Buyer's guide

Outline

  1. Purchase contract
    Purchase contract for a plot of land or a house
    Purchase contract for a flat and non-residential unit

 

1. Purchase of  real estate

The question of real estate purchases is presently enjoying great interest,  due to the desire of many people to live in their own dwelling and ,for example, as a result of entrepreneurial activity. Additionally, relating to real estate contracts – there could be a few legal pitfalls, that I will refer to. Due to the comprehensive nature of this subject it is necessary to split it up into several partial stages.

These stages can be categorised as follows-

  1. Reservation contract
  2. What you need to know about real estate before concluding the contract
  3. Future Purchase Contract
  4. Purchase Contract
  5. Application of a mortgage
  6. Record into cadastre of real estates
  7. Contract of work for house construction
  8. Statement of the owner
  9. Partnership of the owners
  10. Purchase through the intermediary of a legal entity
  11. Cooperatives  and membership of them

 

2. Reservation Contract

The reservation contract is a contract that assures the purchaser, for an agreed period of time, can reserve the property. During this period it is not possible for the seller or for the real estate agency – relating to the real estate in the contract – to sell it to anybody else.

The objective of such a contract is to provide to the eventual purchaser enough time to check the legal and factual position of the real estate and, if necessary, to ensure that the purchaser can check if the financial means for the purchase are available.

Usually  the contract is formed by depositing the  reservation fee .. The size of the fee is not specified by law, or any other legal regulation, but usually it varies from 20 000,-CZK to 100 000,- CZK for a dwelling unit. It is paid in cash at the time of signing the reservation contract. It is recommended that the purchaser check whether the payment of the reservation fee – at completion – is subsequently counted as part of the purchase price.

Now we reach the first potential pitfall – the conditions under which the reservation fee is returned to the interested party. Such conditions  usually cover legal defects, such as existence of right of lien, real burdens (rights of users) or, for example, issues with leases and factual defects (for example the fact that the roof of a house needs repair). There are no stipulated conditions for the negotiation of the aforementioned conditions. Therefore, it specifically depends upon what conditions are agreed within the contract. Ideally, a successful contract is represented by the return of the fee in the event that a purchase contract is not signed.

It could be recommended that one of conditions for the return of the reservation fee includes the failure to agree the wording of the subsequent contract (Purchase Contract or Future Purchase Contract). Generally it is necessary to point out that there would be different conditions for different types of real estate.

What should the contract  include?

Whilst negotiating a reservation contract, it is necessary to pay attention to several elements that should be included in the contract. Firstly, the contract should stipulate the period for which the real estate is reserved to ensure that it cannot be sold to anybody else. The seller, or third party agent, should enable the purchaser to check the legal and factual issues surrounding the real estate. The contract should provide for the preparation of a contract and, ultimately, provision of financial means for the purchase (e.g. mortgage credit).

The seller, usually the third party agent, (e.g. real estate agency) should unconditionally confirm that the specified real estate, within the contract, cannot be sold or offered for sale to anyone else during the period.

The contract should include the size of the reservation fee, as agreed by all parties, conditions for the return of the fee and inclusion of the fee in the purchase price of the real estate.
In the instances where purchasers are informed, during negotiations about real estate purchases, that the submitted reservation contract is standard and cannot be changed (even if you are not satisfied by any part of such a contract), then it is necessary to assess objectively the importance of any modifications to the text. In the case that no modifications are possible ( eg  concerning  return of reservation fee), then it is recommended that purchasers consider contacting another real estate agency and search for a different property. In so doing, you will not needlessly risk the forfeiture of a reservation fee and/or suffer other disappointments. Last, but not least, it is necessary to make sure that the  person with whom you conclude the reservation contract( ie the person who will take your fee), in the event that no purchase contract or future purchase contract is concluded, is such a  person who would return the fee as the basic  condition of the contract. Therefore it is recommended to be diligent when selecting such a person, before you commit to pay a not insignificant reservation fee.

Finally it is necessary to point out, quite firmly, the fact that caution and prudence in life usually pay off, and not just in relation to real estate..

 

3. What you should know about real estate before conclusion of the contract

It is important to point out several significant facts that play important role during the purchase – defects that affect real estate. These can be divided in two basic groups, namely ; factual defects and legal defects.
Real estate suffers from factual defects if it does not have the required or expected features and such defects would impede the daily use of the  anticipated purchase.  These defects are usually sorted out by repairs to the property etc.

Legal defects are represented by the existence of the rights of the third parties to the real estate that you intend to buy. Usually it is the existence of right of lien, real burden or lease agreement. It is a fact that such rights can considerably limit the purchaser and, under certain circumstances,  even invalidate the whole conveyancing process.
This subject can be divided in two basic sections, namely; the purchase of a plot of land and the purchase of a house or flat on the aforementioned plot of land.

Acquisition of a plot

We now come to the subject of a plot for the purpose of house-building.

The potential factual defects of the plot of land for the planned purchase( including house- building) should be examined. Firstly, it is important to check that the land has approval for building, to what extent and under which conditions. Simultaneously, one should investigate the future house-building that is planned within the neighbourhood of the plot. Checks should ensure that it will  be  possible to connect the plot with the utility  networks and that the plot is located in an ecologically sound area. These actions will ensure an easier construction process and ensure that the house ultimately is placed in a suitably pleasant location.

It is recommended that a preliminary statement from the administrative authorities( giving their opinions about decisions affecting the land, construction permits and opinions about the proposed construction permit. This will considerably simplify the subsequent process.

Next to stated factual defects it is necessary to pay attention to legal defects where it is almost necessary to be acquainted mainly with record in cadastre of real estates. But even from this register all legal defects might not be noticeable.
The Real Estate Cadastre will provide information about contractually established rights of lien, contractually established real burdens, limitation of ownership rights arising out of joint ownership or any other fact relating to legal issues surrounding the real estate.
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The Real Estate Cadastre should record (usually as an official duty) the rights of lien established by law, real burdens established by law or those established by adverse possession and, at the same time, any legal interests established on the basis of a court decision or any other body. This clarification will prevent a number of difficulties.

Additionally, it is necessary to check that there is no evidence of lease agreements or agreements about establishment of rights of use that are not in the purchaser’s legal interests, leading to potential problems. It is also important to ensure that there are no matters of unsolved restitution relations( relating to past owners- pre 1989)  or the potential for the execution by court, administrative decision and distraint.

Acquisition of house or flat

Another issue is the possibility of the acquisition of house or flat with rights to the  plot under the building as the purchaser will become, at the very least, the shared owner.

