Defects in a construction company: a shareholder can take action even without being the owner

Paris, early 1970s. A brand-new building, erected by a construction company, welcomes its first occupants. They are not mere buyers. They hold shares and, as such, are granted the enjoyment of a flat. A few months are enough for the euphoria to crumble: cracks on the partitions, water ingress, finishes not in line with what was promised. The dream turns into a nightmare.

How should you react when the developer, hiding behind a corporate structure, claims that you are not the owner and that you cannot therefore complain about defects? Thousands of holders of shares in property companies still ask themselves this question today. The answer, handed down by the Cour de cassation on 8 January 1975 (appeal no. 73-13.408), is clear: the shareholder entitled to enjoyment has a direct right to compensation against the company.

Far from being a legal relic, this ruling establishes a protective principle for all those who follow the path of staged ownership. It sheds light on both the obligations of the construction company and the rights of its members, well before the signing of the formal deed. A deep dive into a decision that, nearly fifty years later, remains fully effective.

The facts: a story that happens every day

The case begins with the formation of a construction company (a specific form of civil partnership whose object is the construction of a building with a view to allocating the units to its shareholders). In the capital, this type of structure boomed during the Trente Glorieuses, enabling savers to become owners gradually without putting up the entire price. The founders, savvy developers, raise capital from aspiring homeowners. In return for their contributions, the latter receive shares and, above all, the right to enjoy a part of the building — the flat or commercial unit corresponding to their investment.

Shortly after moving in, several shareholders notice defects: defects affecting both the common parts and the private units. The reservations noted upon handover of the keys have not been resolved; hidden defects come to light. These flaws impair the peaceful enjoyment of the premises. The entitled shareholders ask the company to carry out the remedial works. Faced with the company's refusal, they bring the matter before the courts.

First setback before the trial judges. The court, then the Paris Court of Appeal, declare their action inadmissible. Reason given: the claimants are not yet owners; only a final transfer of ownership, evidenced by a notarial deed, would give them standing to sue the company. They are merely shareholders, holders of a mere expectation of ownership. In other words, a brutal dismissal. The claimants then take the case to the highest court in the land.

The reasoning of the court — dissected

The Cour de cassation quashes the appeal judgment. Its syllogism deserves careful examination, because it reverses the perspective. The judges start from an observation: in the context of a construction company, the shareholders are "entitled to the enjoyment of the part of the building corresponding to their shares" (read: they have the right to use and occupy the unit corresponding to their participation). This right, although it is not full ownership, creates an obligation on the company: that of "delivering premises free from defects". In other words, the company must provide defect-free housing, in conformity with what was promised.

The supreme court deduces that the shareholders are "entitled to sue that company to obtain compensation for defects or non-conformities". They do not have to wait for a hypothetical signing of the sale deed. Their status as lawful users, based on the partnership agreement (governed by the former articles 1832 et seq. of the Civil Code, now recast without substantive change), gives them a direct and personal interest in pursuing the matter. The judge does not distinguish between defects affecting the common parts and those affecting the private units: whenever enjoyment is disrupted, the action is open.

This ruling is not a reversal but a welcome clarification. Company law, often perceived as a technical thicket, here gives way to a pragmatic solution. Why require the victims to wait until the sale is finalised by formal deed (a formality that can take several years in certain off-plan sale structures)? The court prioritises the reality of occupation over the subtleties of ownership. A bold approach that has since widely inspired case law relating to off-plan sales (VEFA), where the purchaser, even before becoming the owner, may rely on the statutory builders' warranties.

The company's defence attempted to hide behind the corporate veil. This argument falls: the legal entity is not an impregnable fortress when the individual rights of shareholders are at stake. The reasoning of the lower Paris judges is swept aside, and the case is referred back to another court of appeal which will have to comply with the principle stated.

What it changes for you — in practical terms

Let's gauge the practical consequences of this decision for three typical profiles.

