The sale of a life annuity

Definition and conditions

Individuals choosing this type of transaction are still quite rare. And yet, it is a means of acquiring a property at a discount and responds to the will of the elderly to remain in their homes. The advice of an expert with Claudia THIRION, Court lawyer


The sale of a property via a life annuity is the contract whereby, in return for the acquisition of a property, the acquirer (annuity debtor) is committed to periodically pay the annuitant-creditor for his entire life-time or that of a third party the arrears representing all or part of the price of sale of the property. “Generally, this type of transaction concerns a building, but it can also be applied to a single property or to capital”, explains Claudia THIRION. “This does not necessarily imply the integral transfer of the property to the annuitant-debtor and only concerns the freehold of the property sold and can only cover the bare ownership of a building reserved by the Annuitant held by the annuitant-creditor in usufruct or maintained as a right of use and habitation”.

We must remember two notions. Firstly, usufruct is the right to enjoy something and to dispose of the fruit of the property, but not to sell it or give it away.  This right is provisory and ends at the death of the usufructor. Secondly, the right to use and occupy the property corresponds to the right of the annuitant-creditor to live in the property.

When acquiring a home in life annuity, in most cases it concerns an occupied property occupied on the basis of usufruct or a right of usage and occupation retained by the seller.

The contract of sale with life annuity is an aleatory sale. “In fact, the acquirer (annuitant-debtor) acquires the property of the building ceased by the annuitant-creditor even if he dies quickly, which means that paid arrears are inferior to the value of the property in question”. Conversely, he is obliged to keep paying the royalties until the death of the seller even if because of his long life, the arrears exceed the value of the property in question” 

Constitution of the pension

The constitution of a pension annuity, in exchange for the transfer of a building can be analysed as a sale of property and is subject to the common law of property sales in terms of the formal requirements of the contract as well as the conditions of legal capacity and the rights of the parties.
“It is subject to the rule of the double original when it is under private seal (article 1325 of the Civil Code) and must be carried out by an authentic (notarized) deed published in the Office of mortgages to become enforceable against third parties”

However, sales in life annuities are also inapplicable to common law in other aspects. “For example, the rescission of the sale due to injury of more than 7/12 is generally inapplicable because it is usually an aleatory sale in which the seller has taken the risk of a reduced price”

Diversity of the terms of the contract

It often occurs that the annuitant-creditor maintains the right to use or live in the habitation.           “The annuity rate is established in consideration of the value of the property, the age and state of health of the annuitant-creditor and the usufruct or right of use and occupation that the annuitant-creditor has been able to establish to his advantage “.

It is also quite common that a sale contains the immediate payment of part of the price, known as a “bouquet”. “The pension is then calculated in consideration of the balance of payment”.

Finally, the annuities are often constituted on two heads, generally in favour of two spouses. In this case, instead of extinguishing at the death of the subscriber, the pension continues to be due to the survivor for his or her entire life.

Necessity of a clause of risk

In the absence of a clause, the sale by annuities is null, without cause.

“Therefore, if the person on whose head has been constituted the pension annuity dies the day of the contract, it has no effect and is considered to be null (article 1974 of the civil Code)” This is the case when the annuity is constituted on the head of a third party whose contractors are unaware of the death when they have contracted.

Jurisprudence considers that "the constitution of any life annuities amounting to less than or equal to the income of the alienated property" is void (French Cassation 1st civil; July 4, 1995) – Death of the annuitant-creditor in the 20 days of the contract and knowledge of his or her desperate condition” According to article 1975 of the Civil Code, the contract has no effect when the pension is established on the head of a person already suffering from a mortal illness and dies in 20 days of the contract. It pertains to a text concerning public order; i.e. to which the parties cannot derogate. “The article only applies if the annuitant-creditor was suffering from an illness and dies in 20 days of the signature of the contract.

The pension rate (amount)

“Article 1976 of the Civil Code provides that the annuity can be constituted at the rate that appeals to the parties concerned”. The determination of the arrears of the pension is thus left to the discretion of the parties, based on the principle of contractual liberty, limited by the requirements of a fair and serious price. “However, jurisprudence surveys the maintenance of a certain correlation between the principle amount of the arrears owned by the debtor and the value of the property sold (French Cassation, 1st civil; March 25,1969) “. 

To fix the pension in a sincere and genuine way, it is usual to refer to the statistics and barometers of the mortality tables. The pension can also be established in function of the probable length of life of the annuitant-creditor.

Taxation  

The taxation of life annuities responds to the following criteria:
-    exemption of the 1st instalment of 50% of the monthly life annuity pension;
-    taxation of the 2nd instalment of 50% of the monthly annuity pension at the normal rate;

The taxation of capital is based on the following tariff provisions: application to the capital at half of the global rate.

By Emilie Di Vincenzo