With respect to the factual defects it is appropriate to differentiate between new buildings and longer term established real estate.

In case of a new building most often the defects are caused by standard procedures connected with the construction itself. These defects might be easily removed with the assistance of a guarantee that should be provided by the supplier of the real estate.

The situation with existing older houses or flats is different. In such cases it is necessary to undertake a survey(eg wear and tear) and to take account of the costs for any anticipated changes/needed improvements when considering the purchase price that you are ready to accept. A suitably qualified surveyor or building engineer should undertake this survey.
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As far as legal defects of real estate are concerned it is necessary to consider the issues relating to plots as well. Identical legal interests or rights of obligation of third parties may exist  in relation to the house or flat.
During the purchase of a flat not only the co-ownership share on the plot under the building is transferred but also the co-ownership share on the common parts of the building that the flat is located within.
It is important to be aware of the statutes of partnership of owners, to which you would become bound to upon acquisition of a unit. There will be certain obligations, such as contributions to the fund for building repairs. Cooperative flats , where there is no de facto transfer of ownership rights, transfer member rights and duties.
The most significant right is the right of use of the dwelling unit to which you are a member. Shares in a cooperative are mostly acquired with the presumption of the future transfer of ownership rights , transferring the unit that was being used during the cooperative period. Therefore it is important to check the legal position relating to the ownership of flat, within the cooperative, during the transfer of membership rights.
Checking the factual and legal defects , although slowing down the process, is fundamental to the process. This will prevent the future owner suffering from unexpected problems later on, usually relating to unknown future costs, and assist the buyer in the negotiation of a reduced price in such cases. This work should really be undertaken by a suitably experienced lawyer, ensuring a smoother process, with minimal problems.

 

4. Future Purchase Contract

This is mainly used when the purchaser needs to secure funding( mortgage). This is accepted by the majority of banks as evidence of purchase. This also stipulates the conditions in the event that the purchaser cannot complete the purchase. This may be , for example, where the purchaser is limited by foreign exchange regulations.
This can be resolved by a contract that proves the authority of the purchaser and the assignment rights and duties to the other third parties that there is authority to complete the purchase. An example of this could be the use of a newly established company.

What should be included in Future Purchase Contract and what should be its form?

The main purpose is the written commitment of the participants to conclude the purchase contract within an agreed period, following conditions set in the original future purchase contract.

The law dictates that a substantial part of the ultimate purchase contract should be in the future purchase contract. This will ensure the success of future negotiations about future contract conditions.

It is important to ensure that the purchase contract is concluded within the specified timescale, to avoid any problems. However, if this is not the case, based upon the Civil Code, it is possible to obtain a court decision on the outcome.

The written contract should stipulate the parties to the contract, express obligations for the conclusion of the contract and the period during which the contract must be concluded. It is standard to stipulate the obligation of the seller to transfer the ownership rights and the obligation of the buyer to pay the seller the agreed price. It is imperative that the purchase price is clear, or the method by which the price will be determined.

Generally, the transfer of ownership of real estate is governed by the Civil Code, future purchase contracts are governed by the Commercial Code- even if the contract refers to real estate.
Although generally the system of Future Purchase Contract concerning transfer of ownership.

Recommended contractual clauses in Future Purchase Contract

Besides the necessary contractual clauses it is necessary to point out further clauses that should be included in the contract for your protection and safety.

Firstly, the Future Purchase Contract usually  stipulates the method of payment of the purchase price. The buyer is obliged to pay a certain  amount of money. This is then deposited in an escrow account( with a notary or lawyer). This is set off against the full purchase price.
However, this money may also serve to pay the vendor a contractual penalty, as per the contract conditions, for failure to meet obligations or withdrawal from the contract.

The  important part of the contract is undoubtedly the specific reference to contractual penalties for breaching obligations within the Future Purchase contract. Further sanctions would arise in the event that the buyer fails to obtain the finance for completion or if statements made by the participants to the contract are deemed to be invalid.
It is possible to agree conditions for withdrawal that are in favour of both parties.

Clauses frequently state that the subject of the real estate in question( during the period stipulated in the contract) cannot be sold, assigned or encumbered in any way by the vendor.

The contractual freedom of the participants to a Future Purchase Contract allows parties to adapt the contract to suit both sides of the deal. Therefore, it is not possible to list all possible variations and possibilities of such contracts. Due to the wide range of possible contract wordings, it is important to take the advice of an experienced lawyer.

 

5. Purchase Contract

The next important subject is the Purchase Contract itself. In this case it is necessary to differentiate between a plot of land and house/flat and non-residential unit. A Contract for the purchase of a flat or non-residential unit has specific differences compared to a Purchase A Contract for the purchase of a plot or a house is analysed below in detail. The  Purchase Contract for a house or  a flat relates also to the  Purchase contract for a flat or non-residential unit.

Contract for purchase of a flat or a house

Due to the comprehensive nature of this subject the whole article is divided into three parts, namely; the formal terms of the Purchase Contract, the contents a contract and important clauses about method of payment of the purchase price.

Formal terms

The law concerning the form of a Purchase Contract stipulates several conditions. The contract for the purchase of plot or a house normally has to be executed in writing and the  signatures of the buyer and seller have to be on the same document. As the cadastre office verifies the signatures of the seller and buyer, it is recommended that the signatures are verified on the contract itself. Also it is a significant condition that the correct description and locating of the real estate being sold is in accordance with cadastre law. Finally, the contract should be clear as to the purchase price or the method of its calculation.

Content of a contract

The contract must state the buyer and seller’s names, domicile and personal idenfication number( date of birth for foreigners) correctly. The contract needs to state clearly what is being sold. Within the contract the seller must be obliged to sell the real estate and the buyer must be obliged to purchase the real estate at the purchase price.

To ensure that there are no problems acquiring real estate in the Czech Republic it is necessary to ensure that there are substantial guarantees built into the contract for the buyer. Similarly, the seller will need guarantees to be provided by the buyer to ensure the payment of the purchase price- whether by mortgage or similar credit.

These guarantees legally secure the position of the buyer and the seller in the event that problems occur during the sale or at completion. Guarantees have the form of a statement or a commitment. The parties declare the facts about what does and does not exist and what has or has not happened.A guarantee in form of a commitment means that the buyer or the seller is obliged to do something or ,on the contrary, not do anything.

In order to ensure that the provisions of a contract are not toothless and that the buyer and the seller are motivated to uphold the guarantees it is useful to link the breach of guarantees to the payment of a contractual penalty. Provided the said party breaches its guarantee granted to the other party, or such a guarantee is found as false, distorted or incomplete, then the breaching party is obliged to pay to the other party the contractual penalty.

