38 i n t r o d u c t i o n a n d c o n t e x t

from a tax and estate planning point of view (cf. The Janus Face, section 5 below).

Although the nude owner and the usufructuary do not co-own the property in undivided shares, and each party has independent rights over the property, the actual powers of each party are determined and limited. Neither the usufructuary nor the nude owner can act as if he/ she were the full owner. Each party must respect the interests of the other party while exercising his/her own rights. In this sense, there exists a fiduciary relationship between the two parties.21

Usufruct, as a typical civil law institution, is as such unknown in AngloAmerican jurisdictions. Civil law is structured on the basis of ownership as the most extensive right with regard to property and more than one person can have real rights over the same property, as in the case of undivided full ownership of property being burdened with a usufruct, superÞcies, emphytheusis or a servitude.22 Common law, on the other hand, is based on a system of estates or tenures without full ownership, except for ownership held by the Crown. There is no room for real rights such as usufruct and personal servitudes. In spite of the different conceptual framework, a comparable pragmatic result is achieved by way of a life interest on property.23 A life interest or life estate confers the right on a person to enjoy the property for his/her lifetime. The legal life tenant has the right to use the property and to receive the profits directly.24 The equitable life tenant, however, does not have the right to enjoy the property in specie. He obtains his right via payments or distributions by a third person such as the trustee under the life estate.25

3. The traditional face

3.1. Control

Although the usufructuary has a strong right conferring the enjoyment and use of the property on him/her, the obligation to preserve the substance of the property imposes serious limits on his/her control and use of the property.26

21Verbeke, ‘Creatief met vruchtgebruik’, p. 537; cf. Nudelholc and Karadsheh, ‘Re´flexions’, p. 424.

22Bougle and Gouthiere, ‘Patrimoine’, p. 135; Ferid, ‘Review of the Louisiana Practice’,

u s u f r u c t 39

Some jurisdictions hold that a usufruct as such can be transferred by the usufructuary while others hold that it is only the rights under a usufruct that can be transferred. The latter means that the usufructuary who transferred the rights under a usufruct remains liable to the nude owner. Roman law held that the usufructuary could rent out, pledge and even sell or donate the usufruct. Under Polish law, the rights under the usufruct are transferable, although the usufruct as such cannot be transferred. The transferred right cannot last beyond the term of the initial usufruct or the life of the initial usufructuary.27 The position is similar under German law (BGB, § 1059).28 Under French and Belgian law, the usufructuary can alienate his/her usufructuary rights (FCC/BCC, art. 595): they can be sold, leased or mortgaged29 but the transferred rights expire with the death of the original usufructuary (FCC/BCC, art. 617).30

The obligation to preserve the substance of the property encompasses the duty of care,31 the duty to draw up an inventory and the duty to provide security against damage to the property (FCC/BCC, arts. 600–1; BGB, § 1037). The usufructuary can be exempted from these obligations, but the nude owner may always insist that they should be complied with at his/her own cost. The exemption is automatic in the case of a donation with reservation of a usufruct which legally exempts the usufructuary from these obligations.

The usufructuary cannot transform the property or make substantial changes.32 The substance must be maintained at all times. This holds true even if the intention of the usufructuary is to upgrade the property by replacing it with something of a higher quality, or to prevent the decrease of income or revenues.33 Repairs and renovations are allowed only to the extent that they are considered normal maintenance of the property (BGB, § 1041). The usufructuary is, however, not responsible for alteration or deterioration of the property that arises from the proper exercise of the usufruct (BGB, § 1050). This is the position in Germany, Australia, Greece, Belgium, Portugal, Italy, South Africa and Poland. Under Portuguese and Spanish law, the usufructuary can

27 Belgian report, Case 1. 28 Prutting, Sachenrecht, p. 362.

29Cass. 30 May 1995; Bull. Civ. 1995 IV, no. 161; de Page, ‘Les Donations’, p. 261; Hansenne, Les Biens, p. 1043; Zenati-Castaing and Revet, Les Biens, p. 496.

