Real estate finance law in Czech Republic

A. Mortgages

1. Can security be granted to a foreign lender?

Foreign lenders are not restricted from taking mortgages over immovable property located in the Czech Republic.
 

2. Can lenders take a mortgage over land and the buildings on land?

Both land and the buildings on land can be mortgaged to a lender under Czech law. The principle of “superficies solo cedit” applies in the Czech Republic, so any mortgage created over land also extends to the buildings that form an integral part of the land plot. If there is a building which (legally) does not form part of the land plot on which it is located, then it is necessary to specifically create a mortgage over both the land plot and the building.
In addition to land and the buildings on land, in rem rights over immovable property, such as right of superficies (právo stavby) and easements (věcná břemena), can also be mortgaged. 

2.1 What is the distinction between mortgages over land and the buildings on land?

There is no distinction under Czech law between a mortgage over land and a mortgage over the buildings on land. In both instances, the mortgagee has the benefit of the same rights against the mortgagor.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

The concept of mortgage certificates does not exist in the Czech Republic.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Yes. The registration process of a second (or subsequent) ranking mortgage is in principle the same as that for the registration of a first ranking mortgage. Mortgage ranking depends on the date (and time) when the application to register the mortgage in the Real Estate Register is filed with the relevant Land Office. 

The concept of a priority deed does not exist under Czech law. By operation of law, mortgages rank based on the time of filing of the application. However, the parties can “reserve” in advance a ranking for a mortgage by establishing a future mortgage (a future mortgage can be established over property which will be acquired by the mortgagor in the future provided that the current property owner consents to its creation).

However, it is possible for the ranking of mortgages to be changed with the consent of all affected mortgagees by filing a written consent with a change of ranking of the mortgages with the relevant Land Office.

2.4 Can real estate be transferred to a third party (being still subject to mortgage) without the lender’s consent?

Yes, unless a prohibition on the encumbrance and transfer was registered simultaneously with registering the mortgage in the Real Estate Register. If such prohibition on encumbrance and transfer is in place, the Land Office should refuse to register the title of the new owner without the consent of the mortgagee. In practice, the Land Office sometimes requires consent with the transfer of ownership right over real estate of the mortgagee, even if no prohibition on encumbrance and transfer is registered, and only the mortgage is in place.

2.5 Are there any preferred creditors (other than prior ranking mortgage holders)?

Generally, secured creditors, i.e. creditors in whose favour a mortgage securing the satisfaction of their claims is established, are satisfied in succession corresponding to the ranking of the mortgages. Any preferred creditors, which would be satisfied before the mortgage holders, would be taken into account only in the event of the mortgagor’s insolvency (owner of the real property).

2.6 Can “all monies” mortgages be taken?

An “all monies mortgage” (i.e. a mortgage where the mortgaged property stands as security for indebtedness that is not determined when the mortgage is created) is not possible under Czech law because secured debts must be sufficiently determined/specified. In addition, the maximum amount of secured debts which is secured by the mortgage is entered in the Real Estate Register.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes, claims for rent can be pledged or assigned. The landlord and the lender must conclude an agreement on the pledge/assignment of the landlord’s existing and future claims against the tenant(s). To become effective towards the tenant(s), the pledge/assignment has to be either notified to the tenant(s) by the pledgor or proven to the tenant(s) by the pledgee

However, such pledge/assignment of receivables is not in any way linked to the mortgage and is not registered in the Real Estate Register. In the event of the borrower’s default, the lender may be repaid directly from the pledged/assigned claims if agreed so between the lender and the landlord.

2.8 It is customary/possible for a lender to take a charge/security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Yes. A pledge over bank accounts is a common type of security over a borrower’s receivables under bank account agreements. In addition to a pledge, a negative pledge undertaking is also commonly established and registered in the Czech Notarial Pledge Register, being established as an in rem right on its registration. It is usual for a loan agreement to contain various provisions and restrictions on how the balance on the borrower’s bank accounts can be used. 

3. What are the mechanisms for registering land and for registering and perfecting security?

Generally, all real estate property (land and buildings) is registered in the Real Estate Register. For registering either a transfer of ownership right or mortgage over real estate property, an agreement in written form with notarised signatures (all signatures forming part of the same document, i.e. signing in counterparts is not possible in the case of agreements concerning real estate property) is required to be filed with the Real Estate Register. The registration of both the transfer of ownership right and of mortgage is constitutive in nature, i.e. such transfer/mortgage is effective only on its registration in the Real Estate Register (backdated as at the moment the application for registration was filed). 

3.1 What are the consequences of a failure to register?

A mortgage is perfected only on its registration in Real Estate Register. A failure to register means that the mortgage is not perfected.

