Mortgage and Guarantee: When a Bank's Action Binds the SCI

Imagine: you are the owner of a property in Beaumont, and you decide to act as guarantor for a loan taken out by the SCI you manage with your family. The bank registers a mortgage on the property. Later, you contest the validity of your undertaking. The question then arises simply: can this registration of a mortgage be considered a commencement of performance of your guarantee, thereby preventing you from challenging your signature? This is exactly the issue the French Supreme Court had to decide in its judgment of 9 March 2017.

For the uninitiated, commencement of performance is a key concept in law: if a party has already begun to perform a contract, it is more difficult to seek its nullity. Here, the bank had taken the initiative to register the mortgage, and the SCI had done nothing. So, does this registration count as an act of performance attributable to the company?

The magistrates' answer is unequivocal: yes, the registration of a mortgage constitutes a commencement of performance, regardless of who carries it out. In other words, it does not matter that it was the bank that acted: the act is attributed to the SCI because it directly results from its undertaking. A decision that reinforces the security of creditors, but which should make guarantors think before signing.

The facts: a story that happens every day

Mr. Georges C. and his mother, Mrs. Thérèse C., were shareholders in a family SCI. On 22 December 2003, Georges transferred his shares to his mother. But before this transfer, the SCI had acted as guarantor for a loan granted by a bank. To secure this guarantee, the bank had registered a mortgage over a property of the SCI. Problem: the SCI considers that its guarantee undertaking is void because it was not validly decided by its management bodies. It relies on Article 1849 of the Civil Code (which sets out the rules for representation of companies).

The bank, for its part, retorts that even if the undertaking was void, the registration of the mortgage constitutes a commencement of performance. However, according to the law, nullity cannot be invoked if the contract has already received a commencement of performance. This is the famous principle of the exception of nullity, which can be paralysed by voluntary performance.

The case comes before the Clermont-Ferrand Court of Appeal. The trial judges rule in favour of the SCI: they consider that the registration of the mortgage was carried out by the bank alone, and not by the SCI. Therefore, it is not a voluntary act of the company, and consequently, not a commencement of performance of the guarantee. The bank is dismissed. But the bank does not give up: it appeals to the Supreme Court.

The reasoning of the court — dissected

The French Supreme Court, in its judgment of 9 March 2017, quashes the appeal judgment. It relies on a fundamental principle: the registration of a mortgage constitutes a commencement of performance, regardless of who carries it out. In other words, as soon as the registration is made in the context of the performance of the guarantee deed, it is attributable to the SCI, even if it was the bank that materially carried it out.

The reasoning is as follows: the bank did not act on its own initiative, but on the basis of the SCI's undertaking. The registration is the direct consequence of the guarantee agreement. The SCI cannot therefore complain about an act that it itself provoked by signing the contract. This is a classic application of the theory of performance: the creditor performs the contract by taking the securities (mortgage) provided for. If the debtor (the SCI) does nothing, it is deemed to have accepted this performance.

This decision confirms well-established case law: the registration of a mortgage is a material act of performance, regardless of whether it is carried out by the creditor. The trial judges erred in requiring a voluntary act of the SCI. Henceforth, it is clear that the nullity of a guarantee can no longer be invoked if the mortgage has been registered, even by the bank.

What this changes for you — concretely

For landlord owners and SCI managers, this decision is a warning: if you sign a guarantee deed (an undertaking to guarantee a loan), and the bank registers a mortgage on your property, you will not be able to go back by invoking a procedural defect. The registration constitutes a commencement of performance that renders nullity inadmissible.

Let's take a concrete example: in Chamalières, a couple gives a guarantee for a loan of €200,000 taken out by their SCI. The bank takes a mortgage on their house. Six months later, the couple discovers that the general meeting of the SCI did not validly authorise the guarantee. Thinking they can cancel their undertaking, they take the matter to court. But with this case law, their action will be dismissed: the mortgage has already been registered, so the contract has received a commencement of performance.

For buyers, be vigilant: if you buy a property encumbered by a mortgage taken as security for a guarantee, you must check that the guarantee undertaking is valid. If nullity has not been invoked before the registration, it is definitively lost. For co-owners, this decision mainly concerns those who act as guarantors in the context of loans to the co-ownership: the registration of the mortgage by the bank is sufficient to block any subsequent challenge.

In practice, if you are in this situation, you must act immediately after signing, and not wait for the registration of the mortgage. A period of five years runs from the signing to invoke nullity, but it is interrupted as soon as the first act of performance occurs.

Four tips to avoid this type of dispute

• Check the validity of your guarantee before any registration. Before signing, ensure that the general meeting of the SCI has validly authorised the undertaking, and that the articles of association permit it. If necessary, consult a lawyer to validate the procedure.
• Do not delay in contesting if you believe the undertaking is void. As soon as you have any doubt, take legal action before the bank registers the mortgage. The registration act, even if done by the bank, will prevent you from seeking nullity.
• Require the bank to inform you of the registration. At the time of signing, ask for a clause specifying that you will be notified of any mortgage registration. This way, you will know when the time limit for contesting begins to run.
• Keep all documents relating to the undertaking. Minutes of meetings, articles of association, correspondence: everything can serve to prove that the guarantee was regularly given. In case of a dispute, this evidence is crucial.

Further reading: related case law and developments

This decision is part of a consistent line of the French Supreme Court. Already in 2012 (Civ. 1re, 7 March 2012, No. 11-10.377), it had held that the payment of a sum by the creditor by way of advance constituted a commencement of performance of a void loan. Here, the logic is the same: any material act carried out by the creditor in performance of the contract constitutes a commencement of performance, even if the debtor has done nothing.

On the other hand, there was a divergence with certain lower courts which, before 2017, required a voluntary act of the debtor. The Supreme Court's judgment puts an end to this divergence. Henceforth, the trend is clear: the notion of commencement of performance is assessed objectively, without regard to the author of the act. For the future, we can expect that other acts of the creditor (such as the publication of a privilege) will also be considered as commencements of performance.

In practice: what to do

FAQ: 4 essential questions

1. Can I still contest my guarantee if the mortgage has already been registered?
No, unless you demonstrate that the registration was not made in performance of the guarantee (for example, if it is fraudulent). Otherwise, nullity is inadmissible.

2. What should I do if I discover that my guarantee is void before registration?
Immediately bring the matter before the judicial court to seek nullity. You have a period of five years from the signing. Once the mortgage is registered, it will be too late.

3. Does this decision apply to guarantees given by individuals?
Yes, the principle is general: any legal or natural person may be concerned, as long as a guarantee is accompanied by a mortgage.

4. What is the cost of a mortgage registration?
The registration fees (land publicity tax, emoluments) are generally borne by the borrower. Allow approximately 1 to 2% of the amount guaranteed, depending on the scales.

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