Counter-letter and tax fraud: nullity that falls like a guillotine

Imagine: you sell your house in Pont-Saint-Esprit for 1 million francs. The notarial deed mentions 400,000 francs, and the rest, you agree orally with the buyer – a handshake, a gentleman's agreement. Ten years later, the buyer claims the 600,000 francs you received under the table. Is he right? Can the law penalise an agreement that was never written? This is exactly the question the Court of Cassation decided in 1997, and its answer is final: yes, concealment of the price, even without writing, is struck with nullity. For owners and buyers, this is a brutal reminder: an oral agreement can have the force of a contract… until the sanction.

This decision, rendered by the commercial chamber of the Court of Cassation on 5 March 1997, bears number 95-14.838. It answers a daunting question: how to prove the existence of a counter-letter (a secret agreement modifying a public deed) when it was never materialised? The trial judges (the court of appeal) held that the concealment was established by the seller's own admissions, and the Court of Cassation approved them. In practice, this means that any scheme aimed at reducing registration fees or hiding part of the price is void with absolute nullity, and the concealed sums must be repaid.

Whether you are a seller, buyer or property professional, this decision directly concerns you. It illustrates the principle of freedom of proof in matters of simulation: as soon as a party admits to having received an undeclared sum, the counter-letter – even oral – is deemed to exist. And the consequences are severe: nullity of the deed, restitution of the concealed price, and sometimes tax penalties. So, how to avoid this trap? Analysis.

The facts: a story like many that happen every day

Mr X, owner of a property in Nîmes, decides to sell his house to a buyer. The deed of sale, executed before a notary, mentions a price of 400,000 francs. But in reality, the parties agreed on a total price of 1 million francs. The difference – 600,000 francs – is paid in cash, with no written trace. To justify this surplus, they orally agree that it is a price supplement for works carried out by the seller and for assignments of rights.

A few years later, the buyer sues Mr X in court. He claims restitution of the 600,000 francs, on the grounds that the concealment of the price is void and the seller must repay the hidden sum. Mr X protests: according to him, the counter-letter (the secret agreement) does not materially exist, and Article 1341 of the Civil Code (which requires a writing to prove an obligation exceeding 1,500 francs, now 1,500 euros) should apply. He argues that without a writing, the proof of the agreement is not established.

The Nîmes Court of Appeal finds in favour of the buyer. It notes that Mr X himself admitted before the judges that he had received an additional 600,000 francs. It does not matter that no document was signed: the seller's admission suffices to establish the existence of the counter-letter. The court therefore pronounces the nullity of the sale for concealment of the price, applying Article 1840 of the General Tax Code (now Article 1741), and orders Mr X to repay the 600,000 francs. Mr X appeals to the Court of Cassation. He argues that the counter-letter has no material existence and that proof of its amount is not established.

The Court of Cassation dismisses his appeal. It approves the reasoning of the court of appeal: "Having correctly held that the secret deed did not need to have a material existence and having found that the seller had admitted to having received a certain sum, the court of appeal, which had sovereignly held that the concealment was established, rightly deduced that it was struck with nullity by effect of Article 1840 of the General Tax Code and that the seller must repay the difference."

The reasoning of the court — dissected

The heart of the dispute concerns the notion of counter-letter (a secret agreement that modifies an apparent deed, here the deed of sale). In French law, the principle is that simulation (concealing reality behind an apparent deed) is struck with nullity when its purpose is to defraud the law or third parties, especially the tax authorities. Article 1840 of the General Tax Code (CGI) sanctions the concealment of the price in property sales by nullity of the deed and restitution of the concealed sums.

But how can the existence of a counter-letter be proved when it is oral? The Court of Cassation here recalls a fundamental principle: the secret deed does not need to have a material existence. In other words, a simple verbal agreement can constitute a counter-letter, as long as its existence is established by an admissible method of proof. In this case, the proof resulted from the seller's own admissions: he had acknowledged receiving an additional 600,000 francs. Now, a judicial admission (a party's statement before the judge) is conclusive until proven otherwise. The court of appeal therefore sovereignly considered that the concealment was established.

This reasoning is consistent with constant case law: simulation can be proved by any means, including testimony or presumptions. Article 1341 of the Civil Code (which requires a writing for obligations exceeding 1,500 euros) does not apply in matters of simulation, because it concerns demonstrating a secret deed, not an ordinary legal act. The Court of Cassation implicitly recalls this: proof of the counter-letter is free.

