Экзамен зачет учебный год 2023 / 06 Czech Republic

Editor’s Preface

I wish to express my deep and sincere thanks to all my distinguished colleagues who have contributed to this first edition of The Real Estate Law Review. I would also like to thank Gideon Roberton and his publishing team for their tireless work in coordinating the contributions from the various countries around the world.

David Waterfield

Slaughter and May

London

February 2012

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Chapter 6

Czech Republic

Martin Kubánek and Pavla Šlapáková1

IINTRODUCTION TO THE LEGAL FRAMEWORK

iOwnership of real estate

Czech law differentiates between the following types of ownership over real estate: ownership right, joint ownership and co ownership of spouses.

The ownership right entitles the owner to possess, use and dispose of the subject of his or her ownership and to enjoy the fruits and benefits thereof within the limits of the law. The ownership right may be acquired under a contract of purchase, deed of gift or another agreement, inheritance, decision of a state authority or by virtue of other circumstances stipulated by law, such as the prescription. Under Czech law, a possessor of real property shall become owner of the real property if he or she has had the real property in his or her possession continuously for 10 years and is in good faith that the real property belongs to him or her.

Joint ownership enables several owners to have joint ownership over an object. All co-owners incur rights and obligations from legal acts relating to the joint object jointly and severally. The co-owners decide on the management of the jointly owned object by the majority of votes calculated on the basis of the size of their shares. The joint ownership may by cancelled by mutual agreement of the co-owners, or, if no agreement is reached, by the court based on an application of any of the co-owners.

Property that is the co-owned by spouses is used and maintained jointly by them both. The ordinary administration of the property held in co ownership of spouses may be performed by each of the spouses; other matters require the consent of both spouses, otherwise the legal act is invalid. Spouses may extend or reduce the scope of the co ownership of spouses by means of a contract made in the form of a notarial record.

1Martin Kubánek is a partner and Pavla Šlapáková is an attorney at law at Schoenherr Attorneys at Law.

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ii System of registration

Under Czech law, transfer of ownership (and the creation of other rights in rem) regarding real property generally must be registered in the land register. This, of course, refers only to real property that is registered in the land register. Registration is a constitutive act that causes the transfer of ownership; therefore, ownership in real estate may only be transferred on the basis of a legal title (e.g., a purchase contract) followed by registration in the land register. As long as a legal transaction involving real estate is not registered, the party to the contract has only a contractual claim for performance against the other contracting party. There are a limited number of exceptions to this principle, where the legal title by itself without an entry in the land register is sufficient for transferring ownership (e.g., adverse possession or inheritance). Ownership of real property that is not subject to registration in the land register (e.g., small buildings, underground buildings) is transferred solely on the basis of the legal title (e.g., a purchase contract).

Any person who is a party to the legal title (e.g., purchase agreement) is entitled to file an application for registration with the competent land register and render an administrative fee amounting to 1,000 koruna. Depending on the nature of the registration, specific documents supporting the granting, transfer or limitation of rights to be registered must be attached (e.g., contract regarding title). On average, the registration process takes approximately between two and eight weeks.

There are no state guarantees in the Czech Republic with respect to the entry of the ownership or other rights in rem into the land register. Nevertheless, the restricted principle of material publicity applies. This means that any person who relies on information in the land register registered after 1 January 1993 must accept that the entry in the land register corresponds with the real state of affairs, unless that person knows that the records are not in accordance with reality, in which case the real situation prevails. The real legal owner of the real property is legally given preference over the owner inscribed in the land register; this means that the extract from the land register does not always reliably reflect the ownership rights on the real estate and, therefore, it is not sufficient documentation to close the real estate transaction.

A person acquiring real property who is acting in good faith on the basis of the entry in the land register cannot acquire real property from a non-owner and only becomes a holder in good faith. When acquiring real estate in the Czech Republic, the legal due diligence of the ownership title with respect to the real estate for at least the past 10 years (statutory time limit for acquiring the ownership right by usucaption) is necessary. Furthermore, the possible transfer limitations arising from the regulation on privatisation and restitution of the real property may be also taken into consideration by the due diligence of the ownership title on the real estate.

iii Choice of law

Generally, the parties to an agreement on the transfer of ownership right over real property may choose the law that to apply to the agreement, or rather a part thereof, but imperative provisions of Czech law have to be considered. This means that the regulation of rights in rem (such as ownership right and its acquisition) is governed, irrespective of the law chosen by the contractual parties, by Czech law and formal requirements set by Czech law for the agreement on transfer of real property have to be fulfilled.

