Buying and selling a vineyard in France

The particularities of purchases in the wine sector are not well known, especially to foreign investors.

Let’s take a quick insight into this sector that is so sought-after, especially after some substantial changes were made by the last agricultural law.

The last three years have been rich with viticultural purchases… Château Beychevelle, Château Lascombes, Château Haut Redon and many others.

Even though dealings are numerous, caution must be applied.
The French legal system is highly protective with its agriculture and seeks to preserve the quality of the soil by maintaining a minimum size to each farm and by giving priority to qualified farmers.

Some transactions can be complex, and this may be down to several reasons, for example:
– The legal and commercial organization of the domain (one or more companies holding ownership of the property, when another may manage & run the farm);
– The purchase scheme envisaged: whether it be a purchase of shares (« share deal ») or a purchase of certain viticultural assets (« asset deal »);
– The person/profile of the purchaser (farmer or investor, French or foreign).
etc.

These transfers are not only subject to a control of the French land agencies, named SAFER’s (« Sociétés d’aménagement foncier et d’établissement rural » = Land Improvement and Rural Settlements Companies), i.e agricultural bodies that have a right of first refusal of most rural properties that come onto the market; but are also subject to national regulations that monitor farming structures (« le contrôle des structures des exploitations agricoles »).

All of these factors reflect the specific nature of transactions in this field.

The latest agricultural law of October 14th, 2014 made quite a few changes that will affect vineyard sales.

Throughout this article we will attempt to raise both future purchaser’s and vendor’s awareness on how to structure their transactions.
First of all we will take a look at asset deals, before talking about share deals, and finally we will take a look at the specific reconveyancing system (« retrocession ») involving the SAFER.

Asset deals in the wine sector

 
As part of an asset deal the investor or farmer acquires immovable and movable assets assigned to the wine-farm (cultivated plots, replanting rights, bare land, built property, intellectual property rights, necessary equipment to run the farm, etc.)
The running of the vineyard will be continued under a different legal entity. The buyer will need to create a new legal entity or use an existing one for completing the transaction and all further operations.

The major advantage of this scheme for the buyer is that he/she is exposed to smaller risks as possibilities of adverse effects arising are minimized since within the asset deal, apart from the assets, only certain liabilities are taken over.
The purchaser is protected against any liability that would be transferred together with the assets, contracts and employees of the farm.
Memo: Currently the courts consider on the basis of Article L.1224-1 of the Labour Code that the employees assigned to the farm are transferred to the new owner when he/she purchases an « autonomous economic entity whose identity and activity is maintained or resumed ».

In the case of an agricultural fund (« fonds agricole »), which has a civil character by nature, the legal and tax-related rules applied to business (i.e commercial) sales (eg registration rights and the right of opposition of creditors of the seller) are not applied by principal. However they may be used if the purchased farm also has a commercial activity, such as a trade of wine products not issued from the wine-farm.

 

  •  The requirement to obtain a farming licence

Article L.331-2 of the Rural Code, amended by the last agricultural law of October 13, 2014 specifies in which cases vineyard purchases are subject to obtaining a farming permit. In France this is called an « autorisation d’exploiter au titre du contrôle des structures agricoles ».

Up until now, the control of agricultural set-ups was set by national guidelines, who were applied at a departmental level to reflect local criteria.
However the new law has shifted the departmental framework. Thus, during the course of 2015 regional masterplans (« schema directeur régional ») will replace existing departmental masterplans. A decree of the French Conseil d’État should come specify the conditions and new development modalities of said regional masterplans, however the decree has not been issued yet.

The regional masterplans should set some basic standards, and in particular define the surface threshold beyond which a farming license is required.
Memo: The reference unit (« l’unite de reference », l’UR) previously defined at a departmental level has been abolished by the new law.

The transactions that trigger the control of agricultural structures remain largely unchanged: new set-ups, expansions or farm holdings. However the threshold should be lowered to be situated between 1/3 and 1 regional average agricultural area. Mechanically this will have for effect the increase in numbers of transactions subject to authorization.