3.2 What are the formalities and costs for the execution of security?

A mortgage needs to be established by an agreement concluded between the mortgagor (the owner of the real estate property or the future owner which has secured the consent to create the (future) mortgage from the current owner) and the mortgagee in written form with notarised signatures (all signatures forming part of the same document, i.e. signing in counterparts is not possible in case of agreements concerning real estate property). Subsequently, the mortgage agreement needs to be filed with the Real Estate Register and the mortgage registered in order to become legally effective.

The relevant costs include:

1. notarisation of signatures: CZK 70 (approx. EUR 3) per signature; and
2. administrative fee for filing an application for registration in the Real Estate Register: CZK 2,000 (approx. EUR 80) per application filed with one Land Office.

4. Can the lender use a Security Trustee to hold security on trust for creditors?

The concept of security trusteeship (within the meaning of English law) is not expressly recognised under Czech law. Czech law recognises a joint and several creditorship and other structures, where established under foreign law.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

Unless the relevant security document provides otherwise, any security is transferred automatically with the underlying receivable/agreement to a new lender

In general, no additional documents regarding the security are required; however, it is customary to execute the transfer certificate mainly for re-registration in the relevant registers in the Czech Republic.

5. Does the landlord/borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease

5.1 Office/industrial lease

Generally, lease agreements for office/industrial space contain a provision which forbids the tenant from subleasing the leased premises without the landlord’s prior written consent (sometimes making an exception for sublease to the tenant’s affiliate).

5.2 Retail lease

Generally, lease agreements for retail space contain a provision which forbids the tenant from subleasing the leased premises without the landlord’s prior written consent (sometimes making an exception for sublease to the tenant’s affiliate).

6. How can the lender enforce its security?

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

In general, Regulation (EU) No. 1215/2012 on jurisdiction and the recognition and enforcement of judgements in civil and commercial matters applies and the parties to a contract can choose a foreign EU jurisdiction. However, disputes relating to real estate can only be settled by the competent Czech court.

If a foreign jurisdiction outside the EU is chosen, the provisions of the Czech Private International Law Act or any bilateral or multilateral international agreements or treaties to which the Czech Republic is a party will apply

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Arbitral awards and foreign judgments are enforceable in the Czech Republic after completing a simplified recognition/declaration of enforcement procedure before Czech state courts. Foreign arbitral awards are recognised/declared enforceable in the Czech Republic under the provisions of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the 1958 New York Convention). State court judgments issued in EU Member States are recognised/declared enforceable subject to the requirements set out in the Regulation (EU) No. 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (the 2012 Brussels Recast Regulation). State court judgments issued in non-EU states are subject to recognition and enforcement pursuant to the provisions of the Czech Private International Law Act or any bilateral or multilateral international agreements or treaties to which the Czech Republic is a party, if applicable. In either of the above procedures, arbitral awards and foreign court judgments are not subject to a review on the merits by Czech courts.

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

In the case of enforcement, real estate property can be sold either by the court or in public auction (both of these types of enforcement being explicitly permitted by law) or, if agreed between the parties in writing, by the mortgagee by direct sale. For an in-court enforcement or public auction, the lender must obtain an “execution title”, i.e. a court decision or an arbitral award declaring that the borrower is required to pay the secured debts.

Conditions for a direct sale agreed by the parties should be sufficiently specific and limit the arbitrary decision making of a secured creditor (e.g. a price/value of the collateral should be determined by an independent valuer or otherwise determined on the market).

In addition, after the secured debts become due, the mortgagor and the mortgagee may agree that ownership of the mortgaged property will be automatically transferred to the mortgagee (foreclosure; please see section 6.5 below)

6.4 Is the lender responsible for maintenance and insurance of the real estate after default until sale?

No, the lender has no such obligation.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

Under Czech law, in the case of a borrower’s default, ownership of the mortgaged property is not automatically transferred to the mortgagee. In general, any such provision agreed between the mortgagor and the mortgagee before the maturity of the claim can be declared invalid.

After the secured debts become due, the mortgagor and the mortgagee may agree in writing and under strict statutory conditions that the ownership of the mortgaged property will be automatically transferred to the mortgagee. The conditions include, in particular, that a value/price of the mortgaged property must be fairly determined (usually by an independent valuer agreed on by the parties) at the time of the enforcement and enforcement may commence only once the secured debts are due.

This method is currently not widely used on the Czech market, mainly due to several practical questions that have not been settled by practice/case law yet.

7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult?

Foreign lenders are not restricted from taking security over shares in companies incorporated under Czech law. 

Second ranking security can be taken over: (i) shares/ownership interest in Czech limited liability companies, being registered in the Czech commercial register; and (ii) book-entry shares in Czech joint stock companies, being registered in the relevant assets account (owner’s account).

Second ranking security cannot be taken over certified (documentary) form shares in Czech joint stock companies as in this case the security becomes effective on the handover of the pledged shares to the pledgee, which is supposed to hold the pledged shares in its custody throughout the whole term of duration of the pledge.

