Commercial real estate law and rules in the Czech Republic

1. Parties and Ownership – Who can own real estate and what types of ownership are there?

Parties

Any legal “person” may own real estate in the Czech Republic. This includes individuals, companies, entities established by statute (e.g. associations of individuals and/or legal entities, associations accumulating property for a given purpose, units of local self-government/self-administration) and the Czech state.

Bodies which are not legal persons, such as unincorporated associations, cannot directly own real estate.

Owners of commercial real estate include private developers, insurance companies, banks and other financial institutions, private or public property companies, the Czech state and local authorities.

There are no restrictions preventing foreign nationals or companies from owning real estate in the Czech Republic.

Ownership

Under Czech law, ownership is the highest title a legal person can hold in relation to property. Ownership of real estate can be equated to the concept of a ‘freehold title’ in Anglo-American legal systems.

Most real estate in the Czech Republic (i.e. all plots of land and most developments) is subject to registration in the Czech Real Estate Registry.

Ownership of real estate is freely transferable. Agreements on the transfer of an ownership title must be registered in the Real Estate Registry. Ownership passes on the execution of a decision of the Real Estate Registry however the decision takes effect retrospectively from the date on which the application to register the transfer was filed.

Ownership may also be acquired by possession. To apply, the property must be in the possession of a “rightful possessor” who believes, in good faith, that the property has belonged to him for an uninterrupted period of ten years.

Under the New Civil Code, which came into force in the Czech Republic on 1 January 2014 (the “New Civil Code”), buildings form a part of plots of land, i.e. separate ownership of buildings and plots of land is no longer possible. It should be noted however that where the owner of a building was not the owner of the plot of land beneath the building on 1 January 2014 it is still possible for both the building and the land plot to be owned separately. Care must be taken to establish whether the ownership of a property has been split accordingly.

Czech law distinguishes between exclusive ownership and co-ownership of plots of land and buildings. A condominium style of ownership is permitted where, for example, a person may be the exclusive owner of a part (unit) of a building and a co-owner with other unit owners of the common areas, the structure and the plot of land on which the building resides. Alternatively, more than one person may own the whole of a building and/or plot of land. In each case, the co-owner is said to have an “ideal” share in such common parts or the whole of the building or plot of land.

Czech law also recognizes the joint ownership of spouses. This is an unapportioned form of co-ownership where (i) real estate is fully owned by each spouse; and (ii) both spouses are jointly and severally entitled and obliged for the respective real estate.

2. Interests – What types of interest in real estate are sold?

Czech law recognises several forms of interest in property. These include:

  • ownership;
  • possession; and
  • limited property rights – e.g. mortgages, easements, right to build, pledges and contractual rights, such as leases.

However, current practice dictates that only ownership interests are sold. The assignment of rights and/or the transfer of obligations under occupational leases is relatively rare, with subletting being the favoured option.

Most commercial property is sold by way of a share, rather than an asset sale. The real estate is owned by a special purpose vehicle and the shares in this are sold. In general, share sales are used to avoid real estate transfer tax (“RETT”) and the risk of tenants terminating occupational leases following a sale.

As in some other civil law jurisdictions, leases under Czech law do not create a property interest and instead create a contractual right to use the property. The period for which a lease can be entered into is not limited by law and depends on the agreement of the parties.

Rights created under leases are not registrable at the Real Estate Registry. However, the New Civil Code permits the registration of leases at the Real Estate Registry – either at the landlord’s request or the tenant’s request following the approval of the landlord.

The New Civil Code covers all types of leases (namely leases of property in general, leases of apartments and leases of business premises). This is a significant departure from past legislation where different types of lease agreements were governed by different statutes. The New Civil Code also gives the parties a great amount of contractual freedom and the terms and conditions agreed between the parties may differ significantly from the dispositive provisions of the New Civil Code.

It should be noted that the New Civil Code also applies to lease agreements concluded before 1 January 2014.