To summarize new set-ups, expansions or farm holdings are subject to prior approval provided that:
– the total area to be farmed exceeds a threshold determined by the regional masterplan – we are still awaiting said plan, however and to give you an idea, before the departmental plan from December 29, 2000 stipulated that the total area would need to exceed 1.5 times the reference unit (UR). This was the equivalent of 33 hectares of vines used in AOC Bordeaux red;
– the purchasing structure contains no member qualified as a farmer, and this whatever the total area purchased to be farmed.
Therefore, the purchase of a vineyard by an investor will normally be subject to obtaining a license to operate.

Memo: Until the publication of the new regional masterplans, which should take place this year, the regulations on control of agricultural set-ups will continue to apply as before.

 

  • The pre-emption rights of the SAFER

The main agricultural bodies that supervise farmland transfers are the SAFER.

Each SAFER has a right of first refusal allowed by the Prefect (« Monsieur le Préfet »). Dependent on the geographical area they are granted a minimum surface area of real estate sold over which their right may be used.
The minimum area granted to the SAFER Aquitaine, for example (which covers the departments of the Gironde, the Landes and the Pyrénées-Atlantiques) is 10 ares (0,25 acres) in the wine-growing areas where wine have an « appelation d’origine protégée » (APO).

Similarly are also subject to the pre-emption rights of the SAFER transfers of immovable property used for agricultural purposes, and their movable assets, as provided by Articles L.143-1, R.143-1 and following of the Rural code.

 

Share deals in the wine sector

As part of a share deal, the buyer (investor or farmer) purchases the shares and equity stakes of the company that owns the assets necessary to run and operate the vineyard, winery and trade of all its products.

In such a case the farms operations continue to be performed notwithstanding the change in ownership.
Benefits, costs, rights and obligations associated with the existing assets and liabilities (debts) remain within the company and all potential risks associated with the above are usually taken over by the purchaser.

Memo: As part of the agreement between the selling company and the purchaser of certain assets, subsidiaries or investments, the company is subject to standard warranty clauses relating to assets and liabilities. The asset and liability granted ensures the purchaser that all the necessary resources are indeed owned by the company and that there are no hidden liabilities. In practice the vendor makes several statements in the contract about the company in which he basically declares the assets of the company sold (the existence of said assets and regularity of the accounting methods). In addition, he ensures the shareholder’s equity on a given date (of the latest balance sheet) and agrees to pay the purchaser all decreases whose generating phenomenon took place before the date of the last balance sheet. This guarantee is given over a period of time and will have a fixed ceiling.

Three main corporate structures exist where farming is concerned:
– Landholding companies – called « Groupements Fonciers Agricoles » (GFA)
They are agricultural land groupings whose purpose are to create or to preserve one or more farms. They have the specificity to enable people to preserve land holdings outside the strict definition of the farm.
At least two partners are required in a GFA.

– Farm management companies – called « Sociétés Civiles d’Exploitation agricole ou viticole » (SCEA /SCEV)
Their aim is to manage or run a farm. They provide the advantage of allowing non-farming partners, investment companies for example.

– Commercial companies – of which we have les « Groupements d’intérêt économique et environnemental » (GIEE)

giee

This is a new tool created by the last agricultural law of October 2014.
The aim is to promote the emergence of collective dynamics taking into account both economic and environmental objectives. And to encourage their creation they will benefit from a deliberately flexible framework, no imposed form or legal status.

 

  • No requirement to obtain a farming licence

The control of agricultural set-ups is not specific to the asset deals.
Are also subject transactions affecting the share capital of the management companies in order to avoid the setting-up of companies whose sole purpose would be to avoid said regulations.

For example the Ministry of Agriculture considers that if a farmer takes an interest in any operating company he must be subject to prior authorization provided that the total surface area exceeds the threshold defined in the master plan. Indeed, such an action is seen as an extension of the initial set-up, subject to authorization.

