CMS Expert Guide on Private Rented Sector leases in Czech Republic

  1. I. Transactions
    1. 1. What are typical structures of transactions concerning PRS projects?
    2. 2. What are the standard conditions precedent under preliminary agreements/SPAs concerning PRS projects?
    3. 3. How financing of PRS projects can be secured?
  2. II. Permitting and Construction
    1. 4. What permits are necessary with regard to PRS projects?
    2. 5. What is the required designation in the master plan or zoning permit to develop PRS projects?
    3. 6. Are there any specific characteristics or requirements in relation to permitting of PRS projects?
    4. 7. What are the terms of quality guarantees and statutory warranties included in the construction contracts regarding PRS projects?
  3. III. Lease Agreements
    1. 8. What types of lease agreement can be used in PRS projects?
    2. 9. Are there any limitations regarding lease term?
    3. 10. What types of collaterals can be used to secure tenant’s obligations under the PRS lease?
    4. 11. Do any limitations apply to eviction of natural persons from premises in PRS projects?
    5. 12. Are rights of landlords under the leases in PRS projects subject to any statutory limitations?
    6. 13. Do tenants under the leases in PRS projects have any special rights or protections?
    7. 14. Can tenants under the leases in PRS projects be obliged to pay service charges?
  4. IV. Other Topics
    1. 15. Do PRS projects require legal separation of the premises (apartments) in a building?
    2. 16. Is there an obligation to form a housing community or housing association in a PRS project? What are the characteristics of such community or association?
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I. Transactions

1. What are typical structures of transactions concerning PRS projects?

In the Czech Republic, the PRS sector is still developing and PRS transactions are rare.

It is more common to have PRS transactions structured as share deals, in particular where large portfolios or entire residential projects are concerned. The deals can also be structured as asset deals; usually this concerns smaller transactions or deals when only a limited number of individual housing units is being transferred. Use of either structure can also depend on the phase of the PRS project, and the risks identified during the due diligence or tax aspects.

Institutional investors usually seek a direct purchase or forward purchase structure. 

2. What are the standard conditions precedent under preliminary agreements/SPAs concerning PRS projects?

The most typical condition precedent is the completion of the construction process: the handover of the property and issuance of the use permit.

3. How financing of PRS projects can be secured?

As in other real estate projects, financing for PRS projects is secured by mortgage and other customary security instruments such as a pledge of SPV receivables. PRS developers usually provide security either in the form of a bank guarantee or a retention.

II. Permitting and Construction

4. What permits are necessary with regard to PRS projects?

No special permitting rules apply specifically to PRS projects. PRS projects are not regulated as a specific category of development under Czech law.

It is a regular procedure to obtain a zoning permit (územní rozhodnutí), followed by a construction permit (stavební povolení) and a use permit (kolaudační souhlas).

A “joint permit” can be issued in one proceeding instead of separate zoning and construction permits. In addition, “public law contracts” between a developer and building authority replacing zoning permits are possible, but in our experience not commonly used in PRS projects.

5. What is the required designation in the master plan or zoning permit to develop PRS projects?

PRS projects should be located on areas designated for “residential use” or “mixed residential use” (which includes services and commerce that do not interfere with the use of surrounding buildings and facilities and do not reduce environmental standards) within a “built-up area”. 

6. Are there any specific characteristics or requirements in relation to permitting of PRS projects?

There are no specific characteristics or requirements regarding permitting PRS projects compared to commercial projects (offices, hotels and retail). 

The parameters and characteristics of PRS and other residential projects are set out in technical decrees and cover many key aspects that need to be taken into consideration, such as the minimum area of the premises, requirements regarding layout, sunlight, number of parking spaces and fire safety requirements.

7. What are the terms of quality guarantees and statutory warranties included in the construction contracts regarding PRS projects?

The PRS sector is still developing in the Czech Republic, but the periods of guarantee and statutory warranty usually reflect the market standard for commercial construction and do not substantially differ from rest of the market. There are usually no material differences in construction contracts used for PRS projects. The typical guarantee period on structures and roof is ten years. 

III. Lease Agreements

8. What types of lease agreement can be used in PRS projects?

There are no special types of leases tailored for PRS projects; standard residential lease should be used. Residential leases are more regulated than commercial leases and offer a higher level of protection to tenants; however, the regulation is still relatively flexible. 

