The Vendor's Privilege and Rescission for Non-Payment: the Unpaid Seller's Securities in a French Business Sale

The unpaid seller of a French business: two weapons the law provides

A seller who agrees to be paid over time carries the risk every lender carries: the buyer's later insolvency. For the sale of a fonds de commerce, the Commercial Code arms the seller twice. The vendor's privilege (C. com. Art. L 141-5) makes the seller a secured creditor: paid by preference out of the fonds' resale price, with a pursuit right that follows the business into anyone's hands - but only if the deed is registered, the privilege inscribed within thirty days, and the price split across the fonds' three families of elements. And where the buyer does not pay, the seller can have the sale rescinded (C. civ. Art. 1654) and take the business back - through a procedure that protects the buyer's own creditors with mentions, notifications and a one-month standstill.

This guide covers both instruments as the texts and the case law shape them: the privilege's conditions, scope, rank and lifespan; why the tripartite price split matters and how the privilege divides; and the rescission - its conditions between the parties and against third parties, the creditor notifications, the take-back accounts, and what survives against sub-buyers, tenant-managers and employees.

The vendor's privilege: security for the unpaid price

A written, registered deed. The privilege exists only where the sale is recorded in a notarial or private deed, duly registered with the tax administration (C. com. Art. L 141-5, al. 1). Since the privilege must be inscribed within thirty days of the sale, the registration must also happen inside that window.

Inscription within thirty days - on pain of nullity. The privilege is inscribed at the registry of the commercial court of the place where the fonds is operated (C. com. Art. L 141-5), within thirty days of the deed's date, on pain of nullity (C. com. Art. L 141-6). The opening of insolvency proceedings against the buyer in the meantime does not bar the inscription (C. com. Art. L 622-30, al. 3). With the deed, the seller files two schedules (bordereaux) stating (C. com. Art. R 143-6 and R 143-8): the parties' names, domiciles and professions; the date and nature of the instrument; the prices set out separately for the equipment, the goods and the intangible elements, with the valued charges and the terms on interest and maturity; the designation of the fonds and its branches with the elements included in the sale; and the seller's election of domicile in the court's district. The registrar returns the deed and one annotated schedule; the other stays on file.

Scope of the security. The privilege attaches only to the elements listed in the deed and the schedules; where none are listed, it covers only the sign and trade name, the lease right, the clientele and the custom (C. com. Art. L 141-5, al. 2).

The tripartite price split. Separate prices must be set for the intangibles, the equipment and the goods (C. com. Art. L 141-5, al. 3). The seller should never state a single global price: courts have sanctioned the omission with nullity of the privilege (another line of authority saves the privilege but shrinks it to the intangibles) - and the fallback rule for unlisted elements does not cure a missing price split, which is in any case indispensable for the rules on allocating part-payments and for exercising the privilege element by element.

What the privilege gives the unpaid seller - and for how long

Duration. The inscription preserves the privilege for ten years from its date; it lapses unless renewed before expiry (C. com. Art. L 143-19, al. 1).

What is secured. The principal, the stipulated price or its balance, plus two years' interest (C. com. Art. L 143-19, al. 2), and the charges of the sale, which the schedules must value: an intermediary's commission charged to the buyer qualifies; the early-repayment indemnity on the buyer's acquisition loan and distribution-procedure participation costs do not. Charges must be split like the price; failing a split they are allocated pro rata across the stipulated prices.

The privilege divides. It bears separately on the resale price of the goods, of the equipment and of the intangibles (C. com. Art. L 141-5, al. 4). The consequence is arithmetic, and it bites. Take a fonds sold for €200,000, intangibles €100,000, equipment €60,000, goods €40,000, and resold for €160,000 split €80,000 / €20,000 / €60,000. The seller collects by preference €80,000 on the intangibles (unsecured for the remaining €20,000), €20,000 on the equipment (unsecured for €40,000), and its full €40,000 on the goods - but the €20,000 excess on the goods escapes the privilege. Secured recovery: €140,000; unsecured claim: €60,000. To blunt the divisibility, the seller can usefully take a pledge (nantissement) over the fonds as well, which bears indivisibly on the price of the equipment and the intangibles.

Preference and pursuit. The privilege gives the right to be paid by preference out of the fonds' resale price (C. com. Art. L 141-5) and a pursuit right - following the fonds into whoever's hands it passes and forcing its sale even against a later acquirer (C. com. Art. L 143-12).

Rank. Unlike other inscribed creditors, ranked by inscription date, the seller whose privilege was inscribed within the thirty days is paid before every creditor holding a pledge from the buyer - even one inscribed within the same period (C. com. Art. L 141-6, al. 1).

Extinction. The privilege's effects end by expiry of the inscription or by its striking-off - recorded by an act of the parties' agreement or by a final court decision (C. com. Art. L 143-20).