3. Employees – What employment issues affect real estate acquisitions?

Typical employment issues which may be relevant to real estate transactions include (i) the acquisition of real estate by a transfer of a business enterprise of a company which owns real estate; and (ii) by a transfer of the shares of a company vehicle which owns real estate.

If a company owning real estate transfers a business enterprise, rights and duties arising from the employment relationships with employees of the enterprise pass from the seller to the buyer. The change in the identity of the “employer” applies as a consequence of the transfer of the enterprise.

If a company owning real estate transfers its shares, the “employer” remains unchanged and all rights and duties of the “employees” remain unchanged.

In both cases above:

  • the continuity of employment for the employer is preserved;
  • the buyer is unable to unilaterally change the terms and conditions of employment agreements by reason of the transfer and may only agree changes with the employee; and
  • elected representatives of the employees must be informed and consulted on the transfer of a business enterprise.

In addition, in the case of a transfer of a business enterprise:

  • an employee may give notice as a result of the transfer of his/her employment to the new employer prior to the transfer of the business enterprise becoming effective. The employment relationship will terminate on the day before the transfer of the business enterprise is effective (i.e. the two months’ notice period does not apply);
  • an employee may give notice or conclude a mutual termination agreement within two months of a transfer of the business enterprise becoming effective due to a material worsening of the employee’s working conditions as a result of the transfer. The employee may subsequently file a lawsuit and claim severance pay in the same amount as that offered by the employer for redundancy.

Redundancies may arise where there is a reduction in the number of employees required. Care should be taken to ensure that the redundancies are carried out in a procedurally fair manner.

4. Procedure – What are the steps in a sale and purchase transaction?

Commercial real estate transactions usually commence when proposed heads of terms are drafted, negotiated and agreed between the seller and buyer. The heads of terms (or a letter of intent, a memorandum of understanding etc.) set out the principal terms agreed between the parties and are generally expressed to be “subject to formal contract” and not legally binding. These terms form the basis of the documents drafted by the lawyers.

Once the heads of terms have been finalised, they are sent to the parties’ lawyers. The seller’s lawyers will usually collate all information relating to the property and send it to the buyer’s lawyers together with a draft of an agreement to conclude a future transfer agreement. The form of the transfer agreement will be attached. A future agreement is not required if there are no conditions to the purchase, in which case the parties will immediately conclude the transfer agreement. The buyer’s lawyers undertake a thorough due diligence process of all legal documents relating to the property. If the purchase is made with the assistance of financing, the lender may instruct its own lawyers to carry out due diligence on its behalf and negotiate any loan and security documentation.

The seller arranges for the property to be valued by a court appointed valuer for tax purposes.

Once the form of the future agreement and the transfer agreement are agreed, the seller and buyer will sign the future agreement. Following the satisfaction of any conditions to the purchase, one party will invite the other to conclude the transfer agreement.

Before signing the future agreement and the transfer agreement, the buyer’s lawyers will conduct a search at the Real Estate Registry to ensure that the seller still owns the property and that there are no new encumbrances or pending proceedings affecting the property.

The signatures of the parties on the transfer agreement (but not on the future agreement) must be officially verified (usually by a notary). The future agreement and transfer agreement may be signed in English with a certified Czech translation of the transfer agreement prepared for registration purposes although in practice it is beneficial to also sign the Czech version of the transfer agreement.

Following the conclusion of the transfer agreement, (i) the lawyers need to register the transfer documents at the Real Estate Registry; and (ii) the seller needs to arrange for the payment of the RETT (i.e. the real estate transfer tax) which is assessed on the higher of the price paid and the valuation carried out by the court appointed valuer. The purchase price is commonly paid into an escrow account (i.e. a bank or a notary) and is partly released on the registration of the buyer as the exclusive owner of the property in the Real Estate Register free from encumbrances and partly (in an equal amount to the tax payable) following confirmation that the RETT has been paid by the seller or the buyer (the parties to a transaction may agree that RETT will be paid by the buyer).