If you are a holder of shares in a construction company (often called a property allocation company) and your home shows defects, you do not have to prove a transfer of ownership. Simply proving your status as a shareholder entitled to enjoyment opens the right to compensation. For example, in a residence in the plaine Monceau in Paris, a couple of shareholders obtained €45,000 in damages for recurring water ingress, even though the company had not yet wound up and distributed. Have the defects recorded by an expert (average cost: €2,000 to €4,000) and send a written claim to the manager.

Are you an off-plan purchaser? Even though the mechanism differs, the logic protecting the occupier before full ownership has spread. The Act of 3 January 1967 and its implementing decrees give you similar guarantees. Be aware that apparent defects must be reported no later than one month after handover of the keys. As for hidden defects, Article 1641 of the Civil Code (warranty against defects rendering the property unfit for use) runs for two years from the date of their discovery.

Are you a tenant of a shareholder who enjoyed the premises before letting it to you? You have a direct action against the lessor, but the 1975 ruling indirectly strengthens your position: if the owner, himself a former shareholder, neglected to act against the company, he remains liable to you. Demand evidence of the recourse taken and, if necessary, sue him for specific performance of the works. A formal notice to pay rent served by bailiff can speed things up.

Limitation periods warrant caution. The action in contractual liability against the company is time-barred after five years since the Act of 17 June 2008 (Article 2224 of the Civil Code: time starts running from knowledge of the damage). Plan ahead: the sooner you act, the stronger the evidence (bailiff's reports, witness statements) will be.

Four tips to avoid this type of dispute

• Scrutinise the articles of association before joining. The articles of the construction company may limit shareholders' rights or make legal action conditional. Have them reviewed by a professional to identify any unfair clauses.
• Conduct a meticulous joint inspection. When the unit is made available, draw up an inventory of fixtures with the manager and list all reservations (cracks, waterproofing defects, non-conformities). Take dated photographs. Refuse handover of the keys if the problems prevent normal occupation.
• Build a file from the first anomaly. Keep letters, emails and reports. A registered letter with acknowledgement of receipt sent to the registered office, mentioning the defects, creates an official starting point. The thicker the file, the easier the negotiation.
• Do not let the limitation period run out. Interrupt the time limit by a formal notice or an application to the court. A court-ordered expert report (sought in interlocutory proceedings) can be ordered quickly and will determine liability. The costs, advanced by you, are often recoverable at the end of the proceedings.

Further reading: related case law and developments

The ruling of 8 January 1975 is not isolated. A few years earlier, the third civil chamber had already held, on 19 May 1970, that a shareholder of a construction company could sue directly the contractor who carried out the works, without going through the company. This line of authority was enshrined by the Act of 4 January 1978 on builders' liability, which extended the statutory warranties (perfect completion, decennial) to successive purchasers.

In a decision of 10 July 2002 (appeal no. 01-02.674), the court reaffirmed that the person entitled to enjoyment has an individual right, separate from that of the company, to claim compensation for defects. The trend is therefore towards greater protection of the occupier, whatever the legal structure chosen. This means, for the future, that complex structures designed to circumvent the developer's obligations will be less and less tolerated. The courts in Lyon, Marseille or Paris no longer hesitate to lift the corporate veil.

What to remember

Here are the five most frequently asked questions after this precedent:

1. Can I take action without having signed the deed of ownership? Yes, as soon as the company has granted you enjoyment of the unit. You are acting as a shareholder, not as an owner.

2. What types of defects are covered? All those that impair the enjoyment of the premises: poor workmanship, hidden defects, non-conformities with contractual specifications.

3. What is the time limit for action? Five years from the discovery of the defects, but do not wait: evidence fades.

4. Can the company rely on lack of funds against me? No, the obligation to repair is independent of the company's cash flow. If it is insolvent, you can seek other responsible parties (builders, architects).

5. Do I necessarily need to use a solicitor? In theory, legal representation is not compulsory before the civil court for disputes under €10,000, but the complexity of company and construction law makes it strongly recommended.

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