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Rescission when the price stays unpaid

The principle. If the buyer does not pay, the seller can have the sale rescinded (C. civ. Art. 1654): the fonds returns to the seller's estate. Because that return strikes the buyer's own creditors holding rights over the fonds, the Commercial Code frames how the action is exercised. The regime governs rescission for non-payment of the price, total or partial, whether or not the failure is the buyer's fault - and, on the better view, it extends to amicable rescission and to automatic termination clauses in the deed; it does not govern rescission on other grounds, such as hidden defects or eviction.

Against third parties: two locks. To produce effect against third parties, the rescission action must be expressly mentioned in the inscription of the vendor's privilege, and it cannot be exercised to third parties' detriment after that privilege is extinguished (C. com. Art. L 141-6, al. 2). Only "third parties" can invoke a breach of those conditions - a category the Cour de cassation has read restrictively (creditors holding a pledge from the buyer and good-faith sub-buyers, but not unsecured creditors), against the majority of commentators and some lower courts, who read the protection as covering all creditors.

Between the parties: ordinary law. Between seller and buyer, the action follows the general law of rescission, and its exercise does not depend on the privilege's existence. The buyer sued for rescission can ask the court for time to pay (C. civ. Art. 1228, al. 3). One bar is absolute: once insolvency proceedings (sauvegarde, redressement, liquidation) open against the buyer, the seller can neither sue for the price nor seek rescission for non-payment, even where only one of several co-buyers is in the proceedings, and must declare its claim to the court-appointed officer.

Running the rescission: notices, then taking back the business sold unpaid

Who acts. The action belongs to the seller alone - and where there are several sellers, or several heirs after the seller's death, all must act together: the action is indivisible.

The creditor notifications. Where creditors hold inscriptions (privilege or pledge) on the fonds, the seller must notify them of the rescission demand, and the rescission judgment cannot issue before one month has run from those notifications (C. com. Art. L 141-8); an un-notified demand is inadmissible. The same discipline applies outside court: a rescission flowing from an automatic termination clause or from an amicable agreement with the buyer must also be notified to the inscribed creditors, and becomes final only one month after the notification (C. com. Art. L 141-9). The month is the creditors' window: they can pay the price themselves to head off the rescission and save their inscriptions, or contest the rescission for failure of its conditions.

Between the parties: the take-back and its accounts. Amicable or judicial, the rescission obliges the seller to take back every element that was part of the sale - including elements already paid for, on which the privilege is extinguished (C. com. Art. L 141-7); it cannot reach new elements the buyer added to the fonds. The seller takes the elements as they stand, and accounts are drawn:

• for the goods and the equipment, their value at repossession is fixed by adversarial expert appraisal, amicable or judicial; from it is deducted, separately per category, what remains owed to the seller on those assets under the privilege: the balance is what the seller owes the buyer;
• for the intangibles, on which the Code is silent, the ordinary law of rescission applies: they return to the seller at the contract price, with no allowance for the loss of value they suffered between sale and rescission - that depreciation is compensated only where it is due to the buyer's fault.

How far the unpaid seller's rescission reaches third parties

The buyer's creditors. Rescission normally extinguishes everything the buyer did with the thing - sales, security interests. For the fonds the effect is tempered: the buyer's pledge creditors, and failing them its unsecured creditors, keep a preference over the sums the seller owes the buyer on the take-back of the equipment and the goods (C. com. Art. L 141-7).

Sub-buyers. Rescission takes full effect against sub-buyers who failed to run the purge of inscriptions: the unpaid seller retakes every element of the original sale, in whoever's hands and wherever moved - even elements whose price it received and on which the privilege died. The sub-buyer of the fonds or of an intangible element cannot resist by pleading good-faith possession, that defence applying only to tangible movables - so the sub-buyer of the equipment can invoke it.

Tenant-managers and lessors. A location-gérance the buyer granted must be terminated: although a seller must honour leases the buyer made without fraud, letting out a fonds is an administration act of an exceptional kind, too heavy to force an unchosen tenant-manager on the returning seller. And where the premises' owner had granted the buyer a new lease the very day of the sale, the rescission of the sale carried the lease with it, deprived of its cause, so no eviction indemnity was owed to the ex-buyer who stayed on.

The employees. Provided the fonds is still operable and has kept its identity at the rescission date, the employment contracts that had passed to the buyer continue by law with the seller (C. trav. Art. L 1224-1) - the automatic-transfer rules covered in this series' employees guide run in both directions.

The tax line. Rescission refunds no registration duties paid at the sale (CGI Art. 1961), and the seller does not recover the tax paid on its capital gain - it may instead book a loss of the same amount.

Left unpaid: your move as seller

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Frequently Asked Questions

This article is for general information only and states French law as published in the sources available at the date shown above. It does not constitute legal advice. Deadlines and formalities are strict and fact-dependent. Always seek qualified legal advice before acting.