At the same time it is necessary to recommend inclusion of the rights of the affected party to withdraw from the Purchase Contract should  the other party breach the main guarantee.

This situation is made easier by the stipulation of the obligation of the seller to return any part of the  purchase price, already paid,  within a certain period and an obligation of the buyer to vacate the real estate within the same period. The latter is the case where the affected party will use their right to withdraw from the purchase contract.

We are of the opinion that it is best to stipulate the right of withdrawal from the contract in the situation that the buyer will not be registered as the owner by the third application to the land registry.
Last, but not least, it is necessary to determine exactly when the real estate will be handed over to the buyer, and who will finally submit the application for recording into the cadastre of real estates.

Payment of purchase price

Payment of purchase price for the real estate is the decisive moment of the purchase of real estate, even though this is finalised by registry in the cadastre of real estate.Therefore the timing of the payment is crucial, because if the registry is refused the buyer cannot take ownership. In this situation the buyer would not be sure that the seller would return the purchase price.
On the other hand, if the buyer waits until the real estate is registered before paying, then the seller is not sure to receive the purchase price and would have to go to court.

The standard, and for both parties a compromise solution, is to deposit the purchase price into an escrow account. The custodian of the purchase price could be anybody but normally it is a lawyer, a notary or a bank. Payment is then effected on the basis of an Escrow Contract that includes all rights and duties. The contract is concluded by the buyer, the seller and the custodian and precisely governs  the deposit of  the purchase price into escrow, the release of the purchase price to the seller and covers the situations were the purchase price is returned to the buyer.

It is recommended that all the provisions of the Escrow Contract should  accurately follow the respective provisions of the Purchase Contract.
In case that the buyer has sufficient funds then it is standard that the buyer deposits the purchase price into an escrow during signing of the purchase contract and the purchase price is then released to the seller after recording the  ownership right of the buyer to the purchased real estate into cadastre of real estates.
Should the buyer not have funds immediately available , and the funds are to come from a mortgage, then the deposit and release of the purchase price from the escrow is slightly  different. This relates to the  conditions and possibilities of drawing credit . This is to be modified individually, according to the conditions of the respective mortgage and the purchase.

 

6. Mortgage application for the purchase of real estate

What is a mortgage?

From the legal point of view the mortgage is the designation for two juridical subjects, namely a credit contract concluded according to the Commercial Code, and ultimately a contract as per the Civil Code that is secured by right of lien to real estate.

Right of lien

Right of lien may be characterized so that the lien creditor – in this case the bank providing credit – will get the right to claim satisfaction on something pledged in the situation where the debtor does not fulfil the secured debt properly and/or in time. Such rights and obligations of the parties arise on the basis of a Pledge Contract that usually stipulates, clearly, the  rights and duties of all the parties. It is necessary to point out that right of lien is connected to the term of the legal life of the secured debt. It means that origin and duration of right of lien inseparably relates to the secured debt. A right of lien has two functions, namely a securing function – debtor is motivated to dispose of the burden of right of lien by means of payment of the obligation, and function of the disbursement – the lien creditor may be satisfied from the pledge – from the proceeds of its sale provided the debt is not satisfied by the debtor.

Pledge Contract

The basic requirement is that the contract should be executed in written form, if not the right of lien is invalid.

The Pledge Contract has to make clear the subject of right of lien. The contractual parties are the lien creditor – the bank providing credit and the debtor – the mortgager. i.e. the person having some real estate that may be given into the pledge and, at the same time, the person that intends to draw credit and to buy real estate.
A pledge can be offered by a third party, in the event that the buyer has not real estate available.

Furthermore, it is possible that the mortgager will assign the pledged real estate to a third party who  then becomes a mortgager. The debtor is still obliged to pay the debt to the bank.

Pledge

It is necessary to point out that it is not possible to pledge the cooperative flat.

The proportion between the value of debt and value of pledged real estate is not stipulated by any legal regulation. It is then only a matter for banks to verify the value of pledged real estate. Therefore, banks require a valuation report from a recognised expert.
Should the pledged real estate lose value and the debt security becomes insufficient, the lien creditor has the right to require additional security from the debtor. Should this not happen the part of the debt not secured by right of lien will become due.

Secured debt

By secured debt it is understood to be the debt resulting from a credit contract. It is possible that the credit contract will assume more debts, e.g. debt for purchase of real estate.

Origin of right of lien

For a right of lien to be valid it is required to be recorded into the cadastre of real estates. The proposal of the right of lien is presented by the parties to the Pledge Contract, namely the lien creditor and the mortgager. Due to the fact that the bank providing credit insists on proper security of debts, i.e. the provided credit, it is usually required that evidence of submission of the Pledge Contract to the cadastre office is provided to the bank prior to the provision of credit. In this way the banks minimise their risk, by having their debt secured.
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The Pledge Contract often includes provisions about the fact that the mortgager is obliged to provide to the lien creditor the maximum possible cooperation to remove any obstacle restraining the entry of right of lien (eventually to conclude a new and correct pledge contract). For such cases the lien creditor may be protected in relation to the debtor by arranging that the provided credit will be immediately due.

Satisfaction from right of lien

A lien creditor may reach satisfaction of his debt from proceeds resulting from pledge monetization in case that the debtor is in delay with payment of obligations against the lien creditor. On the other hand it is necessary to point out that the lien creditor has the possibility to select another method of settling the debt.
In principle the pledge monetization may be realized in public auction or by a court sale of the pledge.
A lien creditor cannot attain satisfaction from a pledge by any method other than stipulated in law.

Settlement of debt secured by right of lien

Settlement of debt secured by right of lien is one possible way of the extinction of  the right of lien. Due to the fact that existence of right of lien depends only upon the existence of debt it may be stated that, by extinction of the debt, the right of lien also becomes extinct.

It is in the interest of the debtor to pay the debt against lien creditor , in order to delete the right of lien from the cadastre of real estates.

For the sake of completeness we add that right of lien may become extinct by further ways, namely waiving of the right of lien by lien creditor, monetization of the pledge, extinction of the pledge (e.g. due to destruction of the pledged real estate) and under certain conditions also by a bankruptcy order for the property of the mortgager.

 

7. Record placed into the cadastre of real estates

This section covers the  explanation of the workings of the cadastre of real estates and to questions surrounding this. The subject of cadastre of real estates is divided into  sections;  what  the cadastre of real estates is, proceedings with the cadastre office and finally the recording of such evidence.