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Furthermore, the procedural provisions of Czech law stipulating the procedure of entry into the land register apply.

II OVERVIEW OF REAL ESTATE ACTIVITY

The Czech real estate market is slowly recovering from the global credit crunch and worldwide recession in 2008 to 2010. After the drop of real estate transactions in 2009 and 2010, there was a remarkable rise in real estate investment in 2011 of 30 per cent to 40 per cent compared with 2010. This concerns especially the segment of commercial premises, which saw record total investment in 2011. The major investments were in the retail sector (46 per cent), followed by leased offices (26 per cent) and industrial premises (15 per cent).

As the construction of new real estate projects (commercial and residential) is still in recession, the main object of real estate transactions in 2011 became the reselling of existing real estate property. Compared with 2010, the number of foreign investors increased rapidly up to 80 per cent of the total amount of investments. The prices of real estate have grown about 3 per cent compared with 2010; revenues from the best offices reached 6.5 per cent in 2011, 6.25 per cent in retail properties and about 8 per cent in industrial and logistics properties.

About 4 million square metres of new industrial premises were completed in 2011 and approximately 200,000 more square metres are expected to be completed in 2012; of these, 75 per cent are already pre-let. The total amount of leasing transaction of industrial premises in 2011 has decreased compared with 2010. The renegotiations amounted to 45 to 55 per cent of the gross take-up. The vacancy rate has been dropping during the course of the year and was 6 per cent at the end of 2011.

As a result of the wave of construction of residential development in 2010, there has been visible stagnation in this area in 2011. Two new factors played a role in determining the prices of residential premises: large inventories of unsold new premises (in some projects up to 66 per cent of completed premises) and an increasing number of foreclosures by banks and the subsequent selling of properties at substantial discounts.

According to economic analysis, however, the Czech Republic will go into recession in 2012, especially if the Eurozone crisis deepens. Property prices are predicted to fall by 4 per cent and stagnation or decrease of development of new residential premises is expected.

III DEVELOPMENTS IN REAL ESTATE PRACTICE

After many years of preparation and long discussion, the Czech parliament approved the new Civil Code on November 2011. The new Civil Code will come into effect in 2014.

The new Civil Code reacts to the necessity to change private law. The current Civil Code was adopted in 1964 and has been adjusted many times since then. The main deficiency of the current Civil Code is the regulation of civil relationships in various legal acts. The new Civil Code will completely change the current system of private law. It will include and regulate all main legal fields of private law, such as the general part (regulating the legal act, subjects and objects of civil relationships) family law, absolute

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property rights (ownership, other rights in rem and inheritance law), relative property rights (contracts) and concluding parts.

The main changes with respect to real estate may be summarised as follows:

i New enlarged catalogue of rights in rem

The new Civil Code will enumerate the rights in rem and introduce some new rights in rem. While the regulation regarding the different types of ownership on real estate (see Section I.i, supra) will generally stay the same, easements will be newly divided into servitudes (burdening the owner of the obliged real estate to tolerate the use of the real estate by another person) and real burdens (burdening the owner of the obliged real estate to provide special performance in favour of third parties). The new Civil Code will further incorporate new rights in rem, such as the right of construction, enabling the person to build a construction on a plot owned by another person, or the trust of foreign property.

ii Detailed regulation of possession

The new Civil Code will contain many detailed regulations about possession as a main part of the exercise of the ownership right to real estate. Possession will be newly divided into justified and unjustified possession and honest and dishonest possession. Under the current Civil Code, the criterion of justified possession is the good faith of the possessor; the new Civil Code will connect this criterion with honest or dishonest possession. An honest possessor may therefore also be a person who possesses the real estate without legal title. On the other hand, a justified possessor can only be a person who possesses the real estate based on legal title or who acquires possession without disturbing the other possession or rights of another person.

iii Return to the principle of superficies solo cedit

The Roman law principle superficies solo cedit was broken in the Czech Republic by an older version of the Civil Code,2 with legal effect as of 1 January 1951. This principle was never again restored, so currently it is common for the owner of real estate to be different from the owner of the building built on it. In practice, this legal regulation caused legal issues with respect to the regulation of the relationship between the owner of the building and the owner of the plot. If the owner of the plot is also the owner of the building, he or she is allowed to dispose of both real properties separately, including selling them separately to two different subjects.

