Purchasing a property via a life annuity (en viager) is rare in Luxembourg, accounting for only a tiny fraction of real estate transactions. However, this type of purchase does offer some potential advantages. How does purchasing a property via a life annuity work? What are the pros and cons for a buyer?
It is a transaction between an owner (crédirentier) who sells a property to a buyer (débirentier) in return for the payment of an initial lump sum (bouquet) and a regular annuity.
Unlike a traditional real estate purchase that is settled by the payment of a single sum, settlement takes the form of a regular annuity (monthly, quarterly or annual) that is paid until the death of the vendor. The total purchase price is therefore uncertain, as it depends on the life expectancy of the vendor, which is established on the basis of official population statistics. This is also why this type of transaction is sometimes referred to as a sunk costs transaction – a term derived from the insurance sector where premiums paid belong to the insurer even if the risk covered never materialises (e.g. life insurance premiums paid whilst the policyholder is alive).
→ Useful info: the uncertain nature of the agreement is key. To be valid, the buyer must not be aware of any health issues of the vendor prior to concluding the sale. The date of death of the vendor must be unpredictable. What’s more, the transaction may be annulled if the vendor dies of an illness within 20 days of signing the agreement. Like any property purchase, an acquisition via a life annuity requires a notarial deed.
In Luxembourg, there are different ways to sell a property via a life annuity – usually the property is sold occupied, although in rarer cases it may also be vacant. The sales agreement defines the various terms and conditions of the sale.
Traditionally, the property is sold as occupied (viager occupé) and the vendor retains the right to use and inhabit the house – after the sale, the vendor can remain in the property until their death. The vendor may also retain the usufruct, which means that the vendor can let out the property, for example, if they decide to move into a retirement home. Meanwhile, the buyer only receives unrestricted ownership of the property after the death of the vendor.
In the case of a property sold as vacant (viager libre) the vendor may no longer live in the house after the sale. Unrestricted ownership of the property is transferred to the buyer as in a standard real estate transaction. The buyer has the right to live in the property or to let it out immediately.
In both cases, an initial lump sum is generally paid upon signature of the agreement and an annuity is paid until the death of the vendor. However, in some cases the agreement may stipulate that there will be no initial lump sum or no annuity payments.
→ Useful info: it is possible to restrict the period during which the annuity is paid and/or the property can be occupied. This is referred to as a time-restricted life annuity (viager à terme). The deadline set must be respected, even in the event of the death of the vendor, in which case the annuity is paid to the vendor’s heirs until the date defined in the agreement.
The buyer undertakes to pay an annuity until the death of the vendor, without really knowing exactly how long the vendor will live.
This type of purchase is a bet on the future. The buyer must be aware that they are agreeing to pay an annuity until the death of the vendor, without really knowing exactly how long the seller will live. If the vendor dies before the estimated date, the buyer will get the property at a lower price than its real value. On the contrary, if the vendor lives for longer than estimated, the price paid will be higher than the value of the property. The actual price that will be paid for the property is therefore unknown (except in the case of a time-restricted life annuity).
→ Useful info: in principle, the annuity is paid to the vendor, but the sales agreement may stipulate several recipients of the annuity (joint and survivor annuity). If there is a survivor clause, the payment may be transferred to the surviving spouse upon the death of the first spouse.
The amounts payable to the vendor are calculated as follows: the total of the initial lump sum and the annuities paid until the estimated date of death of the vendor must be equal to the value of the property. It is therefore advisable to have the real estate valued by a professional.
The annuity payments are lower for an occupied property than for a vacant property, to compensate for the fact that the property cannot be used.
The initial lump sum can be any amount agreed upon by the parties and is paid upon acquisition. It generally represents between 30% and 50% of the value of the property.
The annuity amount depends on several criteria: whether the property is occupied or vacant, the lump sum amount, the age of the vendor and their life expectancy (based on official statistics for the country), etc.
The principles used in the calculation are as follows: for a vacant property, the annuity corresponds to the price of the property less the lump sum paid. This figure is then divided by a coefficient that corresponds to the life expectancy of the vendor. The calculation is the same for an occupied property, but a discount is applied to reflect the fact that the property is occupied by the vendor.
The size of the annuity is therefore lower for an occupied property than for a vacant property, as compensation for the buyer being unable to use the property. The annuity is indexed to the consumer price index and will therefore change over time.
NB: the vendor can have a termination clause included in the sale agreement to offer protection from non-payment of the annuity by the buyer. If the buyer fails to meet their payment obligations, this clause allows the vendor to cancel the sale and, depending on the terms of the agreement, to keep any annuity payments already made.
Such a sale is of course interesting for the vendor, who can secure a decent level of additional income in retirement whilst continuing to live in their own home. There are also several advantages for the buyer.
Lastly, it’s worth noting that in the case of a property sold as occupied, the fact that the price is fixed in advance (for the initial lump sum and the annuity) is an advantage in a market where property prices are constantly rising. However, if property prices fall, the buyer has made a bad deal unless the vendor dies early.
For the vendor, the main issue with such a sale is that their heirs may be dissatisfied with an arrangement that reduces their inheritance. As far as the buyer is concerned, there are a few issues worth considering.
The buyer must be fully aware of the inherent uncertainty involved before signing an agreement to purchase a property via a life annuity.
Although purchasing property via a life annuity may have negative connotations, it does offer some real advantages for both sides. The vendor can continue to live in their home whilst receiving additional income for the rest of their days, whereas the buyer may be able to purchase the property for a lower price.
However, the buyer must be fully aware of the inherent uncertainty involved before signing an agreement to purchase a property via a life annuity. It is a good idea to involve a notary or an expert on this type of transaction for advice on the type of clauses that should be included in the agreement (purchase with or without the transfer of usufruct, payment of an initial lump sum, annuities, any time restrictions, etc.), as well as any best practices such as a minimum age difference between the buyer and vendor, investment diversification to minimise risk, etc.
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