Cadastre of real estates

According to the Cadastre Law the cadastre of real estates is defined as a collection of data about real estate in the Czech Republic that includes; their schedule and description and their location and geometrical determination. The cadastre of real estates is shows evidence of ownership and other legal interests to real estate. It is public evidence whereby everybody has the right to view such evidence in the  presence of the officer of cadastre office. The public can take copies, extracts or drawings. Some data evidenced in cadastre of real estates are available on the internet pages of the cadastre.

The first thing to consider is the plot that is considered as a part of ground that is identified by a  certain number ( "plot number"). There are several kinds of plots, namely arable land, hop gardens, vineyards, gardens, orchards, forest land, water areas, built-up areas, courtyards and other areas.

 The cadastre also shows buildings with allotted descriptive or evidenced numbers, also buildings with no such numbers. Buildings are mainly constructions connected with the ground by a solid base. Not all constructions are in the cadastre, for example underground constructions or constructions that are not connected with the  ground by solid base or  "petty constructions" are not included.

Flats and non-residential areas are evidenced in the cadastre.
The details include geometrical determinations of real estate, location determination of real estate, determination of territory cadastre, plot numbers, kinds of plots, plot acreages and/or use of land. The cadastre may include also data about legal relationships, including data about the owners and their rights.

Procedure with the cadastre office

The procedure for admission of a record into the cadastre office is divided into several sections. It includes the  embarkation of procedure, correction of draft of contribution, reconsideration of draft and related documents and finally adjudication.

Embarkation of procedure – draft of record into the cadastre

The procedure is opened up by the delivery of a draft of record of ownership into the cadastre.
The draft must conform to particular terms so the office can complete the record. The draft must include an indication of the cadastre to which the draft is addressed, the exact identification of the individuals who are party to the  procedure and also the designations of rights which are supposed to be entered into the cadastre.

The titles of the cadastre offices can change and so it is necessary to check the correct exact title of the office. This is possible to find in Cadastre Code.

Exact identification is important. The code exactly states the disclosures which are absolutely necessary for identification. It is assumed that if someone does not have a birth number , then date of birth is enough.

The third condition of the draft is the indication of rights that means that the applicant must state in the draft what is to be entered. A draft illustration of a sale contract is attached. The  entering of these rights into the cadastre draft of record it is not enough. This draft must be have annexes attached  stating the correct number of executions.

According to the Code, upon entry to the cadastre documents must be annexed to the draft of contribution and that means the deed that states the basis upon which it is to be entered  into the Cadastre (for example Purchase Contract). By power of attorney if the attendant is represented by a third party, a certificate of incorporation or other legally stated person/entity.

 Additionally, it is necessary to provide a deed proving the rights of the owner, or other legally  qualified person, to treat the subject of legal operation and provide a certified translation of the deed stating the basis of the right to be entered into the cadastre(  if this deed is not written in Czech). This must be handed into the relevant numbered office as per the Cadastre Code.

Correction of draft of contribution

 If the draft of record does not have the above stated terms, it will have errors. In that case the cadastre office asks the applicant to correct these errors or present requested deeds within a stated period. The applicant is  reminded of the possibility of refusal of the draft should the stipulated duties not be fulfilled.

Reconsideration of draft of record and presented deeds

The cadastre office examines the facts before releasing a decision. Preferably it is better to find out if the suggested contribution is presented correctly at outset.

The office will then ensure that the parties have the legal right to be registered and that there is no outstanding legal issues that could affect this.

Adjudication

If the conditions are fulfilled then the cadastre office will approve the contribution of right into cadastre.

If a draft suffers from errors, or the conditions for accomplishing the record are not fulfilled, then the cadastre office dismisses the draft of contribution and the contribution is not approved. It is possible to appeal within 2 months of the delivery of this adjudication. The appeal goes through the appropriate cadastre office which dismissed the draft. This office examines the  appeal whether it can be met and then the office passes  it to the county court for a decision.

It is worth pointing out that some cadastre offices reject applications because of over formal reasons or a lack of legal knowledge on their part. Therefore, a large proportion of appeals are successful.
Once again, a suitably experienced lawyer is essential to avoid problems and prevent delays.

Record into the cadastre of real estates

This relates to an entry, record, note or erasure in the cadastre. There is a sequence of events to be adhered to, but there are exceptions.

After receipt of the proposal for permission of entry, record or note, the cadastre office will mark  each real estate with a “seal” registering the letter "P" . That means that the real estate is affected by legal process. This register shows third parties that proceedings are under process. Information about the kind of proceedings are provided by the cadastre office.

Entry

The administrative procedure regarding the permission of ownership right entry is commenced upon specific legal requirements. The proposal is delivered to the local cadastre office dependent upon the location of the real estate. It must not be signed by all parties, the signature of one part is enough. The cadastre office will notify the other parties of the action. All rights recorded in the cadastre originate, are modified and become extinct according to the so called "principle of intabulation", which refers to the date of delivery of the proposal.

Record

The registration by record originates on the basis of the legal matter of fact. Thus recorded rights may be  modified or become extinct by the law, decision of a Government body, and a few other potential reasons.

The office, during registration by record, proceeds on the basis of deeds established by Government bodies or other deeds that confirm or verify such legal relations.
It is necessary to point out that the cadastre office does not commence the proceeding, no parties exist in the case, the cadastre office does not issue any decision and thus it is not possible to file legal remedy. The change then occurs automatically without decision of the cadastre office.

Note

In case of a note the cadastre office proceeds the same way as registration by record. The note does not influence origin, modification or extinction of rights to the real estate. It may refer to registration of the facts that limit rights of disposal, and it can be considered as information for the third parties about legal defects of real estate.
A  note provides the possibility to find information about commencement of certain administrative or court proceedings or that the owner of real estate has limited rights of disposal, etc.

 

8. Contract for Work for house construction

The subject of Contract for Work is very comprehensive, so it it easier to break it down into two sections, namely Contract for Work for house construction and Contract for Work for house with flats and non-residential areas.

A Contract for Work for house construction describes the execution of certain work, i.e. construction of new house, as a family house as a rental house. In such a  house there will not be flats and non-residential areas segregated as individual units. The contract is concluded between a client – the future owner of newly built house and a contractor – building company or a builder that will build the house. A house for rent, after its recording into cadastre of real estates, can  be divided into individual flats, non-residential units and common parts of house by means of Statement of the Owner and its entry into cadastre of real estates. This is the common method of construction, chosen by developers.

