner immediately. This constitutes a transfer subject to registration duties under Article 738.1° of the General Tax Code.

The reasoning of the court — dissected

The Court of Cassation relies on Article 738.1° of the General Tax Code (CGI), which provides that terminations of building leases are subject to transfer duties, except for exceptions. But note: it is not the termination itself that is taxable, but the transfer of ownership of the buildings it entails. In other words, the termination is not simply an annulment of the contract, but a transaction transferring ownership.

The building lease is a special contract: it confers on the lessee a temporary ownership right over the buildings they construct. During the lease term, the lessee is the owner of the buildings, but the lessor remains the owner of the land. At the end of the lease, unless otherwise agreed, the lessor becomes the owner of the buildings without compensation. This is called accession (Article 555 of the Civil Code). Early termination accelerates this mechanism: the lessor immediately recovers ownership of the buildings before the scheduled term.

The judges rejected the lessee's argument that the termination merely "delays the realisation" of the accession. On the contrary, they consider that early termination creates a distinct transfer, taxable in the same way as a sale. undefined, I have encountered cases where owners were surprised by this taxation, thinking that an amicable termination was tax-neutral. It is not.

This decision is not a reversal: it confirms previous case law (Cass. com., 1992) and fits within a logic of protecting the tax authorities against arrangements aimed at evading transfer duties. The judges therefore have a teleological reading of the law: favouring the taxation of property transfers, even when they take the form of a termination.

What this means for you — in practice

For the owner lessor: if you terminate a building lease early, you will have to pay registration duties on the value of the buildings you recover. These duties are calculated according to the scale for transfers for valuable consideration (about 5 to 6% depending on the department, plus notary fees). For example, in Dax, for a building worth €200,000, you will have to pay about €12,000 in duties.

For the lessee (developer): you lose your temporary ownership right over the buildings. If you have invested in buildings, early termination deprives you of the enjoyment of these assets. You may receive compensation from the lessor (as in the case), but this compensation is separate from the tax duties.

Worked example: In Parentis-en-Born, a developer built a housing estate of 10 houses on land leased for 30 years. After 5 years, they terminate the lease. The court values the buildings at €500,000. The lessor will have to pay about €30,000 in registration duties. If you are in this situation, you must factor this tax charge into the negotiation of the termination compensation.

For notaries and advisors: when drafting a termination deed, it is imperative to provide for the payment of transfer duties. A clause for apportionment can be inserted between the parties. However, be careful: if you fail to declare the transfer, the tax authorities may reassess you with penalties of 40%.

Four tips to avoid this type of dispute

• Anticipate the tax consequences of termination: from the signing of the building lease, include a clause specifying the tax consequences of an early termination. Indicate who bears the registration duties (lessor, lessee, or shared). This avoids unpleasant surprises.
• Value the buildings before terminating: have a professional valuation carried out by a surveyor or notary. The duties are calculated on the market value of the buildings on the date of termination. Undervaluation may be challenged by the tax authorities.
• Negotiate the termination compensation taking into account the duties: if you are the lessor, the compensation you pay to the lessee may be offset by the duties you will have to pay. If you are the lessee, insist that the lessor bears these duties.
• Consult a lawyer lawyer before signing: a professional in property and tax law will help you structure the transaction. In Mont-de-Marsan, for example, many firms are experienced in this type of litigation. A simple 30-minute consultation can save you years of proceedings.

Further details: related case law and developments

The 1997 decision is part of a series of Court of Cassation rulings on building leases. Notably, Cass. com., 2 June 1992, No. 90-15.487, had already held that early termination of a building lease constitutes a transfer subject to registration duties. More recently, the Court extended this reasoning to emphyteutic leases (Cass. com., 15 May 2012, No. 11-17.228), considering that early termination of this type of lease also transfers ownership of the buildings to the lessor.

The trend of the courts is therefore clear: any early termination of a lease conferring a temporary ownership right on the lessee is fiscally treated as a transfer. What few people know is that even a judicial termination (for fault, for example) is concerned. The judges do not distinguish between amicable and contentious termination.

For the future, one might expect the legislature to clarify the method of calculating duties, particularly when the buildings are partially depreciated. But as it stands, the 1997 case law remains the reference.

Checklist before acting

• Question: Is the termination of a building lease always taxable?
  Answer: Yes, unless the lease provides that the lessee retains ownership of the buildings after termination, or if the termination occurs after the normal end of the lease. But in practice, this is rare.
• Question: Can I challenge the taxation if the termination is amicable?
  Answer: No, the Court of Cassation assimilates amicable termination to a transfer. You cannot escape registration duties.
• Question: What are the deadlines for declaring the transfer?
  Answer: You must register the termination deed within one month of its signature. After this deadline, late payment penalties apply (0.20% per month).
• Question: Does the lessee also have to pay duties?
  Answer: No, the legal debtor is the lessor, since it is they who receive ownership of the buildings. But the parties may agree to share them.
• Question: How is the value of the buildings calculated?
  Answer: The market value on the date of termination, determined by comparison with similar properties or by expert valuation. In case of disagreement, the tax authorities may proceed with a reassessment.

Are you in a similar situation? A first 30-minute consultation with Maître Zakine (€45) can save you months of proceedings — and often much more. Book an appointment →