5. Contract terms – What provisions does a real estate contract contain and what is implied by law?

Provisions of the contract

An agreement for the sale and purchase of a property must be (i) in writing; (ii) contain all the terms and conditions specified by law; and (iii) must be signed by both the seller and the buyer with both signatures of the parties having been officially verified.

Provisions relating to value added tax (“VAT”) will be included where relevant, to ensure that the agreed tax position is preserved. Alongside the essential terms of the sale and purchase agreement, such as an exact specification of the property and the price, the agreement should also mention the following, in particular:

  • the title document under which the seller acquired ownership;
  • all liabilities burdening the property (mortgages, easements, pre-emptive rights, leases);
  • the conditions for the payment of the purchase price;
  • the date of a handover/takeover of the property;
  • the provision which states which party will pay the RETT;
  • the provision which states which party will file a petition for the change of ownership;
  • the conditions to be satisfied which enable a party to withdraw from the agreement; and
  • the seller’s warranty that it is a sole and unrestricted owner of the property and that the real estate is, and will remain, in the (legal and actual) condition described in the agreements until the registration of the transfer of title in the Real Estate Register.

Terms implied by law

Some of the most significant issues are as follows:

  • the registration of ownership – to complete the process of a change of ownership, the transfer agreement must be filed with the Real Estate Registry. Ownership title passes on the execution of the decision of the Real Estate Registry. The decision of the Real Estate Registry has legal force as of the date the application was filed.
  • the ‘principle of reliability’ – the principle of reliability of the Real Estate Registry, which is explicitly stated in law, presumes that the information registered after 1 January 1993 is correct and can be relied upon by third parties, unless the third party had knowledge that the information registered was incorrect. Notwithstanding this, there remains a possibility that the information on the Real Estate Registry may be incorrect. There is a procedure for rectifying the records kept by Real Estate Registry. The New Civil Code further enhances the principle of reliability of the Real Estate Registry.
  • a change of landlord – the Civil Code explicitly states that, on a sale of a property which is subject to leases, whilst the new owner will adopt the position of a landlord vis-à-vis the tenants, a tenant is entitled to terminate its lease agreement. Unless the parties expressly agree, this provision does not apply to leases of non-residential premises under the Act on Leases and will not be applicable for all leases under the New Civil Code (as described above).

6. Due Diligence – What investigations does the buyer normally make?

Pre-exchange of agreements

A prudent buyer is likely to commission a survey of the building and plot of land and in appropriate cases, soil and geological investigations, plant and machinery tests and environmental investigations. There are three prongs to the due diligence of the buyer’s lawyers.

First, the title to the property will be investigated. The buyer’s lawyers will consider the entries on the Real Estate Register and, where relevant, historic title documents (usually ownership titles going back ten years plus one preceding title).

By submitting details of the property to the Real Estate Registry, the buyer’s lawyers will receive the relevant list of ownership interests for the seller and the property confirming whether the ownership right of the seller is registered. Additional details of the registered interests (e.g. easements, mortgages, pre-emptive rights) will need to be obtained from the Real Estate Registry. If the ownership list reveals a “P” (i.e. a “plomba”) in the relevant section, this means that there are pending proceedings against the property. More details on the pending proceedings can be found in the relevant Real Estate Registry.

Where the property is leased, or subject to other occupational interests, the terms of the relevant occupational documents (e.g. the administrative permits) need to be considered carefully to ensure that they do not conflict with the buyer’s intentions for the property. The buyer’s lawyers will also need to check whether the documents require the consent of any third party to the transaction.

Secondly, the buyer’s lawyers will carry out due diligence, which will include conducting various searches to check the position regarding the municipal land use plan and zoning plans, environmental matters, financial encumbrances etc. Where the seller is a company, the buyer’s lawyers will also conduct corporate searches of the seller at the Companies Register to ascertain whether or not the company is registered or declared insolvent and/or bankrupt and confirm that the company may dispose of its assets freely, the current name and registered office of the company and who is entitled to act on behalf of the company.

Thirdly, the buyer’s lawyers will raise additional enquiries of the seller’s lawyers to obtain information regarding a large number of practical matters which may affect the property and ask any relevant questions in relation to the title to the property.