The new Civil Code will return to the principle respected by most legal systems in European countries under which the building and other constructions firmly connected with the plot are not individual objects of legal relationships but are just parts of the plot. Therefore, the owner of the plot shall generally also be the owner of the building erected on the plot.

To legally allow the use of a foreign plot for building purposes, the new Civil Code will introduce a new legal instrument, the ‘right of construction’. The right of

2 Act No. 141/1950 Coll.

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construction shall be legally considered as a right in rem with the nature of real estate. The right of construction shall be established as a temporary right (with a maximum duration of 99 years), shall burden the plot and allow the entitled person to place and use a building or other construction on the plot owned by another person. The right of construction is transferable and inheritable; it becomes effective upon entry into the land register. The new Civil Code also regulates the financial settlement between the owner of the right of construction and the owner of the plot after the termination of the right of construction.

iv Acquisition of ownership rights from non-owners

The main legal issue of the current legal regulation is the legal impossibility to acquire the ownership right on the real estate from a non-owner (see Section I.ii, supra).

Under the new Civil Code, the records in the land register shall generally prevail over the real state of the legal matter, provided the person acquired the real estate in good faith. This means that the purchaser in good faith may become a legal owner of the real estate, even if he acquired the real estate from a non-owner. The new Civil Code further regulates the protection of the real owner of the real estate. The real owner of the real estate may request, within the given term, the deletion of the entry in the land register if it was processed without legal grounds. If the real owner of the real estate misses the term, however, he or she is protected only before the unjust acquirer of the real estate.

v Restriction of invalid acts

Strict rules and regulations apply for transfer of real estate in the Czech Republic. The purchase contract has to be made in writing, and the manifestation of intent of both parties must be contained in the same document. This formal requirement affects the validity of the agreement; oral agreements are therefore invalid. The purchase contract has to fulfil formal legal requirements with respect to the designation of the real property. Under Czech law, transfers of ownership regarding real property generally have to be registered in the land register, whereby this registration is a constitutive act that causes the transfer of ownership. During the procedure on entry of the right into land register, the land register authority reviews the submitted contracts only to the legally specified and limited extent. In practice, the acquirer of a real estate transferred on the basis of an invalid purchase contract is often inscribed as the owner of the real estate in the land register. The acquirer of the real estate does not become the legal owner of the real estate, but only the holder in good faith.

The new Civil Code will reduce the legal reasons for which the legal act may be considered absolutely invalid. Under the new Civil Code, legal acts will generally be deemed primarily valid and effective. The invalidity of legal acts may be divided into absolute (the legal act is considered invalid from the beginning, whereby the reasons for declaring the absolute invalidity are specified in the new Civil Code) and relative (the legal act is considered valid until the entitled person raises the objection of relative invalidity).

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IV REAL ESTATE AND FOREIGN INVESTMENT

With effect from 19 July 2011, based on an amendment to the Foreign Exchange Act,3 there are generally no legal restrictions on foreigners acquiring ownership of real estate located in the Czech Republic. Prior to the effectiveness of the cited amendment, the Foreign Exchange Act set out conditions for the acquisition of agricultural and forest land by foreigners, whereby the conditions for the acquisition of the land were regulated differently for each given group of foreigners (such as foreigners with Czech citizenship, EU citizens fulfilling certain conditions set by law and other foreigners). Currently, however, any restrictions on foreigners in the acquisition of real estate no longer apply.