However things are not all clear when it comes to share deals, and uncertainties arise especially when it comes to financial participations.
The concern comes from the large definition of the concept of farming business (« exploitation agricole ») within the meaning of Article L.331-1 of the Rural Code.

A circular from the Ministry of Agriculture of May 21st, 2008 states that « the mere financial contribution in an agricultural company is not subject to authorization under the control of agricultural set-ups. »
We can deduce from this the essence of the previous agricultural laws, i.e the fact that farmer is more important than the investment of non-farming partners.
However when we know the possible influence any investor can have on decision making it was envisaged to qualify investors as ‘farmers’ in regards to the control of agricultural set-ups.
The law of October 13, 2014 attempted to redefine the notion of farm businesses subject to the control by targeting « any direct or indirect contribution in another farm. » However the French Conseil Constitutionnel rejected the attempt, and judged that said provision infringed entrepreneurial freedom and property rights. Certain legal authors wrote that in order to comply with the constitution, the law should have specified « significant contributions » instead.

 

  • Henceforth a pre-emption right of the SAFER in share deals

Before the law of October 13, 2014 the pre-emption right of the SAFER could only be used when real estate used for agricultural purpose or farming land was sold.
Thus, as part of a share deal, the SAFER had no pre-emptive rights, even in the case of a massive transfer of shares. These transfers only needed to be declared to the authorities.

Now the SAFER may acquire by means of a private sale contracted directly with the vendor shares of farm management company (for example: SCEA) or a landholding company (for example: GFA). Thus, a SAFER can acquire:
* all the shares in a farming company,
* all or part of the shares of a GFA or GFR.

In addition, the SAFER now benefits from a right of first refusal in the event of the sale of shares. However please note that such pre-emptive rights may only be exercised in the event of sales of the entire shares of a farming company (for example: SCEA) or a landholding company (for example: GFA), and it may lead to the installation of a farmer.

 

So-called « retrocession operations » involving the SAFER

As we have mentioned above the principal aim of the SAFER is to purchase (part 1) rural property to sell it on again (part 2). They can also acquire, in the aim to improve property structures, shares in agricultural companies allowing to possess or to enjoy the farming business or land (Article L.141-1, II, 3°).
However the grounds on which a SAFER can intervene must be based on the interests of maintenance and development of the farming fraternity or the local environment. They would not be allowed to buy land to put up a commercial center for example.

 

  • How does it work?

Instead of going through with part 1 (purchasing the property) to its completion the SAFER also has the right to substitute one or more beneficiaries, who will purchase all or part of the farm in their place.
To do so, the SAFER will sign crossed unilateral promises with both the seller and the purchaser. The latter will have no contractual relationship until the day of the final signature.
However and due to the status of the SAFER, there must also be a public call for candidacies. At the end of a period of 15 days the SAFER will designate the person to whom the farm will be awarded. If no candidacies were made the SAFER will designate the potential purchaser with whom was signed the unilateral promise to purchase. Said person will substitute his/herself in the final deed.
It’s what we could call reconveyancing.

 

  • What are the advantages and disadvantages of such an operation?

Two main advantages exist in this type of scheme:
Firstly, the company awarded the farm is by principal exempt from any application for farming permission, which can significantly speed up the completion of the transaction.
Secondly, the right of pre-emption of SAFER, of which is always source of shared uncertainty for the seller and the buyer, is automatically dismissed.

The main disadvantage to a simple and direct sale between the vendor and the purchaser is the intervention of a third party, i.e. the SAFER that has the power to buy and sell the estate.

Moreover, it cannot be excluded that after the candidacy procedure the SAFER chooses a third party (deemed a better candidate) who the farm would then be offered to.
Another disadvantage of this procedure is that the purchaser will subsequently be subject to the SAFER’s rules and regulations, such as the obligation to maintain the agricultural purpose of the property over a certain length of time, or to grant the SAFER a preferential right to purchase the property if it is sold within the next ten years.
We hope that this brief article relating to the specificities of vineyard transactions has been insightful.