Pre-completion

Shortly before completion, the buyer’s lawyers will also conduct searches at the Real Estate Registry to confirm that there are no pending proceedings regarding the property. Further searches will be carried out at the Companies Registry to confirm that the seller has not been declared insolvent and/or bankrupt. These searches should confirm that the information gained in the due diligence process remains unchanged immediately prior to the execution of the transfer agreement.

Reporting to the client

Before signing the agreements, the buyer’s lawyers usually report their due diligence findings to their client, raising any matter of particular importance or concern.

7. Registration and Notarisation of real estate – What are the basic requirements?

The Czech Republic’s central real estate register is the Real Estate Registry which is run through regional district Real Estate Registries responsible for specific areas of the country. The Real Estate Registry shows the legal status and details of the owners and other persons authorised in connection with the property. As the Real Estate Registry is accessible by the public, third parties are assumed to have knowledge of the contents of the records kept by the Real Estate Registry.

As mentioned above, the Real Estate Registry provides a record of who owns property, the registrable rights benefiting or burdening the property and the title under which the seller acquired the property. The record is contained on an ownership list, which shows all property owned by a particular legal entity in a certain cadastral area, in relation to which:

  • Part A gives details of the registered owner of the property;
  • Part B gives a description and location of the property by reference to plots of land and identification numbers for buildings together with any rights benefiting the property and a note on the protection of the property (for example national monument property). It should be noted that the street address of the property is not shown on the ownership list for the property. It is sometimes difficult for lawyers to identify property and additional advice is taken from a surveyor (“geodet”);
  • Part C gives a description of rights encumbering the property, such as a mortgage, easement or pre-emption rights;
  • Part D can contain various pieces of relevant information relating to the property;
  • Part E refers to agreements or documents on the basis of which the ownership right was created.

The Real Estate Registry may also contain, where appropriate, a special “P” note showing that there is either a pending procedure concerning the property or a restriction on the owner’s ability to deal with its ownership title without obtaining the consent of another party.

8. Permits – What permits are required for the use and occupation of real estate and are they personal?

Structures or facilities and alterations thereto may be placed and their impact on the use of the area may be changed only on the basis of:

  • Planning permit;
  • Planning consent;
  • Planning agreement between the applicant and construction authority; or
  • if the structures or facilities are contemplated to be placed in a built-up area, on the basis of a regulatory plan to the extent approved by regulatory plan, without a specific planning permit.

Applications to obtain a planning permit to develop a plot of land must be filed with the local construction authority which is responsible for controlling the use and development of plots of land in its area. Local construction authorities have statutory time periods within which a decision must be made as to whether a planning permit should be issued. There are various statutory rights in relation to appeals made if an application is refused. The applicant does not necessarily need to be the owner of a plot of land. As a result, any party can apply for a planning permit in respect of a plot of land, provided that the applicant received the approval of the owner of the plot of land on which the applicant intends to build. During the planning permit proceedings, the relevant authority considers each application in respect of (i) the application’s compliance with the zoning plan of the relevant territory (ii) ) the application’s protection of the environment and health and safety; and (iii) the standpoint of other participants in the planning proceedings. A planning permit will contain conditions regulating the impact of the development of the plot of land.

In certain cases, for example, where a structure does not require a building permit or a notification, the construction authority may issue a planning consent instead of a planning permit. A planning consent is issued within 30 days of the date of notification (if the authorities agree with the project).

The Construction Act states the types of structures, technical infrastructure, pylons, aerials, facilities, conservatories or sheds, landscaping work, maintenance and construction works or alterations which do not require a building permit or notification to the respective construction authority.

In some cases, only a notification to the construction authority is required e.g. for a residential house of up to 150sqm with one basement floor and a ground floor (assuming certain other conditions are met). If the notification is complete and complies with the requirements, the construction authority will approve the construction within 30 days of receiving the notification.

