Real estate finance law in Slovakia

A. Mortages

1. Can security be granted to a foreign lender?

Foreign corporate lenders are not restricted from taking mortgages over immovable property located in Slovakia.

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

Both land and the buildings on the land can be mortgaged to a lender under Slovak law. However, the principle of “superficies solo cedit” is not applicable in Slovakia. It is therefore possible that the mortgage over the land plot differs from the mortgage over the construction built on it.

2.1 The distinction between mortgages on land and buildings on the land?

There is no distinction under Slovak law between a mortgage over land and a mortgage over the buildings on the land. In both instances the mortgagee would have the benefit of the same rights and means of redress against the mortgagor.

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

Mortgage bonds (mortgage certificates) in Slovakia are commonly used and governed by special acts. The total value of the certificates, including the yields, must not exceed the value of the secured property for which they have been issued. The mortgage bonds are transferable and can be traded on the stock exchange.

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

The Slovak Civil Code refers to the existance of second ranking mortgages over one property. This is also used in practice. A second ranking mortgage is created when a multiple claims are secured by a lien on one and the same real property. The amount of satisfaction from the proceeds from enforcement of the second ranking mortgage is the remainder of the realization proceeds of the first-ranking mortgage. The rank of the mortgage is indicated in the Cadastral registry by the entry in Part C of the ownership deed of the real properties to which the mortgage relates.

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

In practice, the mortgage agreements usually include a prohibition on the selling or otherwise disposing of the encumbered property. This prohibition is registered with the Cadastral registry and is stated on the deed of ownership. In such a case, the transfer of real estate subject to mortgage cannot be performed without the prior written consent of the lender.

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

In Slovakia the system of priority is established. It means that the creditor whose security is registered first, is the prior ranking creditor. The prior ranking creditor is obliged to inform the other creditors in writing about the enforcement of the mortgage.

2.6 Can “all monies” mortgages be taken?

The Civil Code requires that a mortgage agreement provides for the secured amount (its absence triggers the invalidity of the mortgage agreement).

The maximum secured amount is calculated as the sum of the principal amount lent to the mortgagor and an additional amount that is a good faith estimate of all amounts due by the mortgagor to the mortgagee as interest, default interest, fees, charges and any other costs under the loan facility and the related finance documents. This additional amount generally represents up to 50% of the principal amount. It may be varied (upwards or downwards) so as to give the mortgagee the comfort that the claims it may have against the mortgagor can be realised to the maximum extent.

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?

Under Slovak law, also receivables can be pledged in order to secure a debt. However, the value of the receivables must be certain or at least be ascertainable during the existence of the pledge. It means that also a landlord’s right to receive rent may be charged to a lender by way of a pledge. In the event of enforcement, the receivable is paid directly to the lender.

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?

It is possible and common for the lender to enter into a pledge agreement in relation to receivables from bank accounts with the borrower. The pledge usually applies not only to the receivables, but also covers any parts, benefits, interest due and other appurtenances of the pledged receivables. The pledge comes into existence only after its registration in the Pledge register. In the event of default, the lender may have recourse to the receivables from the bank accounts. In the absence of such a pledge agreement, the only way for the lender to take charge of the borrower´s bank accounts is to request a preliminary court order to freeze the bank accounts. However, this procedure is not widely used due to its legal intricacy.

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

3.1 Consequences of failure to register?

Mortgage security must be perfected by the registration in Cadastral registry.
A failure to register a mortgage agreement will prevent the mortgage from coming to existence.

3.2 Formalities for execution of security and costs?

For the transfer of ownership of real property, Slovak law requires a written contract with signatures of the parties verified by a public notary or other authorized person. When the signing and the verification of the signature happens outside of Slovakia, Czech republic or Austria the documents need to be apostiled (legalized). Furthermore, the transfer of the title must be registered in the Cadastral registry. The transfer of ownership is perfected when recorded in the Cadastral registry.