A pledge over shares/ownership interest in Czech limited liability companies is registered in the Czech commercial register and a pledge over book-entry shares in Czech joint stock companies is registered in the relevant assets account (owner’s account). Both of these pledges are perfected on registration in the relevant register.

A pledge over certified (documentary form) shares in Czech joint stock companies is not subject to registration proceedings and is perfected on the handover of the pledged shares, including pledge endorsement, to the pledgee.

3.1 What are the consequences of a failure to register?

In the case of a pledge over shares/ownership interest in Czech limited liability companies and a pledge over book-entry shares in Czech joint stock companies, a failure to register means that the pledge is not perfected.

As set out above, a pledge over certified (documentary form) shares in Czech joint stock companies is not subject to registration proceedings.

3.2 What are the formalities and costs for the execution of security?

A pledge over shares/ownership interest in Czech limited liability companies and a pledge over book-entry shares in Czech joint stock companies need to be established by an agreement concluded between the pledgor (the holder of the shares/ownership interest) and the pledgee in written form with notarised signatures.

The relevant costs include:

1. notarisation of signatures: CZK 70 (approx. EUR 3) per signature; and
2. registration costs:
   1. shares/ownership interest in Czech limited liability companies: administrative fee for filing an application for registration in the commercial register: CZK 2,000 (approx. EUR 80); and
   2. book-entry shares in Czech joint stock companies: the costs depend on the relevant assets account administrator; but, generally, there are no additional fees for registering the pledge in addition to the general costs for administration of the assets account. 

A pledge over certified (documentary form) shares in Czech joint stock companies is established by an agreement between the pledgor (the holder of the shares) and the pledgee. Although Czech law does not require the written form for such agreement, if an agreement in writing is concluded, simple signatures are sufficient. Following the conclusion of the agreement, the shares need to be endorsed with a pledge endorsement and handed over to the pledgee. Generally, there are no mandatory costs associated with this type of pledge.

No. For the creation of security over shares or ownership interest, no transfer is required.

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers/liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

In the case of enforcement, shares can be sold either by the court or in a public auction (both of these types of enforcement being explicitly permitted by law) or, if agreed between the parties in writing, by the pledgee in a direct sale. For in-court enforcement or public auction, the lender must obtain an “execution title”, i.e. a court decision or an arbitral award declaring that the borrower is required to pay the secured debts.

The conditions for a direct sale agreed by the parties should be sufficiently specific and limit the arbitrary decision making of a secured creditor (e.g. the price/value of the collateral should be determined by an independent valuer or otherwise determined on the market).

In addition, after the secured debts become due, the pledgor and the pledgee can agree that ownership of the pledged shares will be automatically transferred to the pledgee (foreclosure).

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of the enforcement of a share pledge should a default occur?

In general, Czech law recognises contractually subordinated receivables. In the case of Czech market standard financing: (i) the repayment of intra-group loans is subordinated to the repayment of the loans granted by the senior lenders; and (ii) receivables under the intra-group loans are pledged in favour of the senior lender.

Shareholders can agree that the repayment of their loans will be waived/written off should a default occur.

1.1 What is a typical lease length?

Lease length may vary according to the business strategy of the landlord, geographic location, age of the leased premises and type of property. In our experience, commercial leases are generally entered into for a specific period of time (as opposed to indefinite periods) and their usual length is five to ten years.

1.2 Maximum/minimum lease length if any?

In general, no. However, if a lease is entered into for a definite period of more than 50 years, it will be considered a lease for an indefinite period of time (which has an impact on some aspects of the lease, such as termination rights, whereas in the first 50 years such lease can only be terminated for agreed termination reasons and within agreed termination periods). 

1.3 What are the statutory controls and obligations regarding renewal/termination of leases, e.g. does a tenant have an automatic right to renewal or can they apply to the courts for a new lease? Does some form of notice have to be served to terminate a lease to avoid renewal

There are no statutory controls or obligations regarding the renewal of commercial leases. The tenant does not have an automatic right to renew the lease. The parties may agree to grant the tenant a right to extend the lease before the expiry date of the fixed term. Indefinite lease terms are uncommon. If the lease term is not extended, the lease terminates on the expiry of the fixed term

If on the expiry of the fixed term the tenant remains in the leased premises and keeps using the premises for at least three months, and the landlord does not object within such period by a notice served to the tenant, the lease is automatically extended by operation of law for an additional term (for the same lenght as the original term, up to two years). This statutory extension is always excluded in institutional/commercial lease agreements.

1.4 Are there any overriding statutes concerning the ability of the tenant to break a fixed-term lease (whether or not included as a term of the lease)?

Regarding commercial leases, the parties are free to agree on the application of (any) termination options regarding fixed term leases.

