Contributed by PRK Partners.
1. REAL ESTATE OWNERSHIP
1.1 Legal framework
Full ownership of real estate is recognized under Czech law. Ownership rights of real estate benefit from constitutional protection, which also sets forth crucial rules for expropriation – permitted only in exceptional circumstances, driven by the public interest, and subject to strict rules set forth by law and payment of compensation.
The Czech Civil Code (Act No 89/2012 Coll.), which came into effect in 2014 as part of the entire private law recodification, governs all matters related directly to real estate, including fundamental provisions for conveyance contracts, rights related to liens and encroachments, condominium rights and obligations, commercial leases, and others. Since the recodification of private law, no further major changes to real estate ownership regulation can be expected for some years to come.
In principle, any entity (a company or person) may acquire and own real estate in the Czech Republic with few restrictions. This means that not only Czech or EU residents, but also residents from third countries may acquire real estate in the Czech Republic.
1.2 Registration of ownership
All land and most buildings in the Czech Republic are registered in the Real Estate Register (Cadastral Register), which is administered by the Czech State (through a specialized cadastral office authority). Records in the Cadastral Register are legally determinative, except in specific circumstances, such as proven fraud.
Ownership rights – including mortgages, easements, pre-emptive rights, and other in rem rights concerning real estate registered in the Cadastral Register – originate, change, and cease to exist upon their registration therein.
In addition to transfers under an agreement, the ownership title to real estate can also be acquired: (i) based on a decision of a state authority; (ii) by operation of law; (iii) upon being built (in the case of buildings); (iv) through a public auction; (v) by positive prescription (the lawful (good faith) possessor of real estate is entitled to become its owner if it keeps the real estate in its possession for 10 consecutive years); and (vi) by other means (e.g., inheritance). In all these cases, the relevant change must also be registered in the Cadastral Register, the effect of registration is, however, of a declaratory nature only.
The ownership right of real estate that does not need to be registered in the Cadastral Register – such as minor constructions (such as fences) and underground constructions – follows a similar regime as those of movable assets. Nevertheless, there are some formal requirements that apply to all real estate irrespective of its need to be registered in the Cadastral Register (see below).
1.3 Publicity of real estate register
The Cadastral Register contains information on land parcels (including information about any buildings constituting a part of the given parcel, if any), buildings, housing and non-residential units within condominiums, rights to build, and other real estate established by operation of law. It also includes geometric descriptions of land parcels and most surface constructions along with their classification.
The Cadastral Register is publicly available, and information on a particular real estate can be obtained through an extract, which represents proof of ownership of the given real estate or a right to it. An extract from the Cadastral Register contains, in particular, the following information about the real estate:
(a) identification of the owner(s), and their ownership shares,
(b) the surface area in square meters,
(c) type of protection applicable (such as a historical area, if applicable),
(d) reference to the purchase agreement or other title deed used as the basis for registering the current owner's title to the real estate in the Cadastral Register, including the file numbers under which such contracts or other documents are kept in the archives of the cadastral authority,
(e) restrictions on the ownership title to the real estate, i.e., mortgages, easements, rights to build, or pre-emptive rights – with a specification of the parties in favor of which the rights corresponding to such restrictions exist – the contracts or other titles under which such restrictions came into existence, as well as the file numbers under which such contracts or other documents are kept in the archives of the cadastral authority,
(f) other rights registered in Cadastral Register to the real estate in question,
(g) an indication that the real estate or right vested in the real estate in question has been affected by ongoing judicial proceedings or proceedings before the cadastral authority.
The archives of the Cadastral Register represent an additional source of information regarding real estate.
A simplified extract is free and freely accessible on the web of the cadastral office. The official extract is easily accessible from every official administrative point of contact for a modest fee.
Similarly, all documents kept in the archives of the cadastral office are accessible either at the competent cadastral office or online. However, this is a special service restricted to registered users only.
1.4 Protection of ownership
The principle of material publicity of entries in the Cadastral Register (introduced under the current Civil Code) has applied since January 1, 2015. This means that each acquirer of real estate (or any right in rem to such property) who purchased it (in a form of an asset deal) for consideration and in good faith can rely on the correctness of the relevant entry in the Cadastral Register and is protected against any third-party claims of ownership, save for very limited circumstances.