The costs relating to mortgages include (i) the notary fees, (ii) the Cadastral registry stamp duty:

(i) the notary fee is EUR 4.38 for verification of signatures. A 19% VAT rate is also applied to the notary fee;

(ii) administrative fees for registration of the mortgage is EUR 66 in stamps (60 days) or EUR 265 also in stamps in accelerated procedure (8 days)

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

Security trustees are not used in Slovakia with regard to holding security, but security agents can be involved provided they act also as lender.

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

It is possible to change lenders, for example by way of assignment, but there is no obligation to sign new security, because all securities are transferred automatically with the assigned receivables.

There are two conditions for a valid assignment of receivables in Slovakia. The law requires that the assignment be in written form and for notification of the debtor.

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?

The tenant is bound by the lease agreement with the landlord and may not unilaterally transfer the lease to another person. Any changes in tenants is subject to the prior consent of the landlord. Without the prior consent, the tenant may not even sub-let the premises. A unilateral assignment of the lease on the part of the tenant constitutes a breach of the lease agreement.

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?

No. A foreign jurisdiction cannot be chosen to settle disputes in relation to real property in Slovakia pursuant to Art. 22 of the Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters. The above mentioned regulation establishes exclusive jurisdiction for rights in rem (immovable property or tenancies of immovable property) of the state in which the property is situated, regardless of the domicile of the parties to the proceedings.

The same applies for arbitration awards relating to real property. Although Slovak Republic is the contractual party of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NY Convention), the provisions about immovable property cannot be used, as Slovak Republic has made a reservation with regard to immovable property.

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

Please refer to section 6.1.

It is not possible to allow the enforcement of arbitral awards or foreign judgements without judicial review, because only Slovak Courts have exclusive jurisdiction in disputes over rights in rem in immovable property or tenancies of immovable property.

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?

There are two legal options how the security can be enforced.

First, as part of the mortgage enforcement, the mortgagee can enforce its security as provided in the mortgage agreement. In the case of property sale other than by auction, the creditor is obliged to exercise due diligence, so that the proceeds from the pledge enforcement are equal or higher to proceeds usually obtained from the sale of similar property in the same area at the same time.

Secondly, the mortgagee can sell the property in a public tender (auction), which is regulated by a special act on public tenders.

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

The person in possession of the real property during the enforcement of the mortgage must not doing anything which could depreciate the value of the property, other than normal wear and tear. As regards the insurance, the mortgagor is only obliged to take on insurance if it is provided for in the mortgage agreement.

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?

In the case of default the automatic transfer of ownership title to lender is prohibited. The lender can only use methods which are outlined in section 6.3.

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

Since 2009, there is an option to have a property transfer agreement authorized by a notary or an attorney. This procedure has been introduced in order to both speed up the process of registration with the Cadastral registry and to prevent fraud. If property transfer agreement has been concluded in this manner, than some of the obligations of the Cadastral registry with regard to registration are transferred to the attorney/notary. The attorney/notary is liable for the due registration of such an agreement.

Also, except for Czech documents, for which bilateral international agreements have been concluded, all documents submitted to public authorities in Slovakia have to be in Slovak language or an authorised translation.

B. Security Over Shares

1. Can security be granted to a foreign lender?

Yes. Security over shares in a Slovak company can be granted to foreign lenders. The same applies to security over an ownership interest in a limited liability company.

2. Can second ranking security be taken? If so, how is it registered?

Second ranking security over the shares in Slovakia cannot be taken. Shares which are already pledged cannot constitute the subject of a share pledge agreement.

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

Shares evidence by certificates
A pledge is created on its registration in the Central Securities Depository of the Slovak Republic (Central Depository). Upon registration of the pledge, the Central Depository records on the share certificates that each share is “on pledge”. If the share certificates are transferred by endorsement (registered shares certificates), the written declaration of the owner of the share certificate to be made on this share certificate is the requirement for creating the pledge. The written declaration must contain the name, business seat, business identification number of the pledgee and the signature of the pledgor.

Registration can be undertaken by the pledgor or the pledgee. For registration certain confirmations regarding the share pledge agreement must be delivered to Central Depository.
Dematerialised shares

A pledge is perfected by its registration in Central Securities Depository of the Slovak Republic.

Registration can be undertaken by the pledgor or the pledgee. For registration certain confirmations regarding the share pledge agreement must be provided to Central Depositary.
Ownership interest in a Limited Liability Company

A pledge is perfected by its registration in the Commercial Register.