The usual practice on the market is that a fixed term lease cannot be terminated by the tenant until the fixed term of the lease has elapsed, unless there are contractual break options in the lease (which, if any, usually only refer to a situation where the leased premises cannot be used for the intended purposes).

1.5 Are there any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

If the tenant does not vacate the premises after the termination of the lease, the landlord may potentially face difficulties removing the tenant from the premises and may need to seek a court order and, eventually, enforce the order in execution proceedings. However, various commercial instruments are available to landlords which may be used to prevent such behaviour by tenants, e.g. failure to vacate the premises may be sanctioned in the contract and the landlord’s rights may be secured by contractual penalties. Institutional lease agreements often contain provisions under which the landlord is entitled to remove the tenant’s movable assets from the leased premises and move them to storage at the tenant’s cost if the tenant fails to vacate the premises.

2.1 When is rental income receivable, e.g. quarterly/monthly in advance/in arrears?

Rent is usually paid in advance. Monthly or quarterly payments are most common. Rent is usually denominated in the local currency (CZK) or in EUR (majority of mid-size and larger commercial leases).

2.2 What is the periodicity of reviews?

Most commercial leases are subject to indexation on an annual basis.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

It is customary for the basis of reviews to be indexation only. The index to be applied depends on the currency in which the rent is set:

1. in CZK, the Consumer Price Index compiled by the Czech Statistical Office is applied; and
2. in EUR, the harmonised index of consumer prices (HICP) is applied.

Indexation is usually upwards-only and the rent cannot fall below the initial base rent.

2.4 Are rents/reviews subject to statutory control regarding quantum or increase, i.e. rent control

No.

3.1 Internal maintenance, decoration and repair?

The landlord must provide premises suitable for the purpose of the lease. Internal maintenance/decoration/repair of the leased premises is then typically a responsibility of the tenant.

3.2 External maintenance, decoration and repair?

Landlords are usually responsible for the maintenance and repair of the building structure, exterior walls, roof, main common utilities and ventilation systems, and surroundings of the building (gates, communications, etc.), unless the damage is caused by the tenant (its employees, contractors etc.).

3.3 Structural repairs?

Landlords are usually responsible for structural repairs. The tenant must not modify the structural parts of the premises/building without the landlord’s prior approval (typically to be provided in writing).

3.4 Insurance?

In the case of institutional “triple net” leases, the insurance of the leased premises is usually paid by the landlord, but re-charged to the tenant as part of the service charges.

The tenant is usually required to have all-risk property insurance for its property installed in the leased premises and liability insurance for a certain minimum coverage. Business interruption insurance is often also required.

3.5 VAT?

If the landlord is a registered VAT payer, 21% VAT is charged on rent and service charges.

3.6 Rates?

In institutional commercial leases (“triple net”), landlords include all payments regarding the property (including property tax; usually paid by the landlord, but re-charged to the tenant) in the service charges/outgoing payments.

3.7 Other typical outgoings?

As outlined above, in the case of institutional “triple net” leases, the landlord’s outgoings are part of the service charges.

3.8 The ability to recoup any of the landlord’s outgoings (including management costs/fees) by way of service charges?

In the case of institutional “triple net” leases, the landlord’s outgoings are part of the service charges (including management costs/fees). The payments (advances) for outgoings/service charges are usually paid in advance. After reconciliation is made, the tenant will pay any outstanding amounts; in the case of overpayments by the tenant, these can be set off against the next outgoings payment/returned to the tenant (depending on the commercial agreement of the parties). The tenant’s financial obligations (including rent and service charges’ payments) are typically secured by a security deposit or a bank/corporate/parent company guarantee.

4.1 Are the terms of leases/contracts recognised and supported by case law in the jurisdiction?

The terms of lease agreements are recognised and enforceable by Czech courts (if in compliance with the mandatory provisions of law). Although the Czech judicial system is not based on case law, Czech courts may refer to previous court judgments (especially those adopted by higher courts), typically in disputes over the termination of leases or other key aspects of lease arrangements on which courts have already adopted decisions in the past, and where the aspects of the given case are similar to those in previous cases.

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated/qualified party or is a RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

In general, either appraisal can be presented to the court as evidence. The court then evaluates the significance of the evidence freely (taking account by whom the report was prepared as well as other factors). If the court requests the appointment of an expert to make an appraisal or the court itself decides to arrange to obtain an appraisal, the court would appoint a qualified expert from the lists of experts with a domestic licence (registered with the Czech Ministry of Justice). 

5.2 Is it possible/customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

In general, qualified/insured environmental professionals can prepare environmental reports but such reports are not binding on the environmental agency or the courts.

Governmental authorities have rights and obligations, among others, regarding monitoring compliance with environmental laws but it is not possible to appoint them for the purposes of preparing environmental reports for private entities/individuals.

5.3 Is it possible for liability for past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

Generally, no, if there is no other connection between the lender and the real estate.