Similarly, any person concerned by a change in a Cadastral Register entry has one month from the moment that person learned about the change (but no more than three years from its registration in the Cadastral Register) to challenge the change. In order to protect the claimed right against third parties, the person disputing the change must file a claim with the competent cadastral office, and the real estate concerned will be marked with a ‘note of disputability.’ A note of disputability does not prohibit transfers of ownership, but any ownership transfer of real estate marked by a note of disputability would interrupt ownership in good faith.
The above is without prejudice to the general right of anyone to challenge an entry in the Cadastral Register that affects them. The outcome will, in such a case, be opposable only against the person who acquired the right after registration of the note of disputability in the Cadastral Register.
2. REAL ESTATE ACQUISTION
2.1 Share deal or asset deal?
It is possible and typical in the Czech Republic to structure deals both as direct sales of real estate (asset deal) as well as indirect sales by selling a shareholding in a special purpose vehicle company owning the real estate (share deal).
Asset deals are most common in disposals of real estate among private investors, whereas share deals are most common in business deals. Share deals have the following key advantages:
(a) share deals are subject to fewer formalities since the relevant share purchase agreement (SPA) must not be registered in a public register (unlike an asset deal, which must be registered in the Cadastral Register – after first filing the related application);
(b) the disposal is completed on one closing date (as opposed to an asset deal, which is only completed upon its registration in the Cadastral Register);
(c) even though the property transfer tax has been abolished in the Czech Republic, with retroactive effect from December 1, 2019, share deals continue to be less burdensome from a tax point of view (this especially applies to the application of VAT to asset deals, as the tax treatment remains unclear in specific cases, and asset deals may not benefit from an exemption, unlike share deals under certain circumstances);
(d) gains made on asset sales are generally subject to corporate income tax (if realized by corporations) or personal income tax (if realized by individuals) and will be taxed at the applicable rate (progressive rates of 15 percent or 23 percent for individuals, and a flat rate of 19 percent for corporations). Under certain circumstances, capital gains realized by individuals could be exempt at their level as well; and
(e) share deals have, in most cases, no negative impact on the contractual relationships of the SPV owning the real estate, as there is no change in the contracting parties (except for contracts with change of control clauses and similar undertakings).
In this respect, it should be noted that acquiring an SPV through a share deal involves other risks not necessarily related to the property, but to the SPV itself, such as past or even hidden corporate, contractual, or tax liabilities.
2.2 Share deal
A share deal is a commonly used term for disposals of a shareholding in a corporation. In terms of real estate, the two most common entities used are the limited liability company (in Czech spolecnost s rucenim omezenym) and the Czech joint-stock company (in Czech akciova spolecnost). Thanks to its simplicity and variability, a limited liability company is the most commonly used form while joint-stock companies are often used as a holding entity. There are no specific restrictions with respect to real estate holding entities and, as a result, other types of Czech or foreign entities are available to investors. Both entities can have only one shareholder.
In most real estate share deals the closing occurs within the same day as the signing since the transfer is completed and effective upon the execution of the SPA. For limited liability companies, the signed and effective SPA must also be delivered to the company; for transfers of book-entered shares in a joint-stock company, the transfer becomes effective upon registration in the Central Depositary of Securities. Although registering the transfer in the Commercial Register is mandatory, it is of a declaratory nature only.
The price for the shares (derived from the value of the underlying real estate owned by the SPV) is usually split between a full repayment of the shareholder's loans and the purchase price of the shares. The market standard is direct payment to the seller's bank account, which is done on the closing day.
The fees associated with a share deal are quite modest and include the costs of verification of signatures and registration of changes in the Commercial Register.
2.3 Asset deal
In asset deals, if the transfer relates to a real estate which must be registered in the Cadastral Register (all land and most buildings), the transfer only becomes effective upon registration; if the ownership title to the real estate is not subject to registration in the Cadastral Register (if it is transferred by agreement), ownership is acquired on the effective date of the relevant agreement.