V STRUCTURING THE REAL ESTATE INVESTMENT

Investors generally use the following two legal approaches in order to invest in real estate in the Czech Republic. The following short review will focus only on direct investments in real estate (indirect investment based on participation in diverse real estate investment funds or similar financial structures will not be discussed).

i Asset deal

Acquiring real estate through an asset deal is a popular and common form of real estate investment in the Czech Republic. The object of the transaction is the chosen real estate. The subjects of the transactions are the owner of the real estate as a seller and the investor as a purchaser. The owner of the real property and the investor conclude a purchase contract under which the ownership right to the real estate is transferred to the investor. The investor becomes the new owner of the real estate upon the entry in the land register.

The main advantage of this investment structure is its universality. The asset deal may be used when the owner of the real estate is a natural person or if the owner of the real estate is a company (a legal entity). It also provides the possibility of adjusting the object of the investment transaction with respect to the special interests and needs of the investor by identifying the real property in detail in the purchase contract. The legal due diligence focuses only on the real estate that is the object of the transaction.

Nevertheless, the acquisition of the real estate through an asset deal has some negative tax implications that affect the owner of the real estate (see Section VI.iii, infra). For this reason, the sale of real estate via an asset deal is not the preferred option for the owner of the real estate in real estate transactions.

ii Share deal

Another form of investment in real estate is a share deal. In this case, the object of the transaction is not the chosen real property, but the company as an owner of the real estate. Via the share deal the investor acquires shares in the company that owns the chosen real estate.

3 No. 219/1995 Coll.

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This form of acquisition of real property is not widely seen, as the owner of the real estate has to be a company. The main advantage of acquiring real estate via a share deal is the avoidance of paying taxes, especially real estate transfer tax and VAT (see Section VI.iii, infra). As the legal owner of the real property remains the same, the acquisition of the real property has almost no legal impact on the contracts concluded with respect to the real estate (provided the contracts do not include a ‘change of control’ clause).

On the other hand, there are some additional legal risks connected with this special form of real estate transaction. As the subject of the real transaction is not only the real estate but also the company as its owner, the actual status and history of the company must be carefully reviewed during the legal due diligence in addition to the real estate.

The purchase contract has to include specific representations and warranties with respect to the real estate (which is the primary object of the investment) as well as with the company (which is the tool for operating the real estate).

VI REAL ESTATE OWNERSHIP

i Planning

The Czech Republic has comprehensive land-use planning and building regulations set out in the Building Code.4 Based on these rules, municipalities enact a zoning plan setting out a basic development concept of the municipality, the protection of its values, its layout plan, landscape arrangement, public infrastructure conception, built-up areas, etc. For certain public and private projects that are likely to have significant effects on the environment, a statement from the authority focusing on nature protection and an assessment of their effects on the environment are required. The relevant proceeding is governed by the Environmental Impact Assessment Act.5

The construction of new buildings is generally possible after the issuance of a planning permit and a building permit.

The building authority issuing the planning permit usually imposes a number of conditions in order to protect the environment and neighbours and sets conditions for the issuance of the building permit. The planning permit is valid for two years. The planning permit does not entitle the erection of the building – only the building permit does this.

In the building permit the building authority sets the number of conditions for the implementation of the building and resolves objections by the participants in the proceedings. The building permit expires if construction has not commenced within two years of the date the permit came into force.

A completed building may be used on the basis of notification to the building authority or occupancy approval. Occupancy approval is required for buildings whose characteristics cannot be influenced by future users, such as structures for assembly of a larger number of persons, technical infrastructure, structures for business and industry, etc. After the issuance of an occupancy approval, the owner of a building may apply for the

4No. 183/2006 Coll.

5No. 100/2001 Coll.

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change of the permitted use of the building. The application is filed with the competent building authority together with documentation required by the Building Code.

ii Environment

Under the applicable laws on protection of the environment, a party that caused ecological damage (such as contamination of land) can be held liable for its action. If the polluter is not known, the owner of the contaminated real property may be held liable for the contamination as a subsidiary. Under certain circumstances, however, the owner of the contaminated real property may seek financial support from the state to remedy the contamination.

Generally, the polluter must undertake measures in order to remedy the ecological harm. If the polluter fails to do so, it may face a fine from the competent public authority (e.g., under Act No. 167/2008 Coll., on the Prevention of Ecological Harm and its Remedy).