3.1 Consequences of failure to register?

If the relevant perfection requirements in B3 have not been met, the security is not validly created and cannot be enforced.

3.2 Formalities for execution of security and costs?

The share pledge agreement and the required confirmations of the content of the share pledge agreement must be provided to the Central Depositary together with the registration form.

The cost for registration itself is calculated by reference to the amount of the secured receivables.

For the registration of a pledge over the ownership interest the pledge agreement as well as the resolution of the General meeting must be submitted to the Commercial Register, if the consent of the General Meeting is required according to the memorandum of association of the limited liability company. The registration form needs to be delivered to the Commercial Register.

The fee for the registration is EUR 66.00.

4. Do the shares need to be transferred into the name of the lender or its nominee?

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

5. How can the lender enforce its security?

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?

Yes. Shares as well as the security interest can be sold to a third party, and recourse to the courts is not required, as the security may only be enforced based on the valid share pledge agreement/pledge agreement regarding the ownership interest.

Private sales of pledged shares are not possible. The shares may only be sold by the Securities Trader and at the highest price that may be achieved subject to exercising due diligence. The ownership interest may be sold in direct sale, in a public tender, auction, or in any other way agreed in the agreement on pledge of ownership interest. It is possible to agree any way of enforcing the pledge, therefore we are of the opinion that private sale of ownership interest is possible, however the lender must exercise due care and the ownership interest must be sold at the price usually quoted for identical or comparable ownership interests under comparable conditions and at the time and place similar to those of the ownership interest sale.

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 an enforcement of a share pledge should a default occur?

Loans from shareholders can be contractually subordinated and this is common practice.

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

C. Leases

1. Lease Structure

1.1 Typical lease length?

Although lease lengths may vary according to the business strategy of the landlord, geographic location, age of the leased premises and type of property, our experience shows that commercial leases are generally entered into for a specific period of time (as opposed to indefinite periods) and their usual length is approx. 5 – 10 years.

1.2 Maximum/minimum lease length if any?

None.

1.3 Statutory controls and obligations re renewal/termination of leases (does tenant have automatic right to renewal or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

Tenants of non-residential premises do not have any statutory rights for renewal or extension of the lease period. The landlord need not serve any notice to avoid an extension of the lease.

Upon change of ownership of their leased premises, a tenant is entitled to be relieved of its obligations owed to a previous owner as soon as he has been notified or received evidence of the change in ownership. In the event that there is a change in the ownership of the landlord, a tenant is entitled to terminate the lease agreement (including premature termination where the lease is for a definite term); however, the tenant’s termination notice must be served in the next closest notice period, unless provided otherwise by law. Sale of the building does not affect leases of commercial units.

1.4 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)?

The statutes include a number of reasons for which a tenant may terminate a fixed term lease. The reasons typically relate to a breach of contract by the landlord. However, some of the reasons for termination can be excluded by contract.

The overriding reasons for termination of fixed term leases by tenants are:

(a) where the premises are not suitable for use according to the lease agreement;

(b) if the building or land is transferred;

(c) if the tenant loses its licence for activities carried out in the leased premises (non-residential premises only);

(d) if the landlord grossly breaches its statutory obligations (non-residential premises only).

The provision on the termination of the lease agreement executed for definite term in case of lease of non-residential premises before expiration of the term agreed does not unambiguously indicate whether it is mandatory and whether some of the parties may exclude or amend some of the termination events subject to their agreement or whether further termination events may be added. The applicable case law provides that the provision in question is mandatory in the sense that the termination events provided by the Act cannot be excluded by the parties. However, it is possible to add further events authorising termination or provide for other ways of agreement termination (such as withdrawal).

1.5 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 termination of the lease, the landlord cannot remove the tenant from the premises, but must seek a court order and, eventually, enforce the order in execution proceedings. The proceedings may be lengthy. However, failure to vacate the premises may be sanctioned in the contract and the landlord’s rights may be well secured by contractual penalties etc.

