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Changes in Real Estate Due Diligence on the Horizon?

Changes in Real Estate Due Diligence on the Horizon?

Czech Republic
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When acquiring a company owning real estate or an independent property, a check of the seller’s title to the real estate is an integral part of the due diligence process. The scope of the due diligence that is necessary is about to be narrowed.

The new Czech Civil Code (NCC) and the new Czech Cadastral Act will have an impact. The NCC enshrines the principle of material publicity, which protects the good faith of the buyer registered in the Land Register. Under Section 984 (1) of the NCC, where the status registered in the public register does not correspond with the actual legal status, the registered status will be in favor of the person who acquired the right in rem in good faith from the person authorized to do so according to the registered status.

Several conditions have to be met in order to become the rightful owner of real estate, even if this right is acquired from an unauthorized person. 

First, there must be a discrepancy between the actual status and the status registered in the Land Register – e.g., due to a non-book entry or lapse of the right, an initial absence or additional failure of the legal basis for the claim of ownership, or an incorrect entry.

Second, the acquisition of the real estate must be based on a legal act: namely, an act for a consideration. The provision does not protect other acquisition options, such as inheritance, donation, or auction.

Finally, the most important condition is the buyer’s good faith in the accuracy of the data in the Land Register. The buyer shall be considered to be in good faith unless he or she did not know and could not have known upon exercising a usual degree of caution that the person registered in the Land Register did not have title to the real estate. 

Therefore, if there are no legal defects arising from the entry in the Land Register or any other entry indicating such defects, the buyer is not obliged to check the acquisition titles and other documents in the Collection of Deeds of the Land Register or to find the restitution claims, etc.

Although Section 984 of the NCC does not make this explicit, a negative condition must also be fulfilled in order to acquire real estate from an unauthorized person; namely, that the actual owner has not filed a so-called “discrepancy note” or a note on the disputability of a registration pursuant to Sections 985 and 986 of the NCC.

Put simply, if more than three years have lapsed since the seller registered title to the real estate in the Land Register, and if it is not apparent from the extract or other records that the title has been challenged, the title of a buyer who is in good faith at the time of purchase cannot be questioned.

However, buyers may lose their right if the three-year period has not yet expired, even if they were in good faith at the time the real estate was acquired. This only happens when the original owner who disputes the registered status in the Land Register has not been properly informed about the registration in favor of the seller.

In practice, the following alternatives may occur during the due diligence of title to real estate:

If a buyer purchases real estate from a seller whose right was entered in the Land Register before the NCC came into force – i.e., before January 1, 2014 – the three-year period for seeking the disputability note expired on December 31, 2017. After that date, all real estate buyers who acquired the right in rem for a consideration from the seller in good faith in the entry in the Land Register shall be protected.

If a buyer purchases real estate from a seller whose right was entered in the Land Register after the NCC came into force, and the three-year period has expired and the potential buyer is in good faith that the seller’s entry is correct, then the potential buyer will become the rightful owner of the real estate, and the previous acquisition titles do not need to be checked.

Thus, after January 1, 2018, the scope of the due diligence of the seller’s title to the real estate prior to its acquisition can be narrowed to a check of the data in the extract from the Land Register and, for example, a check of donated or inherited real estate or restitution claims.

By Martin Kubanek, Managing Partner, Schoenherr Prague 

This Article was originally published in Issue 5.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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