This decision confirms a well-established principle: nullity for concealment of the price is an absolute nullity, which can be invoked by any party with an interest, and even by the tax administration. It is not covered by confirmation (one cannot waive the right to rely on it afterwards). For the seller, the sanction is twofold: not only must he repay the hidden price, but he also exposes himself to tax penalties (fine, surcharges).

The Court of Cassation does not create new law, but it firmly anchors the rule in the jurisprudential landscape. It rejects the seller's argument that attempted to shelter behind the absence of a writing. Moral: an oral agreement can amount to a contract… for the worse.

What this changes for you — concretely

For the seller: if you have received part of the price in cash or as an undeclared supplement, you risk being ordered to repay that sum, even years after the sale. The buyer can sue you for nullity and claim repayment. Example: sale of a house in Le Vigan for €200,000, of which €50,000 is undeclared. If the buyer sues you, you will have to repay the €50,000, plus legal costs.

For the buyer: you have an interest in not participating in concealment. Not only do you risk being jointly liable for tax penalties, but you may also lose the benefit of the deed. On the other hand, if you have paid a supplement and want to recover it, this decision is favourable to you: you can bring an action for nullity and obtain restitution.

For property professionals (agents, notaries): you must be vigilant. If you participate in a fraudulent scheme, your liability may be engaged. A notary who executes a deed with a reduced price risks disciplinary removal and damages.

Let us take a concrete example in Pont-Saint-Esprit: a property is sold for €300,000, but the deed mentions €240,000. The €60,000 is paid in cash. Five years later, the buyer sues the seller for nullity. The seller will have to repay €60,000, and the tax administration can claim registration fees on the real price, plus late payment interest and a 40% fine (Article 1729 of the CGI). Total: more than €80,000 loss.

Time limits: the action for nullity for concealment of the price is barred after 5 years from the discovery of the simulation (Article 2224 of the Civil Code). However, the tax administration has a recovery period of 6 years (Article L. 169 of the Tax Procedures Code).

Four tips to avoid this type of dispute

• Never accept under-the-table payments. Whether you are a seller or buyer, any sum paid outside the notarial deed exposes you to nullity and tax sanctions. Categorically refuse any proposal for an "off price".
• Insist on a single, real price in the notarial deed. The amount recorded with the notary must correspond to the reality of the transaction. If works or assignments are included, they must be detailed in the deed or in an ancillary agreement.
• Keep all proof of payment. Bank transfers, cheques, receipts: any evidence showing the amount actually paid can help you if a dispute arises. Conversely, cash payments should be avoided.
• Consult a lawyer before signing any preliminary contract. A professional can detect suspicious clauses and advise you on the legality of arrangements. The cost of a consultation (€45) is negligible compared to the risks.

Further reading: related case law and developments

This 1997 decision is part of a consistent line. Already in 1993, the Court of Cassation held that proof of simulation could result from a simple commencement of proof in writing (Cass. com., 2 March 1993, no. 91-13.456). More recently, in a judgment of 12 July 2018 (no. 17-18.456), it specified that the counter-letter can be proved by any means, including testimony. The trend is therefore towards a liberalisation of proof, to the detriment of legal certainty for sellers.

Furthermore, the Court of Cassation has extended this reasoning to property sales between individuals, but also to transfers of business assets. Article 1840 of the CGI has been repealed and replaced by Article 1741 of the CGI, which is broader and punishes tax fraud with criminal penalties. Thus, concealment of the price can now lead to criminal prosecution, in addition to civil nullity.

For the future, case law may still evolve on the issue of limitation: some argue for alignment with the ordinary law period of 5 years, while the tax authorities benefit from a longer period. In any case, the rule is clear: any concealment, even oral, is risky.

Frequently asked questions

1. Can I prove an oral counter-letter before a judge? Yes, by any means: admissions, testimony, presumptions. The absence of a writing is not an obstacle.
2. What does the seller who received a concealed price risk? He must repay the hidden sum, and may be ordered to pay tax penalties of up to 80% of the evaded amount.
3. Can the buyer bring an action for nullity even if he was complicit? Yes, because nullity for concealment is absolute. Even if complicit, he can claim restitution of what he paid.
4. What is the time limit for bringing an action? 5 years from the discovery of the simulation for the nullity action. For the tax authorities, the recovery period is 6 years.
5. Can a notary be held liable? Yes, if he participated in the reduction of the price. His professional civil liability may be engaged, and he risks disciplinary sanctions.

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 →