In the relationship between two subjects of private law, the polluter may also be held liable under the general liability for damage regulated in civil law.

Information on contaminated sites may be found in the database called the ‘System of evidence of contaminated sites’.6

iii Tax

Real estate transfer tax must be paid on the transfer or transference of an ownership title to real estate for consideration. The current tax rate generally amounts to 3 per cent of the purchase price (provided the purchase price including VAT, if applicable, is higher than an administrative value calculated in accordance with the respective tax laws). The seller is liable to pay the real estate transfer tax with the buyer as a guarantor. If the purchase agreement sets out that the buyer must pay the tax instead of the seller, this contractual clause is not legally binding for the tax authority. In general, real estate transfer tax is payable by the end of the third month following the month when registration of the transfer was made in the land register. An exemption from the duty to pay real estate transfer tax is, inter alia, allowed for the first transfer of a building for which an occupancy approval has been issued and which has not yet been used, provided that the seller is a natural person or a legal entity, and the transfer of the building is made in connection with the business activity of the seller – the development and sale of buildings.

The transfer of real estate may be subject to VAT under Czech law. In general, most transfers of real estate are VAT-exempt. In cases where the requirements for VAT exemption are not fulfilled, the current VAT rate of 20 per cent or 14 per cent (solely for family houses or residential buildings of a limited size) applies. VAT is paid by the buyer to the seller, and the seller must pay VAT to the competent tax authority.

The seller may further be liable for paying income tax if it sells the real estate. Non-entrepreneurial disposals of the property (real estate) of natural persons are exempted provided that the party had his or her domicile (i.e., actually lived there) for at least two years before the date of the sale or the real estate has been owned for at least five years prior

6 Accessible at http://info.sekm.cz/.

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to its sale. The exemption does not apply to real estate used for business activities. For companies a rate of 19 per cent generally applies. For income earned by companies abroad and for natural persons the rate is 15 per cent. Income is reduced by expenses needed for its acquisition in order to set a tax base.

iv Finance and security

There are no special regulations regarding the lending of money to finance real estate, but, the formal requirements set for the loan agreement must naturally be met. The legal regulations distinguish between entrepreneurs and non-entrepreneurs (protected by consumer law). The loan agreement is generally regulated for both categories by the Commercial Code.

The lender will typically seek some form of security instrument – commonly a mortgage, but it is also possible to conclude a guarantee, bank guarantee, financial pledge, secure transfer of rights, contractual fine or an assignment over receivables.

The mortgage agreement must be concluded as a written contract. The mortgage to the real estate comes into effect after registration in the land register, or in some cases in the mortgage registry held by public notaries. Mortgage agreements can also be made in the form of a notarial deed, and may contain a clause that certifies that the mortgage agreement establishes an executory right. The mortgage creditor is thereby enabled to enforce the mortgage immediately in enforcement proceedings without the necessity of prior court proceedings in order to obtain a valid title.

VII LEASES OF BUSINESS PREMISES

Lease agreements on non-residential premises are governed by the Lease and Sublease of Non-residential Premises Act7 and subsidiary by the current Civil Code.

The law sets strict formal requirements for an agreement on the lease of nonresidential premises. If the agreement does not contain all required formalities, the agreement is deemed invalid. The agreement on the lease of non-residential premises should not be concluded before the occupancy approval has been issued by the building authority regarding the non-residential premises that is subject of the lease (and so has not become legally effective) otherwise the lease agreement might be deemed invalid.

Despite the strict formal requirements set for an agreement on the lease of nonresidential premises, the contractual parties have wide scope to deviate from the statutory provisions, which in most cases are non-mandatory.

The length of the lease is not regulated by law. There are two basic lengths of lease contracts. The first is a contract for an indefinite period, and this kind of contract can be terminated in writing without stating a reason. The parties are free to negotiate the notice period for termination or the dates on which it must be served. Unless an agreement is reached on the termination, the tenant and the landlord must file a termination notice, and unless otherwise agreed, the termination period will be three months. It will commence on the first day of the month following the delivery of the termination notice.

7 No. 111/1990 Coll.

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