In all other cases, the construction cannot commence until a valid, effective building permit has been issued. The construction authority determines the binding conditions for the implementation and use of a development in the building permit. The conditions determined by the construction authority will ensure the protection of public interests during its construction and the use of the building, its integrity, compliance with general technical building requirements or other regulations and technical standards and its compliance with the requirements set by the state administrative authorities, in particular, the exclusion or restriction or negative impact of the building and its use on the environment. A building permit generally ceases to be valid if construction has not commenced within two years of the date on which the building permit became legally effective however a longer period may be (i) granted by the construction authority; or (ii) extended on request by the applicant.

Generally, a building permit will be required to construct a “new build” property, to undertake work to refurbish an existing building and to change an existing use (e.g. office space) to another separate use (e.g. retail premises).

The role of Authorised Inspectors has been created to certify plans for new constructions, in particular where a developer wishes to avoid traditional construction proceedings. Based on a contract with the developer, an Authorised Inspector is entitled to:

  • certify that the proposed construction project or modification of the construction project prior to its completion may be executed;
  • draw up an expert opinion (i.e. a certificate) for the purposes of issuing an occupancy permit; and
  • supervise the implementation of the construction project.

Building permits can, in some cases, be replaced by a construction agreement between an applicant and a construction authority.

If works are to be carried out to historically or architecturally important buildings, the investor must obtain a positive statement from the cultural heritage protection authority before a planning or building permit is issued.

During the consultation period the local construction authority is required to undertake, interested third parties may submit objections (or support). These comments should be considered by the authority before deciding whether a planning permit or building permit should be granted. In addition, even after a planning permit or building permit has been issued, there will be a 15 days period within which the participants to the proceedings (e.g. the owners of the neighbouring real estate) are entitled to challenge the validity of permits granted. This should be considered by lawyers and agents acting for a developer prior to commencing work on the development.

Once a building has been constructed or construction works have completed, an application must be made to the construction authority to issue an occupancy consent. The construction authority will examine whether the construction has been carried out in accordance with the planning and building permits and with the applicable building, health and safety and environmental legislation. The issuing of occupancy consent approves the use of a building for a particular purpose. In some cases, only a notification to the construction authority is required.

9. Insurance and Risk – What insurance will the parties effect and when does the insurance risk pass at the time of sale?

Before a sale is completed, insurance is generally the responsibility of the owner of the property. However, where such property is the subject of a lease, the terms of the lease can prescribe which party has the responsibility to insure.

The insuring party should purchase a fully comprehensive buildings insurance policy to protect the structure and fixtures and fittings of the property in the event of damage or destruction by any of a comprehensive list of insured risks, such as storm, lightning, fire and water damage. The policy may also cover additional special heads of cover such as subsidence, earthquake and, if available, terrorism.

In certain areas of the Czech Republic, the policy usually also covers flooding however premiums and excesses are quite high due to the number of claims made in recent years.

Insurance policies (i.e. the insurance contracts containing the contractual terms between the insurance company and the insured) may either comprise of a single policy for one particular property or a block policy designed to cover a portfolio of properties. Larger institutional investors may self-insure.

In recent years, it has been possible to take out insurance if there is some specified defect in the title to the property. For an additional premium, the benefit of such policies may usually be claimed by subsequent owners of the property and tenants.

Insurance policies (except title policies) are personal and not transferable on a sale. On a sale, timing of the transfer of risk is normally prescribed by the transfer agreement as being the date of filing the application to the Real Estate Registry to register the transfer.

10. Environmental – What are the common environmental issues?

Real estate may be contaminated as a result of current and former uses. Primary legal responsibility follows the “polluter pays” principle: the person who spilled, released or discharged a substance will normally be liable for any contamination it causes. However, environmental laws may also apply, imposing liability on future owners and occupiers for contamination present prior to the acquisition of the real estate. This can occur if:

  • the substance is causing, or there is still a potential for it to cause, actual harm to humans, real estate, personal property, protected ecosystems or pollution of groundwater or surface waters, as each owner is obliged to maintain its property in such a state so as to not cause any loss and damage to any third person or protected ecosystem or surface waters; or
  • either the new owner knows about the presence of the substance but fails to take adequate steps to limit the harm it causes, or no person directly responsible for causing or knowingly permitting the substance to be present at the property can be found (for example, because a directly responsible company has since been wound up).

