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Recent Developments in Securitization Law - International Law Office

International Law Office

Securitisation & Structured Finance - France

Recent Developments in Securitization Law

October 27 2009

Islamic Finance
Coeur Défense

Two landmark developments in securitization and structured finance have recently taken place: an attempt at introducing provisions to facilitate Islamic finance - in particular, sukuk - and developments in litigation concerning commercial mortgage-backed securities.

Islamic Finance

On September 17 2009 Parliament adopted a change to the Civil Code concerning the fiducie (trust), which enables the issue of French law-governed sukuk in France. The new provisions will not take effect until final sign-off is given by the Constitutional Court.

The purpose of the change in the law is to provide the beneficiary of a trust (or sukuk owner) with an ownership-like right or equitable right to the underlying asset in order to comply with Shariah requirements.

A new article has been added to Article 2011 of the Civil Code which provides that:

"the trustee enforces the ownership in trust over the assets in the trustee's estate for the benefit of the beneficiary(ies) in accordance with the provisions set out in the trust arrangement."

Although the draft of the provision is vague, it is expected that it would overcome the last legal hurdle to the issue of sukuk in France.

However, on October 15 2009 the Constitutional Court rejected the new provision on procedural grounds, on the basis that the new provision was inserted into a legal provision unrelated to the matter. The Constitutional Court did not take a view on the content of the provision itself. It is expected that such amendment will be put to Parliament shortly in a specific, dedicated law proposal.

Coeur Défense

Coeur Défense is a large property development in Parisian business district La Défense. It has been refinanced by way of commercial mortgaged-backed securities with 11 classes of note, most being rated and listed.

Following the collapse of Lehman Brothers (the hedge counterparty) and the breach of loan-to-value covenants as a result of the decline of the property market, the debtor filed a safeguard proceeding. The effect of such proceeding is a stay of payments and a freeze on any enforcement (including enforcement by secured creditors).

The special purpose vehicle (SPV) fonds commun de titrisation notified the tenants, whose rents had been assigned by way of Cession Dailly, asking them to pay the SPV directly. However, in an interim order the Paris Commercial Court and subsequently the Paris Court of Appeal rejected the request and ordered that the tenants' rent be paid into an escrow account until the claim had been settled on its merits.

In the meantime, despite lengthy discussions, the creditors (mainly the SPV) and debtors failed to reach an agreement or to agree a safeguard plan. Consequently, the debtors requested that the court impose a restructuring plan.

On September 9 2009 the court formulated a plan for the creditors that was in the interests of the property market. The court also extended the maturity of the loan from 2012 to 2014 on the basis that the conditions for such an extension were disapplied given the opening of the safeguard proceeding. Surprisingly, although the public prosecutor was supportive of the safeguard plan, he lodged an appeal against the decision of the court.

Litigation concerning the assignment of the rent is ongoing and this issue is the cornerstone of the case. In a judgment dated October 19 2009, the Commercial Court of Paris recognized that the SPV is the owner of the rents owed by the tenants under the lease agreements and of the cash arising therefrom. However, the court acknowledged the SPV's proposal to transfer back the necessary amount to cover the maintenance and normal operating expenses of the building, and allowed the SPV and the debtor three months to reach an agreement on the practicalities and the amount of such transfer in order to facilitate the performance of the safeguard plan. In the absence of an agreement, the parties will have to refer back to the court.

For further information on this topic please contact Philip Boys at Lovells LLP by telephone (+33 1 53 67 47 47), fax (+33 1 53 67 47 48) or email (philip.boys@lovells.com). The Lovells website can be accessed at www.lovells.com.

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