9. Are there any limitations regarding lease term?

Both definite and indefinite term leases can be used in PRS projects. It is standard on the Czech residential housing market to enter into one-year or two-year agreements, which can be repeatedly extended. If the term of the lease exceeds 50 years, the lease is deemed to be agreed for an indefinite term and specific termination provisions apply.

10. What types of collaterals can be used to secure tenant’s obligations under the PRS lease?

As far as residential leases are concerned, the market standard is a security deposit and a contractual penalty. These are limited by the total combined amount of the rent for three months. Other reasonable forms of security, such as bank guarantees, are not prohibited by law, although they are not commonly used on the market.

11. Do any limitations apply to eviction of natural persons from premises in PRS projects?

If a lease is terminated and the tenant is not willing to leave and return the apartment, the landlord can seek protection through a court decision on eviction. The eviction process is regulated and follows a detailed statutory procedure. The eviction procedure cannot be simplified through the use of directly enforceable notarial deeds as only court decisions represent the legal title how to evict a tenant if the tenant is reluctant to comply. 

12. Are rights of landlords under the leases in PRS projects subject to any statutory limitations?

In general, a residential lease agreement should be fair and balanced as “materially unreasonable obligations” on the tenant and restrictions of the tenant’s statutory rights are not enforceable. 

If no rent increase mechanism is stipulated, the landlord can request a reasonable rent increase, i.e. up to comparable customary rent, provided that the proposed increase, together with any increases already made in the previous three years, does not exceed 20%. Should the parties disagree, the landlord can request a court to determine the rent. Similarly, the tenant may request a reasonable decrease in the rent. Lease agreements can include a specific rent increase mechanism, e.g. linked to the official inflation rate, provided such increase mechanism is fair and not materially unreasonable.

The termination period is generally three months for both definite and indefinite term leases, except for a material breach of obligations by the tenant, in which case the lease can be terminated without notice (e.g. a failure to pay the rent or service charges for at least three months). An indefinite term lease can be terminated by the tenant without reason on three months’ notice. The tenant has two months to apply for a court review of the termination grounds after being served a termination notice. It is important to note that courts not only review the termination grounds but also whether the termination complies with good morals and is not abusive.

13. Do tenants under the leases in PRS projects have any special rights or protections?

Czech law provides tenants under residential leases with a certain additional level of protection compared with standard leases for non-residential premises. These include, e.g. caps on rent increases, caps on the amount of security deposits and contractual penalties or certain limitations on the landlord’s termination rights. In general, any lease stipulations that would impose on tenants an obligation which, given the circumstances, would be seen as evidently excessive, can be disregarded under Czech law.

14. Can tenants under the leases in PRS projects be obliged to pay service charges?

Yes. The lease agreement should stipulate which services associated with the use of the apartment are to be provided by the landlord. If no such services are stipulated, the landlord provides the necessary services such as water and waste management, lighting and cleaning of the common areas.

These costs can be separated from the rent or be combined in one payment together with the rent. In the case of leases with a term of at least 24 months or an indefinite term, some payments (such as payments for heat and waste water management) cannot be included in a fixed fee and are subject to periodical reconciliation.

IV. Other Topics

There is no obligation to undertake the legal separation of the premises (apartments) in a building under Czech law, and it is possible to operate a PRS project without separated premises. However, the owner is entitled to separate the premises if, e.g. the owner intends to transfer or encumber individual units. For separation, a respective separation document must be filed with the real estate register so that units in the building can be legally created. 

16. Is there an obligation to form a housing community or housing association in a PRS project? What are the characteristics of such community or association?

There is no such obligation unless there are at least five units in the building with at least four different owners. In such case, the housing association is formed by the approval of the articles of association and registration of the association. The housing association is a legal entity established to manage the building and cannot pursue any other business. Membership in the association is directly connected to the ownership of a unit and each member is liable for the debts of the housing association in proportion to the percentage of his/her share in the common areas. 

The housing association may have an impact on the operation of the project as it manages the operation and management of the building. Each unit owner exercises his/her rights through the general meeting of the housing association which, most importantly, elects members of the housing association board, approves the budget, decides on management charges and their settlement, the repair and maintenance of common areas, and appoints a person in charge of property management.