The contract for construction of a house with flats and non-residential areas, that are considered as units, refers only to a house in which there are or should be flats and non-residential areas from the beginning. Flats and non-residential areas are units, according to the law on ownership of flats, provided the house is divided into individual flats by means of a  Statement of the Owner. This covers non-residential areas and common parts of a house and it is possible to own the individual flats and non-residential areas of the house.
The contract for the construction of a house with flats does not primarily regulate the relation between  the client of the house construction (the future owner) and construction company, but it regulates relations between the persons that want to build the house that will become flats or non-residential areas( still owned by them) and those that will jointly co-own the common parts of a house.

Contract for Work for house construction

A contract for house construction is covered by the Commercial Code as a Contract for Work. The contract stipulates the mutual rights and duties of the client – the future owner and the contractor – most often it is the construction company that will complete the construction.

In order to ensure that it refers to Contract for Work according to the Commercial Code (and not to an undefined contract) it is necessary to include several elements, namely determination of the parties, i.e. client and contractor, determination of the work and stipulation of price or the method of its determination.

 In the case that it is a Contract for Work, and such a contract does not raise certain questions, it will be processed according to the respective provisions of the Commercial Code about Contracts for Work. The Commercial Code  allows  quite a lot of scope for contractual freedom and so the parties to the  Contract for Work can change some of the rights and duties in the contract, somewhat differently than proposed within  the Commercial Code.

Parties to the contract

It is recommended that the parties to the contract are as clearly identified and verified as possible.
It is also recommended that date from the Trade Register is verified in order to minimize the risk of contract invalidity.

Definition of work

Furthermore, it is necessary to precisely describe and define the work, i.e. in this case the house that is to be built. The ideal situation occurs when the project documentation and further relevant documents form the integral part of the contract as attachments.

During the work performance itself it is important that the contractor is allow to execute  the work  independently and not be bound by instructions of the client regarding the performance of the contract, unless the contract specifically allows this. The contractor mayy authorize another person to execute the work, provided it does not impinge upon the performance. In this case, the third party, acting for the contractor,has the same responsibility for  the work as the contractor.

 It is also necessary to define whether the client is authorized to execute any construction works by covering the costs himself, then such work is not included within subject of Contract for Work.

The contract should stipulate when the stages of construction will be completed.. On the basis of such a schedule it will be possible to check and to monitor the procedure of construction. The schedule is connected to a construction site diary.

Price of work

Clearly, the client is obliged to pay the contractor the agreed price. Should the price not be agreed and the contract remains valid, then the client is obliged to pay the price that is usually paid for comparable work , under similar commercial conditions. It is undoubtedly more convenient to agree the price in advance or, if not, a method of determination to avid disputes in the future. Therefore it is recommended that the price stated in the contract should be stipulated with respect to the budget and calculation of costs. The budget should include a description of individual partial actions, including stipulation of price of work and material. The price stipulated according to this budget should not be changed during the  course of the performed works. It is  possible that the price can change in the event of additional work..
Should the work progress in stages, it is important to be able to formulate clearly the method of measuring the performance to ensure it complies with the contract. This is particularly important in the case of advance staged payments.

Construction site diary

The construction site diary represents one of the tools by which an inspection can check progress. During its use the contractor is obliged to entry the process of construction and the conditions under which the construction has been performed. The construction site diary further includes the deviations from the project and who has approved them, as well as other changes.

Should there be a legal issue later, the site diary is very important as the data included in it may serve as important evidence. The original of diary is taken over by the client, from the contractor, after final building approval and according to the Building Act he is obliged to keep it for the period of ten years. It has its significance in case of the appearance of latent defects.

Handover of work

The handover of work is the transferred  ownership rights and the possibility to pass on responsibility for defects to the client.

In order to avoid any discrepancies it is recommended that the contract includes the method of handover, ie how it will be arranged, by whom and the logisitics of the handover.

Last, but not least, the handover is significant because the 10 year guarantee period starts from the handover.

Defects of work

According to the Commercial Code the work has defects should the work not correspond to the contract. If the contract states that the work must be faultless, then the work must be complete without defects. Even if the client takes over the handover, defective work cannot be classed as performed work, as per the courts.

Assuming that it was not agreed between the parties otherwise, the contractor in such cases is not entitled to be paid for the work. In practice it is stipulated in the contract that the work is considered as performed even it shows defects, but not so that the defects stop the normal functioning of the house. It should be made clear that this refers to a very narrow definition of defects.
The contractor is not responsible for defects when such defects have been caused by use of materials/ processes arranged by the clients that is beyond the reasonable care of the contractor Or when the  contractor is forced to use certain materials against advice to the client.

Should the work have defects it is possible to stipulate a number of sanctions, namely in form of a contractual penalty for delay or discount of price for decreased quality, etc. There are many alternatives to enforce and to set such sanctions (e.g. by a certain percentage from price of work, by certain amount, etc.).

Simultaneously, it is advisable to include in the contract the obligation of the contractor to draw the attention – at the latest by the date of contract signature –  of defects or discrepancies in project that he should discover as part of his professional care. In the course of construction the constructor should have the possibility to view the  respective documentation at any time.
From the point of view of the client it is advisable to stipulate in the contract that the work is thus faultless provided the final building approval – by which the use of house is allowed to be used – has been issued by the Building office.

Guarantee for quality

The parties may agree in the contract  the guarantee for quality of work . The contractor takes over the commitment that the work will be capable of performing the agreed use for a certain agreed period.

Conclusion

A carefully prepared contract is one of key elements in the process of house construction. To ensure the legal security of the parties, the contract should formulate the rights and duties of the parties very clearly. This is significant should matters turn into a dispute. Therefore it is certainly recommended to have a written contract.

Contract for construction of house with flats and non-residential areas

The contract for the construction of a house with flats and non-residential areas has to be concluded by all persons that will share the house construction and who later become the owners of the individual flats and non-residential areas in the house.( after its completion and record into cadastre of real estates). All such persons will be considered as constructors of the house as per the Building Act. It means that all of them will apply for building permits.

The contract is needed if the house already exists and there are within it – by means of a statement of the owner deposited at the  cadastre of real estates – defined individual flats, non-residential areas and common parts of the house. Additionally, this includes plans for new flats or non-residential areas in a roof extension, loft built-in area, additional extension or general planned modifications. The contract should contain all the details of the new flats or non residential area and to what extent these affect the common parts of the house.

In this case the contract has to be concluded by the all owners of the existing  flats and non-residential areas within house, as well as the person intending to build the new unit (and thus  become the owner of such new unit), or the owner of present flat or non-residential area in house who intends to enlarge the flat or non-residential area at the expense of common parts of the house.