If a development project is proposed, then a planning permit may be issued only following an environmental impact assessment of the project on the environment is submitted to the building authority. The planning permit may set conditions under which the development may be carried out to prevent potential contamination.

Acquisition due diligence may involve the appointment of environmental consultants to consider information and to carry out a site visit (Phase I). If considered necessary, further, intrusive investigations (Phase II) may then be undertaken. It is important to identify potential problems early so that there can be a negotiation on price, the need for and scope of any remediation and/or the need to put in place protection in respect of any existing contamination related losses that may arise in the future. Such protection may take a number of forms, including obligations to remediate any contamination discovered post-acquisition, indemnities in respect of first party loss or third party claims to cover any of these risks.

11. Pricing/Valuation – What sets the price/valuation of real estate?

Pricing of real estate investments is a combination of the aggregate rent paid by occupational tenants of the property and the value that investment buyers consider a property of a similar type and location is worth at the time of the valuation.

The rent for a particular property is likely to be assessed by multiplying the area of the property by the market rental value per square metre. The market rental value will take into account factors such as the location of the property, its type and condition and the length of the lease term. There is no fixed method of assessing the property and international developers and investors active in the market tend to adopt the practices of their home countries.

In the case of retail units, it is common for the rent of the property to have an element based on the turnover produced by the business occupying the unit. As before, there is no fixed methodology for assessing the value of the property for investment purposes and the international developers and investors tend to use the methodology used in their home countries. Exchange rate risk is taken into account in valuing leases, with leases, where the rent is quoted in Euro, even though the rent may be payable in Czech Crowns, attracting a higher valuation.

Investment properties are commonly referred to as being sold on a particular yield, meaning the investment return that will be gained from the capital sum which is necessary to pay to buy the property. For example, where a property with an aggregate rent of EUR 100,000 per year is sold for EUR 2m, it will have a yield of 5%.

12. Taxes and Costs – What are they and who pays them?

The main tax applied in acquisitions is the RETT (i.e. the real estate transfer tax) at a flat rate of 4% of either (i) the purchase price; or (ii) the value of the property, depending on which value a court appointed expert determines is higher. RETT is payable by the seller by the end of the third month following the month the acquisition completed. The parties to a transaction however may agree that RETT will be payable by the buyer. The RETT calculation must be included in a RETT Tax Return which is submitted to the relevant tax office. Whilst the seller is primarily liable to pay the RETT, the buyer does guarantee to pay the tax if the seller fails to pay. An amount equal to the RETT is therefore typically placed in escrow and only released to the seller following evidence that the RETT has been paid. Failure to pay the RETT within the prescribed time incurs significant penalties and interest.

VAT on a transfer of a building is also applied (currently at a rate of 21%).

The transfer of the following buildings is exempt from paying VAT: (i) those buildings transferred five years after the first occupancy permit was issued; and (ii) those buildings transferred five years after the commencement of the first use of the respective building.

In general, a transfer of a plot of land is exempt from VAT, unless the plot of land is a “building plot of land” (i.e. the plot is an undeveloped plot of land for which a building permit has been obtained) in which case the applicable rate of VAT is 21%.

If real estate has been acquired by a share purchase, no VAT is payable on the transfer of the shares.

During the due diligence stage of an acquisition, the buyer will pay the costs of conducting searches on the real estate, valuations and surveys of the physical state of the property and any environmental audits or desktop studies. The seller will pay for the valuation by a court appointed expert.

It is not uncommon in commercial acquisitions for the seller and the buyer to each appoint its own broker to whom they will pay any commission due.

Each party typically pays its own expenses. The buyer will usually be responsible for the payment of the Real Estate Registry fees associated with registering the transfer to the buyer.