30Hansenne, Les Biens, p. 1043. 31 de Page, ‘Les Donations’, p. 271.

32Belgian report, Case 7; Planiol and Ripert, Traite« pratique, p. 822. The life tenant has a similar obligation. He is under an obligation not to cause lasting or permanent damage to the property (McClean, ‘Common Law Life Estate’, p. 662).

33de Page, ‘Les Donations’, p. 372.

40 i n t r o d u c t i o n a n d c o n t e x t

improve the property as long as he does not change its economic destiny.34

On the same line of reasoning, the traditional view holds that the usufructuary cannot dispose of the usufructuary property.35 Upon extinction of the usufruct, the owner has to regain a similar use and enjoyment to that existing at the outset of the usufruct.36 Consequently, restoration in kind is impossible if the usufructuary has disposed of the usufructuary property. ‘LÕobligation de conserver la substance et le pouvoir de disposer sont deux choses incompatibles.’37 The consent of both the nude owner and the usufructuary are required to dispose of the usufructuary property in its entirety, even in the case where disposal is necessary to counter decrease in the value of the property.38 Disposal without consent can lead to a forced expiration of the right of usufruct (FCC/BCC, art. 618).

It is clear that the donor who reserves for himself/herself a traditional usufruct, loses his/her absolute control over the assets which he/she donated.39 If the donor donated shares and bonds (investment portfolios), he/she cannot arbitrate, trade or sell the stocks of the portfolio even if this can be construed as sound economic management of the portfolio or be justified or even needed for preserving the value of the portfolio. The donor requires the nude owner’s permission to carry out any such act, which usually means obtaining the consent of his/her children. Consent, however, cuts both ways. Hence the nude owner cannot alienate without the consent of the usufructuary. Consequently, a donation with reservation of even traditional usufruct may be a balanced mechanism for realising a tax optimised transfer of property (see section 1) without transferring full powers of alienation to the children.

The same issues exist concerning voting rights based on shares in companies and partnerships.40 Some argue that voting rights are exercised by the usufructuary, while others plead for them to be exercised by the nude owner. A third view is that it depends on the particular

34See Comparative observations, Case 7.

35Ayne`s, ‘Observation’, p. 168; Bougle and Gouthiere, ‘Patrimoine’, p. 134; de Page, ‘Les Donations’, p. 263; Fiorina, ‘L’usufruitier’, pp. 48 ff.; Hansenne, Les Biens, p. 1028; Planiol and Ripert, Traite« pratique, p. 769; Prutting, Sachenrecht, p. 364; Raynaud, Les Biens, p. 107. See Verbeke, ‘Creatief met vruchtgebruik’, p. 545.

36Jamar, Les Novelles, p. 160; Laurent, Principes, pp. 419, 478.

37Laurent, Principes, pp. 419, 478. 38 de Page, ‘Les Donations’, p. 372.

39Verbeke, ‘Creatief met vruchtgebruik’, pp. 545 ff.

40See Du Mongh, De erfovergang van aandelen, pp. 258 ff.

u s u f r u c t 41

decision to be taken by the organisation in question. The best solution is to determine the voting rights of each party explicitly in the by-laws of the organisation. In the absence of such specification it is, according to the traditional view, uncertain whether the usufructuary is entitled to vote. This is a significant impediment when the shares of a family company are transferred with reservation of a usufruct. The new Dutch Civil Code provides a legal framework for shares burdened with a usufruct (DCC, art. 2: 88–9).

We may conclude that, with regard to the traditional face of usufruct, the possibility to retain control is rather limited. The donor (nude owner) or the usufructuary cannot dispose of the usufructuary assets without the consent of the other. The consent of the nude owner is required for disposal by the usufructuary, which constitutes a serious impediment from an estate planning point of view.