The transfer document (i.e., a purchase agreement) must properly define and delineate the land parcels and buildings to the extent stated in the law. Non-compliance with this obligation can result in a defective transfer. The transfer document must be in writing, with the signatures of both parties officially verified and located on the same document. Unlike many other jurisdictions, the involvement of a notary public is not required, and the transfer document does not have to be in the form of a notarial deed.
If the real estate is purchased by or sold to municipalities or public authorities, there are additional obligations and processes as set out in specific laws.
The mandatory registration of a real estate transfer in the Cadastral Register means there is a lag of approximately 30 days between the signing of the deal and its closing. As a result, the purchaser generally deposits the purchase price in an escrow account of a notary public or a bank, with the funds released to the seller only after successful registration in the Cadastral Register of the purchasers' title to the real estate.
The fees associated with an asset deal are a bit higher than the fees associated with a share deal, but they remain modest and cover verification of signatures, registration of changes in the Cadastral Register, and escrow charges.
2.4 Disposal process
A standard real estate transaction usually starts with a due diligence performed by the purchaser. In larger deals, or deals where participation of more institutional investors is expected, the purchaser's due diligence is preceded with the seller's own vendor due diligence, the outcome of which is shared with interested investors. Although the investors are allowed access to a data room in order to check the vendor report and present their bids, an in-depth analysis of all assets is typically only open to selected (winning) bidder(s).
A proper real estate due diligence will include a 10-year historical review of the acquisition title chain, review of encumbrances, construction compliance, environmental issues, and all other aspects that are relevant to the nature of the property in question. While some local purchasers forego proper due diligence and rely solely on the information set forth in the Cadastral Register, clients are advised to conduct a full independent review of all matters that may interfere with their future intended use of the property. In addition, all corporate, financial, and tax aspects should be investigated by the purchaser as well, in order to limit the risk of undisclosed liabilities or other defects without a proper reduction of the purchase price.
Once due diligence has been successfully completed, the parties can launch negotiations over the share purchase agreement.
A purchaser wishing to protect its interests against undisclosed defects in the acquired SPV, underlying real estate, or shares thereon, must negotiate various remedies in the SPA either to improve the statutory rules on the seller’s liability for defects or to replace it with purely contractual regulations (usually as monetary compensation for the decrease in the value of the acquired assets) since a common issue is that deficiencies in an acquired asset are not easily categorized as defects. The most common remedies consist of agreed remedy or claim processes, indemnities for known risks, seller’s post-closing covenants, which are secured by various schemes of deferred payments, escrows, guarantees, or contractual penalty clauses.
Several types of consents might be required, depending on the specific circumstances. They include:
(a) consent of a beneficiary of a pre-emption right,
(b) corporate consents, including consents of the Ministry of Finance or municipal assembly,
(c) consent of a bank in cases where a mortgage is vested in the real estate (this only applies to asset deals),
(d) spousal consent if the seller is married, or with a divorce in process, or
(e) architect’s consent in the event authors’ rights can apply with respect to the real estate.
For asset deals, the seller is obliged to hand over to the purchaser the original energy certificate pertaining to the real estate as well as complete up-to-date project documentation.
2.5 Registration of change of ownership
Both share deals and asset deals must be registered in their respective registers. Registration of a share deal is of a declaratory nature only; registration does not affect the signing and closing of the deal. On the other hand, registration of an asset deal is a mandatory condition for transfer of the title (with respect to real estate that must be registered in the Cadastral Register).
Therefore, once the relevant transfer agreement with respect to an asset deal is executed at least one of the parties to the deal, if not both together, must fill in and file to the cadastral office the application for registration along with the underlying transfer document. Procedural aspects of title and other record registration in the Cadastral Register are governed by the Act on the Cadastral Register (Act No. 256/2013 Coll.).
Once the cadastral office receives the application for registration of a change, it informs the owner of the subject real estate and other entitled persons that proceedings have been initiated. There is a 20-day mandatory wait period before a registration can be approved; this is to give sufficient time for all concerned parties to raise objections to the registration process, if necessary.
If all statutory requirements are met, the cadastral office will register the ownership right and inform the participants of the proceedings. The registration is retroactive – meaning that the transfer's effectiveness begins from the date of submission to the cadastral office of the application for registration, even though the registration process generally takes three to four weeks.
The fees for registration are symbolic.