In this situation  the constructor will be the  only the person that will become the owner of the newly constructed flats or non-residential areas in the house or the owner of the unit enlarged at the expense of common parts of a house.

The Law clearly defines what essential terms the contract has to include. The main areas include the name of cadastre area, plot number, adjustment of the rights of the owners of future units to the plot upon which the house will be built, numbers of all flats and non-residential areas including designation and location, determination of extent of floor area of the individual flats and non-residential area, their equipment and identification of all future owners.

Besides the above, the contract has to include the method of determination of the common parts of  the house that will be common to owners of all units as well as the determination of the parts that will be common to owners of only some units. Additionally, the contract includes stipulation of the co-ownership share of the common parts of house or method of administration of the house and plot, who represents the co-owners of house externally, how and for how long .

Simultaneously, it is necessary to define, within the contract, the method of financing the construction costs, the amount and dates of such contributions, and the method for evaluating the work of future owners of units in a house, rules for contribution of co-owners of house for costs connected with administration, maintenance and repairs of the common parts of the house at completion and, as an attachment, the ground plans of all floors.. The contract may also include further provisions regulating relations between future owners.

In the case that one of the future owners of a flat or non-residential area is also the owner of a plot upon which the house will be built, he is obliged to transfer the  co-ownership share to the plot to the individual owners of flats and non-residential areas in the house. The size of such share is equal to the size of the share of the  common parts of a house. Transfer of a co-ownership share to the plot has to be included in the contract. Provided one of future owners of flat or non-residential area has another right to the plot on which the house will be built, such as the ownership right (e.g. right of lease, real burden, etc.), he is obliged to transfer  the given right to the other owners of the flats or non-residential area in house.

The law also defines the obligation of the owner of the plot on which the house will be built, to provide ownership rights to this plot in such a way that the extent of these rights to this plot corresponds to the extent of co-ownership shares on common parts of a house.

There is an obligation of the owner of a plot to provide, to the owners of flats or non-residential areas,all necessary co-operation and to conclude with the owners of flats and non-residential areas a written contract in order tol transfer the respective rights and respective shares of such a right. If such an obligation  is not included, then the owner of the unit in house disposing of the right to a plot, in many cases, cannot fulfil his legal obligation to transfer the respective rights onto other owners of unit in a house.

The contract for construction must be attached to an application for the issue of a building permit. It is necessary to point out that building offices do not always have a full understanding of the law and they do not have to require the contract for the issue of a building permit. So, the building permit and final building approval of construction, and ultimately the new unit may be issued also without submission of the contract. One may enter problems during the record of the house and new units with cadastre office because this office does require the contract.Should the owner not submit it, then the office will refuse the proposal for the  deposit of the house or new units.

Therefore I strongly emphasize the necessity  to find out the legal requirements and not to rely only upon decision of the office. It is recommended that legal advice is taken, with the necessary experience and expertise. This should  avoid many unexpected problems.

 

9. Statement of the owner

Significance of the statement of the owner

In principle the ownership of the dwelling may be arranged by one of two ways. One of them is the purchase of the whole house as a complex. In such a case it is a purchase of real estate and the owner of the house, by means of a entry into the cadastre of real estates, becomes the owner  of the whole house with the  plot under the house.

The other case is the purchase of a flat that forms part of the house as a unit. The statement of the owner lists the individual flats in the house. It is necessary to point out that flat (unit) is a part of the house and its use is connected with use of further parts of this house as well ( incl. other rights and duties of the individual owners of units).

Terms of the statement

According to the law, the statement about ownership of flats must be comprehensive and include; address and location within the building, description of the unit and equipment, floor area, common areas and any plot subject to a change of ownership right.
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Furthermore the statement should include the rights and obligations with respect to the buildings, their common parts and rights to the plot and the transfer of rights from the building owner to the owners of the units. It should include, the rules of contributions of the co-owners of the house for costs connected with administration, maintenance and repairs of the common parts of house. Additionally, it should clearly state the person responsible for the administration on the whole complex and the rules for this.

Attached to the statement must be the ground plans of all floors, ultimately including the plans determining the location of the units and the common parts of the house, together with data about floor areas of units.

Common parts of a house are understood to be the parts of the house determined for common use, mainly the base, roof, main construction, entrances, staircases, corridors and many other areas, even those located outside the house. The extras included with the house (e.g. petty constructions) and common equipment of the house (e.g. equipment of area for common laundry) are also considered as common parts of a house.

Record into cadastre of real estates

The determination of the units inside the house is not completed by the statement of the owner itself. It is necessary to record the statement of the owner into the cadastre of real estates at the  respective cadastre office. The proposal for the entry of ownership right into cadastre of real estates is submitted by the owner of the house.
The cadastre office will examine this proposal and will approve or refuse it.

Transfer of the unit

Provided the statement of the owner is approved by the cadastre office, the definition of units inside house have the ownership transferred. This would include  the transfer of the share of co-ownership of the common parts of house and of plots on which the house is built.
The transfer is completed by a contract for the transfer of ownership of the unit. The contract has to include data about the  building or house  according to cadastre of real estates, the number of  the unit (including its designation and location inside building), the description of the flat or non-residential area, determination of the floor area and description of the equipment of the flat or non-residential area. Further inclusions are the  determination of the common parts of the house including determination about which parts of house are common to the owners of only a few units, stipulation of the  co-ownership share of the owner of the unit on the common parts of the house according to the Law( namely stipulation of the co-ownership share of the                                      owner of the unit on common parts of house that are common to owners of only some units, indication of plot that forms the subject of the ownership transfer or other rights by data according to the cadastre of real estates, and the  rights and obligations concerning the house, its common parts and rights to the plot that are being transferred from the present owner of the house to owner of the unit).

Conclusion

The execution of the statement of the owner, and its input into cadastre of real estates, normally occurs when the house consists and where it is the intention of the owner to transfer such units in the ownership of other persons.
The statement of the owner defines rights and duties resulting from the ownership of the units inside house, together with co-ownership share on common parts of a house and a plot.

 

10. Partnership of owners of units

The law on the ownership of flats explicitly stipulates that a partnership is a legal entity with legal identity. The legal identity is limited to  activities connected with administration, operation and repairs of the common parts of the house.
It is advisable to point out that it does not refer to administration, operation and repairs of the individual units in the house because that is the matter of each respective owner of a unit. Legally the partnership may acquire the goods, rights, other property issues of value, flats or non-residential areas. The partnership is obliged to keep accounts.

