The Life annuity contract is a kind of gambling regulated by law. The contract of a Life annuity is a contract considered as a random game of chance.
The impossibility for a party to invoke the lesion was accepted by the hazard. In fact, the harm suffered by one or the other party in a contract or in a partition linked by the life annuity is excluded.
In French private law, the injury is a serious lack of equivalence between the benefits of the parties at the time of the conclusion of the contract.
The Life annuity contract is one of the contracts legally considered as random.
The Life annuity as a principle
Buying a home in Life annuity is possible for anyone with legal capacity. Many people can enjoy a Life annuity. (ex: spouse or other undivided owners).
This is a form of a Real Estate Sale: a person sells his house in return for an annuity, being able if he wishes to keep, the right to reside there.
The buyer, also known as the “grantor of an annuity” is the person designated as the one who must pay the life annuity.
The seller, also called “annuitant” is the one who benefits from the life annuity. The seller retains the enjoyment of the dwelling until his death.
Advantages of the Life annuity
For the buyer, this is a way to graduate the cost of acquiring a real property.
For the seller, the life annuity is a formula that allows him to ensure a regular income until the end of his days.
Indeed, if the seller retains the ownership of his property, he could not take advantage of the capital he holds and it would return to his heirs as an heritage.
It is also a well-adapted formula for people who have no heirs, and may be interesting in some cases. The seller donates the amount called “bouquet” to his or her child (ren) who benefits it immediately.
In addition, selling life annuity can resolve the issue of succession. And if there is no other real property, it avoids the use of a notary, which does not become mandatory.
Risks of the Life annuity
For the buyer (grantor of an annuity), the life annuity essentially have 3 risks:
- The risk of longevity
- The evolution of the price of real estate
- The basic amount of the selling price
In fact, the buyer makes a bet on the longevity of the seller. This bet may be winning or losing.
The Life annuity as a contract
The life annuity is considered as a contract defined by the Civil Code being “random”. It is a sales system framed by the law.
The Life annuity, without which the contract would be zero, is that the purchaser (grantor of an annuity) should not be aware of a health problem of the annuitant: it must be a hazard.
The Civil Code reminds that the life annuity contract is void if the seller is dying or is very sick (no risk). The contract may provide for the payment of initial capital, called the bouquet.
The final amount of the sale price depends on the date of the seller’s death (annuitant). The date of death should not be known or foreseeable. In this case, the calculation of the rent takes it into account: the balance between bouquet and rent remains freely negotiable between the seller and the buyer. The annuity must be indexed to a benchmark.
A notary must draft the contract. The buyer acquires the property as the owner as soon as the act is signed.
The bouquet is the part of the price paid cash at the signing of the contract of sale. The bouquet is not mandatory. When it exists, its price is freely fixed by the parties. In general, the bouquet is equivalent to 30% of the total value of the property.
The rent corresponds to the real value of the property. It may be monthly, quarterly or annually and payable in advance or in arrears. Its amount is estimated according to several criteria among which:
- the age and life expectancy of the annuitant,
- the value of the property,
- the rents it could receive if the unit were rented.
It is the notary who calculates the amount of the annuity according to the market estate scale.
The parties may also include in the deed of sale an indexation clause allowing the automatic revision of the amount to the following annuity (for example, an index published by INSEE.)
The Life annuity as a game of chance …
Games of chance being ruled by the Civil Code, The Civil Code arrangements relating to gamble and bet are established by Law 1804-03-10 promulgated in March 20, 1804.
The concept of Life annuity is indeed very old: under the Babylonian, Egyptian and Roman empires, the Life annuity already existed. And Charles II introduced the Life annuity concept in France.
These agreements are considered out of the law because they have no effect. It is a contract with some exceptional characters specially written by the Codifiers.
The Life annuity is indeed considered by the law and framed by it as being a game of chance…
The seller and the acquirer do not know either if they are doing a good deal.
Key figures of the life annuity in France
- 78%: sale in life that only bears on one head (only one annuitant)
- 79 years old: average age of credentials
- 48 years old: average age of bankruptcy
- 31%: Average share of the bouquet in the purchase price
- 71%: assets sold in life annuity
Source: Real estate database of French notaries