2.6 Risks to be considered
Without prejudice to the principles and rules governing the Cadastral Register, it is important to note that there are still unrecorded encumbrances vested in real estate (such as utility protection areas, municipal or state pre-emption rights, unrecorded easements, and ownership rights acquired through positive prescription or public paths, ways, and roads). A pledge over a property (including real estate, movables, shares, and receivables) might exist or be created by a decision of the tax administrator or other competent public authority without the existence or creation of this pledge being necessarily apparent from a Cadastral Register extract.
Similarly, titles to even duly registered rights might still be successfully challenged and annulled due to, for example, breach of mandatory rules protecting disposals with state or municipal property, breach of public tendering rules, etc.
Therefore, prudent investors go beyond just legal due diligence, they may also arrange for technical due diligence as well as an on-site inspection. Such steps minimize unexpected post-closing complications and trouble. In case of any doubts, a smart purchaser will request strict and broad representations and warranties from the seller, together with liquid security, or will ensure that the appropriate W&I insurance has been obtained.
3. REAL ESTATE FINANCING
3.1 Key sources of financing
Acquisitions of real estate in the Czech Republic are typically financed by a combination of debt and equity. Most debt financing for local real estate transactions is provided through secured bank loans.
Alternatively, finance leasing of real estate is also available on the market. In this case, a regulated financial institution acquires real estate from the original owner; at the same time, the financial institution concludes a long-term lease agreement with the ultimate investor. At the end of an agreed period, the investor is usually obliged to acquire ownership of the real estate at a pre-agreed residual value.
3.2 Protection of creditors
Investors looking for a bank loan will most likely need to provide a wide range of security, including in most cases, a mortgage over all of the real estate, subordination of any shareholder loans, a pledge over cash and receivables, and other securities. A mortgage over real estate registered in Cadastral Register is perfected upon its registration.
Enforcement of a claim is subject to obtaining an Execution Order issued by a court or a recognized arbitration proceeding or by the (future) debtor voluntarily executing a Deed of Enforcement. Private enforcement of a mortgage/pledge is also possible if explicitly agreed upon in the underlying mortgage/pledge agreement.
4. REAL ESTATE TAXES
4.1 Transfer taxes
The real estate acquisition tax was abolished in 2020 with a retroactive effect on all real estate property transfers effected as from December 1, 2019.
4.2 Specific real estate taxes
The real estate tax is generally payable by every owner of land or a building located in the Czech Republic. Generally, real estate taxes are calculated according to the size of the property rather than based on market value. Consequently, real estate taxes in the Czech Republic are not as significant as they may be in other countries.
The tax base for land depends on the area of land occupied (residential land) or the price of the land (agricultural land). The tax on buildings depends on the size and number of above-ground floors of the building. Yearly rates for residential land range from CZK 0.20 to CZK 5 per square meter; agricultural land is taxed 0.25 percent to 0.75 percent of the average price of land per square meter; and the buildings are taxed CZK 2 to CZK 10 per built-up square meter. All the rates can be multiplied by a coefficient from one to five, depending on the type and location of the property (for example, the yearly real estate tax for a 100-square meter apartment in Prague without a parking space or adjoining land would be CZK 1,200).
A real estate tax return generally must be filed by January 31 of the calendar year (with certain exemptions) immediately following a calendar year during which any changes occur to the real estate (including ownership change).
5.1 Legal framework for condominiums
Condominiums do exist in the Czech Republic and provide an important alternative to housing cooperatives. The Civil Code provides full regulation of condominiums.
Czech legislation characterizes a ‘condominium’ as a combination of exclusive ownership of a unit (apartment, or non-residential unit, represented by a delimited part of a building) with co-ownership of what is left after deducting all the units located in the building (common premises). The exclusive ownership of the unit and co-ownership of common premises are inseparable in the event of disposal. The unit has the status of immovable property and, as such, is registered in the Cadastral Register.
Where there is a condominium, there is usually a condominium association (in Czech spolecenství vlastniku jednotek). The law obliges unit owners to establish a condominium association in buildings with at least five units, where at least four are owned by four different owners. The condominium association then manages the building for all unit owners, provided that the unit owners form the highest decision-making body of the condominium association – the assembly of co-owners.