Extent of the competence of the partnership of owners

The partnership is entitled to act in order to secure deliveries of services connected with the use of units, insurance of the house and lease( in the case of a lease of common parts of a house) and further to lease the units in co-ownership with all the owners of units.
Services connected with use of the units include delivery of energy, water, etc. The partnership is entitled to decide about the distribution of costs for services to individual owners of units and simultaneously is entitled, in its own name, to recover fulfilment of obligations imposed upon the owners of units.
The owners of units guarantee the obligations in a proportion that corresponds to the size of the co-ownership shares within the  common parts of house. All the owners of units are guarantors and, on the basis of written demand by a creditor, are obliged to fulfil the debt of the partnership.

The origin of partnership of owners of units

The partnership is specifically defined in law. It should refer to a house where at least 5 units are defined and, at the same time, three of the units have to be owned by  different owners.
The partnership starts upon the  delivery of a deed, with a clause about the designation of entry into cadastre of real estates, or another document by which the cadastre office verifies the ownership of unit and the relationship  to the previous owners. In practice it refers to the contract between the owner of a unit who has defined units in house and a new owner – the purchaser.
The units within the house are defined by a statement of the owner. The exception is applied where a housing cooperative is established that functions as an administrator of the house. The partnership then commences on the first day of calendar month after the month in which the documents, proving that co-ownership share on common parts of house has been lowered to less than one fourth, be delivered to the cooperative.

Bodies of the partnership

The law also stipulates the composition of the partnership – general meeting of the owners of the units, the committee of the partnership or such owner of units entitled to perform function of the committee in the event that no committee is elected.

General Meeting

The general meeting is the highest authority of the partnership. The law stipulates the obligation of completion of the first meeting, namely within 60 days after the commencement of the partnership. Non-fulfilment of this does not attract sanctions. The first general meeting is set up by the original owners of the building and they approve the statutes of the partnership and the  bodies of the  partnership are elected, i.e. mainly the committee and ultimate owners.

The first general meeting may take place with a notary present ,who will prepare the notary records; consisting of the running of meetings, election and composition of the partnership bodies as well as approval of the statutes.

The approved statutes of the partnership have to include; the office of the partnership and its designation( ie details about the house and the reasons for the partnership) and  it should contain the word "partnership". The  subject matter of the activities, relating to the  administration of the house, bodies of the partnership, their rights and duties and method of agreement, the  rights and duties of the members of the partnership, method of payment of costs connected with the house administration and the handling of the partnership property must all be included.

Should the statutes  not be approved by the general meeting, the law reverts to model rules.
General Meeting can pass a resolution based upon a majority decision of the members.

The size of the  co-ownership shares decides the amount of votes the members have. The law also stipulates that a qualified majority is also necessary for the adoption of a resolution about significant matters of the Partnership. A unanimous vote is required to change the purpose of use of construction and change of construction.

Committee

The committee, ultimately the owner, is the executive body, i.e. the statutory body. According to the law, the minimum number of committee members is equal to 3 members. The life of the committee is determined by statute, but it must not exceed 5 years. The committee decides upon matters connected with the house administration, provided such decisions are not delegated to the general meeting.

Entry of the partnership into register of partnerships of owners of units

The partnership is recorded in the register of partnerships of the owners with the regional Courts. The only significance of this is as a declaration.

The proposal is submitted by the person being recorded in the register, thus the partnership.
An extract from cadastre of real estates for house with flats and non-residential areas must be attached to the proposal together with; a notary record about the running of the first general meeting (during which the statutes of the partnership have been approved and the partnership bodies have been elected, including a document verifying the presence of owners of units at this meeting and the approved statutes of the partnership).

Furthermore, the partnership is obliged to submit the application for registration to a regionally competent tax administrator within 30 days of the day when the incomes levied by tax have started to be received or when the obligation for deduction of tax or tax advance payment has originated.

Membership of partnership of owners of units

The membership of partnership is connected to the ownership right of the unit and therefore originates and becomes extinct together with transfer or assignment of the ownership of the unit. Provided the unit has the co-owners, then such co-owners are joint members of the partnership.

 

11. Purchase through legal entity

The acquisition of real estate by a purchase contract is covered by the Civil Code. When it comes to the acquisition itself, the Civil Code assumes not only acquisition by a physical person but also it defines this option for a legal entity. This means that, for example, a company with limited liability or  an incorporated company has the  option to own almost any form of real estate in the Czech Republic, based upon the purchase contract. Also it is possible to find  a number of particulars which discriminate the acquisition of real estate between physical persons and legal entities . For the sake of practicality the  entering into real estate purchase contracts between foreigners , allow for a  kind of assignation of ownership that holds whole range of possibilities which should make this acquisition easier for foreigners.  

Legal entity as a contractual party

The Purchase contract for transfer of real estates may be concluded only by an entity having the competency to perform legal acts. The Civil Code stipulates that legal acts of a legal entity in all matters are made by those being entitled by contract relating to the  establishment of the legal entity, by deed of foundation or by Law. Generally the statutory bodies cover this.. But in the name of legal entity, others may act. This includes its employees or members provided it is stipulated so in the internal regulations of legal entity or it is a usual function of an employees employment contract. In the case of conclusion of purchase contract by a person having no competency to perform legal acts, the contract is invalid.

A  statutory body  is determined by the Commercial Code and whether the company is recorded in the Trade Register, the statutory bodies of individual concrete companies are recorded here.

In name of public commercial company, all associates may negotiate. If the associate of such a company is a legal entity, then the rights and duties connected with participation in the company are performed by the statutory body, and ultimatelyu by its entitled representative.

A statutory body may  only be physical entity that fulfils all conditions of performing the business according to the law on business entrepreneurial activity and that shows no obstacle to performing the business. Indication of a statutory body is included in the Articles of Association.

A company obligation guarantee the associates jointly and severally by their whole property.

The statutory body of a limited partnership are the unlimited partners, the list of which is included in the Articles of Association. If not stipulated otherwise, each partner is entitled to negotiate in the name of the company independently. Should the unlimited partner be a legal entity, it is the same as with the above stated company. The  company guarantee is via the  limited partners up to the amount of their unpaid deposit recorded in Trade Register and one or more associates (unlimited partners) guarantee by their whole property. But if the firm  includes the name of a limited partner, then he guarantees the obligations of the company as the unlimited partner.

A  limited liability company can have one or  more executive heads. If there are more executive heads, all of them may act in the name of the company independently provided the Articles of Association or the Statutes did not stipulate anything else. By the Articles of Association, the Statutes or General Meeting the authorization may be restricted. An executive head  may be elected by General Meeting and any associate or other physical entity can be nominated.