3.2. Income

The usufructuary takes over the owner’s rights of use and enjoyment of the property,41 which is a rather extensive entitlement.42 He/she enjoys the whole of the property, including accessories,43 possesses the asset (BGB, § 1036; cf. FCC/BCC, art. 2228),44 and consequently receives the fruits gained from the property (FCC/BCC, arts. 582–4; BGB, § 954).45 In the case of usufruct, fruits are assets created by, and separable from, the property in accordance with the intended purpose (destination) of that property.46 Hence the qualification as a fruit requires causality, separation and conformity.47 Recurrence of fruits at regular intervals is not required.48

The first element of causality requires that the usufructuary asset must be the direct or indirect cause or source of the alleged fruit.49 Natural fruits are spontaneous products of the earth – in other words, the ordinary, natural products of the property (FCC/BCC, art. 585).50 Industrial or civil fruits are obtained by cultivation (FCC/BCC, art. 583).

41 See Belgian report, Case 1. 42 Prutting, Sachenrecht, p. 361.

43Zenati-Castaing and Revet, Les Biens, p. 491.

44Derine, Vanneste and Vandenberghe, Zakenrecht, p. 247; McClean, ‘Common Law Life Estate’, p. 653; Prutting, Sachenrecht, p. 361; Zenati-Castaing and Revet, Les Biens, p. 488.

45See Belgian report, Case 1; Prutting, Sachenrecht, p. 362.

46Dockes, ‘Essai’, p. 493; Verbeke, ‘Creatief met vruchtgebruik’, p. 570.

47Verbeke, ‘Creatief met vruchtgebruik’, p. 570.

48Dockes, ‘Essai’, p. 485; Verbeke, ‘Creatief met vruchtgebruik’, p. 570.

49Dockes, ‘Essai’, p. 482; Borkowski and Du Plessis, Roman Law, p. 174.

50Borkowski and Du Plessis, Roman Law, p. 174.

42 i n t r o d u c t i o n a n d c o n t e x t

Civil fruits consist of the income and revenues from hiring out the property such as the rent from letting real estate (FCC/BCC, art. 584), interest on sums due and yearly income from annuities.

Secondly, the fruits must be separable from the asset for the usufructuary only becomes the owner of the fruits once they are separated from the principal property.51 Natural fruits belong to the usufructuary upon their harvest. Shares can only provide fruits if separation from the share is possible, for example, the distribution of dividends.52 When the articles of association of a company provide that profits are reserved or at least not distributable, separation is not possible. The profits are then integrated into the capital. Hence fruits which are reserved for the company are not distributable but belong to the owner.53 The usufructuary can, however, exercise his usufructuary rights on shares of a company which declares dividends.54 If such distribution is a monetary distribution, it will qualify as quasi-usufruct (see section 5, below). This situation is also comparable to capital shares of a trust fund,55 where the profits are reinvested systematically. Hence the profits cannot be separated from the capital shares. The usufructuary can, however, claim his/her usufructuary rights upon sale of the capital shares. As the proceeds are of a monetary nature, the usufruct can arguably qualify as a quasi-usufruct in such a case.

The third requirement of conformity relates to the difference between fruits and products.56 The collection of fruits can neither change nor diminish the substance of the usufructuary property whereas the collection of products gathered from the principal property can cause or result in deterioration of the property.57 Consequently, products belong to the nude owner. Gold bars, for example, do not in principle produce fruits. The usufructuary is therefore not entitled to rings or necklaces produced from gold bars which have been melted down.58 He does, however, have the right to use these rings or necklaces by virtue of the application of real subrogation in appropriate

51See Belgian report, Case 1; de Page, ‘Les Donations’, p. 213; Dockes, ‘Essai’, p. 490.

52Cass. 1 Dec. 1960; Pas. 1961 I 355; Dockes, ‘Essai’, p. 484; Verbeke, ‘Creatief met vruchtgebruik’, p. 571.

53Planiol and Ripert, Traite« pratique, p. 783.

54Verbeke, ‘Creatief met vruchtgebruik’, p. 573. 55 Dockes, ‘Essai’, p. 484.

56Verbeke, ‘Creatief met vruchtgebruik’, p. 571; cf. Dockes, ‘Essai’, p. 490.

57van Neste, Beginselen, Zakenrecht, p. 20.

58Verbeke, ‘Creatief met vruchtgebruik’, p. 578.