5.2 Rights and duties of co-owners
The unit owner(s) is entitled to use the unit exclusively and to manage it at their will, with respect to other unit owners and their rights. However, the unit owner's management must not affect the common parts located inside the unit (including load-bearing walls, central heating, etc.) and the common premises reserved for his exclusive use (such as balconies). Unit owners must not jeopardize the functionality of such common premises through their interventions.
The unit owners have the right to use premises common to all co-owners (such as lifts, corridors, stairs) as well as the obligation to follow the rules issued by the condominium association for common premises management. This obligation, however, is conditioned by the owners' acquaintance with the content of these rules. Furthermore, the unit owners are obliged to contribute to the management of the building in proportion to their co-ownership share (generally according to the proportion of their unit's floor size to all units in the building).
We also note that a court may order the sale of a unit of an owner who breaches a duty imposed on them by an enforceable court decision in a manner substantially limiting or precluding the rights of other co-owners.
5.3 Liability of co-owners
Once a condominium association is established, all unit owners are obliged to guarantee that the condominium association’s debts will be paid. This obligation was introduced to protect debtors since the rights and duties of a condominium association are strictly limited to the "usual needs" of the building and its management and, as a matter of example, even though its liabilities are financed by contributions of the unit owners, the assembly of the condominium association can decide not to collect these contributions.
5.4 Rights and duties of condominium associations
Czech law sets out that a condominium association is a legal entity determined by its purpose, i.e. to manage the building and the land plot underneath the building. "Management" includes all activities to which unit owners are not bound to, but that are necessary or appropriate for the proper care of the managed real estate and maintenance of the common premises. It means that all activities of the condominium association as well as all the rights and duties that are vested in it must be directed toward this purpose.
The condominium association is entitled to acquire rights and commit to obligations, but only for the purpose of managing the real estate. The condominium association must not carry on business or participate directly or indirectly in the business activities of its members, as that is not in line with its purpose.
6. COMMERCIAL LEASES
6.1 Form and contents of a lease agreement
Commercial leases in the Czech Republic are private agreements; a written form is not mandatory.
A standard commercial lease agreement is usually very detailed and overrules non-mandatory statutory provisions. It generally addresses in particular:
(a) proper identification of both parties, of the real estate in which the leased premises are located and clear identification of the leased premises,
(b) agreed purpose of the lease including agreed location(s) of the tenant's signage,
(c) amount of rent and annual review,
(d) amount of private charges and common service charges paid by the tenant and their precise scope and calculation,
(e) lease term – most commercial leases are concluded for a definite period of time and give the tenant only a very limited possibility to prematurely terminate the lease,
(f) renewal clauses, rights of first refusal, expansion options as well as other options that give the tenant some flexibility with regard to, in particular, the size of the premises,
(g) landlord's financial incentives and fit-out contributions (if agreed),
(h) sublease and setoff restrictions,
(i) security provided by the tenant in the form of a bank guarantee, corporate guarantee, or cash deposit, generally amounting to three or six monthly payments, and
(j) the division of maintenance and repair obligations (landlords are usually responsible for structural repairs and maintenance of the common premises).
6.2 Regulation of leases
Although the Civil Code regulates leases, the provisions applicable to commercial leases are mainly non-mandatory, and contractual parties can freely deviate from the statutory provisions.
This is not the case for residential leases. Here, contractual parties may only deviate from statutory provisions for the benefit of the tenant. Although rents are not regulated, the landlord cannot freely increase an agreed-upon rent and must follow certain specific rules.
6.3 Registration of leases
If the subject of the lease is registered in the Cadastral Register, the lease agreement may then be registered in the Cadastral Register, but it is not a legal prerequisite. This decision is left up to the parties and is rarely utilized. The registration process is burdensome and the parties tend not to be willing to disclose the agreed commercial terms to third parties (see 1.3 above – Publicity of real estate register).
6.4 Termination of leases and renewals
Most commercial leases are concluded for a definite period of time, with limited possibilities for the tenant to prematurely terminate the lease. These tend to be strictly limited to only a few termination reasons specified in the lease agreement. Statutory termination reasons – which are vague and non-mandatory – are in most cases replaced by contractual terms.