In the case of tenant bankruptcy, the bankruptcy administrator may terminate the lease. Any receivables of the landlord would be settled in the bankruptcy proceedings on a pro-rata basis.

2. Rent/Rent Reviews

2.1 Rental income receivable quarterly/monthly in-advance/in-arrear?

Rent is usually paid in advance. Monthly or quarterly payments are usual.

2.2 Periodicity of reviews?

Most leases are subject to indexation on an annual basis – usually by reference to the HICP Eurozone index for EUR rent.

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

Often the indexation is upwards only, depending on the strength of the position of the landlord. Review is usually based purely on indexation, not on market rent levels.

2.4 Are rents/reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

Not in commercial leases.

3. Lease Obligations: Who has responsibility for:

3.1 Internal maintenance, decoration and repair?

The landlord must provide premises suitable for the purpose of the lease. Internal maintenance, including demising walls, ceilings, floors, all equipment, doors, windows, electrical, mechanical, plumbing, heating, ventilating, air conditioning, security systems, fire prevention, sprinkler systems, is usually the responsibility of the tenant.

3.2 External maintenance, decoration and repair?

Landlords are usually responsible for 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 tenant.

3.3 Structural repairs?

Landlords are usually responsible for structural repairs. The tenant may not modify structural parts of the premises/building without the landlord’s prior approval (mainly written).

3.4 Insurance?

In the case of a lease of commercial premises, the landlord usually maintains property insurance for replacement costs of the building. Landlord insurance costs are usually recovered through outgoings payments. The tenant is usually required to have all risk property insurance for its property installed in the premises and liability insurance for certain minimum coverage. In the case of a lease of entire buildings, tenants are asked to provide full coverage for all risk insurance and liability insurance.

3.5 VAT?

If the landlord is a registered VAT payer, 19% VAT is charged on rent and service charges.

With respect of partial/repeated deliveries of goods or services, if a delivery is partial/repeated, the goods or services are considered delivered (i.e. tax obligation occurs) on the last day of the period (according to the previous version of the relevant Act the delivery was made “no later than on the last day”), to which the payment for the repeatedly or partially delivered goods or services applies.

If, for instance, under a lease agreement the tenant pays rent on a quarterly basis, according to the new regulation, the date of delivery is the last day of the relevant quarter and the rent payment made for instance before the start of the relevant quarter is then considered a payment made before delivery – i.e. the landlord will be obliged to issue an invoice for such accepted payment, based on which invoice the tenant can apply tax deduction. The second alternative is that the landlord will not issue the invoice and the tenant will be entitled to apply the tax deduction, but no sooner than on the last day of the relevant quarter.

3.6 Rates?

In good commercial leases (triple net leases), landlords include all payments in connection with the lease into the service charges/outgoing payments.

3.7 Other typical outgoings?

In good commercial leases (triple net leases), tenants are required to pay for all outgoings, including utilities (water, sewage, power, lighting in common areas), reception services, security services, landlord’s insurance, costs of repairs, replacements, modifications, administration and management costs and general maintenance, repair and replacements. Tenants often pay advance payments on a monthly or quarterly basis, based on the landlord’s estimate of the cost of outgoings. Usually once a year, the landlord provides for reconciliation of the advance payments and actual cost of outgoings.

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

Landlords usually include outgoings in the service charges. The payments for outgoings/service charges are usually paid in advance on the basis of the landlord’s estimate. After reconciliation is made, the tenant must immediately pay any outstanding amounts; in case of overpayments by the tenant, the overpayments may be set off against the next outgoings payment. The tenant’s financial obligations (including rent and outgoings) are secured by a security deposit, bank/corporate/parent company guarantee or, if necessary, other sanctions (e.g. right of the landlord to terminate the lease).

4. Enforceability

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

The terms of the lease agreements are recognized and enforceable by the courts (if in compliance with mandatory provisions of law). However, due to the time-consuming nature of the court proceedings, commercial leases usually include an arbitration clause. As arbitration is used in most disputes and arbitration awards are not public, available case law is not extensive.

5. Valuation and Environmental

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

No.

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

Yes. PI insurance cover for these professionals (if any) can vary significantly so should be checked when the professionals are being engaged.

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

No.