Typically, a party may terminate the lease if the other party grossly violates its obligations under the lease agreement or goes bankrupt. The landlord is usually entitled to prematurely terminate the lease if the tenant is in default with payment of the rent or service charges, if the tenant uses the subject of the lease contrary to the agreed use, or if the tenant subleases the subject of the lease or a part of it without the landlord's prior consent, etc.
We note in this respect that during an insolvency proceeding the insolvency administrator can prematurely terminate a lease without being bound by statutory or contractual terms.
Similarly, parties generally replace the lease renewal rules set out in the Civil Code with more sophisticated and bespoke contractual terms.
6.5 Rent regulations and rent reviews
The parties are free to determine the rent amount. Czech law sets no limitations on rent with respect to leases of commercial premises.
In retail commercial leases, turnover rents are commonly used.
Annual rent reviews are based either on European harmonized indexes (such as MUICP), with respect to leases denominated in EUR, or the Czech consumer price index published by the Czech Statistical Office, for leases denominated in CZK.
Unless there is a mechanism for a change or increase of the rent in the lease agreement, such as an indexation clause, the amount of new rent is subject to the parties' agreement.
6.6 Services to be provided together with the lease
As a rule, all costs related to the leased premises and/or the entire real estate paid by the landlord are recoverable from the tenant (including real estate tax, insurance, etc.), if agreed in the lease agreement. However, the landlord cannot recover private charges (electricity, water, telecommunications) from the tenant at a higher amount than the sum actually paid by the landlord to the service providers, unless the landlord is officially authorized to commercialize such commodities.
Tenants are obliged to pay a pro rata share of the common service charges according to the size of the leased area, usually as regular fixed advance payments that are reconciled after the end of the respective year.
With respect to the actual use of utilities consumed in the premises, tenants pay the costs according to consumption, either measured by separate meters or calculated on the basis of the size of the leased area.
6.7 Fit-out works and their regulation
The tenant may carry out fit-outs, improvements, and alterations to the leased premises only with the landlord's prior consent. Landlords usually require a copy of all documentation related to alterations and improvements to be submitted and maintain the right to inspect how the works are performed and to stop the performance of any works if they are not carried out in accordance with the provided specifications or rules and regulations set forth by the landlord or competent authority. The related permits are usually the tenant's responsibility.
For tax reasons, the tenant is, as a primary option, requested to surrender the leased premises in the same condition as at their handover at the beginning of the lease. Any other situation has various tax impacts on both the tenant and landlord.
The tenant can only be reimbursed for the costs of improvements from the landlord by agreement. If the landlord consented to the improvements but did not undertake to reimburse the tenant, the tenant may obtain compensation for the increase in value of the leased premises at the end of the lease. The increase in value is to be determined by the parties (on the basis of the costs incurred by the tenant) or by an expert if they fail to agree.
If the tenant's improvements carried out in the premises meet the statutory definition of technical improvement and the landlord agrees not to increase the acquisition book value of the real estate, the tenant may depreciate the costs of improvements of the leased premises performed and paid for by the tenant.
6.8 Transfer of leases and leased assets
As a general rule, the tenant is entitled to assign wholly or partially its rights and obligations under the lease agreement, or to sublease the premises, but only with the landlord's prior written approval. The landlord's approval is very often granted even in advance for a tenant's intragroup assignments or subleases.
A share deal has no negative impact on the lease relationship, as there is no change of contractual party (unless the lease agreement contains special covenants of the landlord in this respect, which is rather unusual).
With regard to an asset deal, under statutory provisions of the Civil Code if the owner of the leased premises (and/or real estate) changes, the rights and duties arising from the lease agreement pass to the new owner by operation of law, and none of the parties are entitled to prematurely terminate the lease for this reason. This rule applies towards the new owner – unless the new owner had no reasonable cause to doubt that the purchased real estate was free of all leases (which would be very unusual as regards business leases).
Nevertheless, if the landlord transferred ownership of the leased premises (and/or real estate), the new owner is not bound by any stipulations on the landlord’s duties which are not provided by a statute. However, this rule does not apply if the new owner was aware of the former landlord's stipulations. Because of this more and more tenants now oblige the landlord to ensure that the potential new owner has been duly informed about the terms and conditions of their lease.