Associates guarantee jointly and severally obligations of the company up to aggregate of unpaid parts of deposits of all associates according to the record in Trade Register.

The statutory body of a joint stock company is the Board of Directors that negotiates in the name of the company. Provided nothing else comes out of the Statutes of the company, each member of the board negotiates externally in the name of the company. The  members of the Board of Directors are stated in the statutes of the company. For a breach of its obligations the joint stock company is liable up to its whole property, but shareholders do not guarantee the  obligations of the company.

A Purchase Contract that is concluded by cooperative, also has a board that acts in the  name of the  statutory body of the cooperative. For breaching of its obligation, the  cooperative is responsible up to all of its  property, the members do not guarantee the obligations of the cooperative. There is strict separation of property and members.Member of the Board are stated in the statutes.

Furthermore it is necessary to point out that physical entities in the contract are identified by  name, surname, domicile of permanent residence and personal identification number (birth number). Some contracts include; titles, birth name and other things. The most important is the personal identification number (birth number) that is used also by cadastre of real estates.

Provided the contract party is a legal entity, the purchase contract includes  its name, office, identification number and person entitled to negotiate in the name of a legal entity.A  legal entity has to substantiate to the respective cadastre office with the contract itself the abstract from Trade Register (or other register determined by the Law) that is submitted in original or as officially verified copy.

It is necessary to point out the fact that nondisclosure of a trading firm next to the signature of the negotiating person does not cause invalidity of the legal act. It is important that one can  express free will( not under duress) for the conclusion of Purchase Contract, otherwise the contract remains absolutely invalid.
Last, but not least, it is also necessary to strongly emphasize the legal presumption that the expression of will to conclude the contract was in the purchase contract for the transfer of real estate on one document.

Purchase contracts about transfer of real estates property concluded by foreigners

We would like to point out that subject matter of acquiring of real estates by means of legal entity is very carefully monitored by foreigners, the Foreign Exchange Act has certain restrictions during acquiring of real estates. After the entry of the Czech Republic to the EU, the significance of this question is not so extensive. Although the Czech Republic is, on the basis of international agreements, liable in principle to treat foreigners the same way as citizens of the Czech Republic, some areas  may be found where such a principle does not apply.

 One of such area is the  acquiring of real estates in the Czech Republic, where the citizens of the Czech Republic are not restricted at all. In the case of foreigners the situation is a bit different. It is necessary to differentiate the foreigners between citizens of member states of the European Union, citizens of the other countries who on the basis of the international agreements are granted by some advantages and citizens of other states outside European Union, so called the third countries.

Citizens of member states of European Union

Provided  EU citizens have the identity card for staying in the Czech Republic, then they can acquire the real estates in the Czech Republic. Their situation is further eased because it is not so difficult for them to obtain the permission for temporary or permanent stay on the territory of the Czech Republic. Moreover these citizens, on the basis of permission for temporary stay, are entitled to acquire ownership to real estates in the territory of the Czech Republic.

It is necessary to point out the fact that according to the permission for stay, i.e. permission for temporary stay or permanent stay on the territory of the Czech Republic, the extent of possibility of acquisition of real estate differentiates. In case that they have identity card for permission for temporary stay, they may acquire all real estates in the Czech Republic  with the exception of plots that form part of agricultural land resources or  forest land. It  means that they cannot purchase a garden next to house that usually  agricultural land . They may purchase a flat, house, building plot, i.e. plot on which the house is built.

Citizens of member state of European Union with permission for permanent stay in the Czech Republic may purchase any real estate on the territory of the Czech Republic.
Therefore in case you belong to above the stated categories of foreigners, it is advisable before decision about purchase of real estate to find out if it is possible to purchase such real estate.

Citizens of the third countries, with which the Czech Republic has an international agreement

A special and rather divided group of foreigners are the citizens of several e countries with which the Czech Republic has international agreements. It refers to the countries of the European economic area, United States of America and Switzerland. Such countries have so called most favoured nation clause. Interested parties for the purchase of real estates from such countries are provided at least the same advantages that have been, or  will be provided ,to interested parties from other countries. By such other countries it is necessary to understand the third countries.

Citizens of the third countries

According to the present legal regulations the citizens of the third countries can acquire real estates only when fulfilling several  requirements. It refers mainly to the condition of permission of permanent stay in the Czech Republic and eventually they can acquire real estates under situation when they acquire them into joint marital property with a citizen of the Czech Republic or with a physical entity that has permission for permanent stay in the Czech Republic. It means that they have ,as a spouse, a citizen of the Czech Republic or a person with permanent stay in the Czech Republic and together with him/her they purchase real estate as joint marital property.

Last, but not least, the law gives the possibility for citizens of the third countries to acquire real estates on the territory of the Czech Republic in case that it refers to acquisition from a relative in direct line, sibling or spouse, that it refers to construction on the own plot, on the basis of pre-emption right from the reason of co-ownership of given real estate or under situation when the given real estate is a plot that forms one functional complex with immovable construction in their ownership.

In case that the given interested party does not fulfil the above stated conditions, the situation is usually solved so that the citizen of the third country in the Czech Republic will establish or will purchase a Czech legal entity, most often a limited liability company, and such a company will purchase the required real estate.

Due to the fact that this subject matter includes a lot of pitfalls and controversial issues it is recommended that, in case you belong to above stated categories and you are interested in purchase of real estate on the territory of the Czech Republic, you find a lawyer with experience. Certainly you will save not only  time but also eventual complications.

Consequences of purchase of real estate through intermediary of legal entity

Firstly, it is necessary to point out that for foreigners outside EU and for selected plots even for foreigners from EU the legal solution may represent the way how "to get around" the Foreign Exchange Act.

Acquisition of real estate through a limited liability company may have for its acquirer substantial advantage in the sense that for eventual damage caused in consequence of operation of real estate to other persons (e.g. by fire) the Limited Liability Company will be responsible as it guarantees by its whole property. Provided the acquirer gets the real estate as physical entity, being responsible for its obligations by its whole property, then the part of such responsibility for damage could burden also directly the property of such acquirer. In relation to transferability of real estate and legal entity it may be generally pointed out that the  transfer of legal entity is easier.

Therefore, it is possible that the owner of such legal entity is changed (legal entity will be sold) with it that the record in cadastre of real estate remains unchanged because this legal entity still remains as owner of real estate. Typically it is necessary for a limited liability company to execute the contract about the transfer of trade shares that is effective the moment of signature by the parties, under presumption that it has been delivered to the company itself.

The record into the Trade Register is only  confirmation that such a transaction has been effected.Should the real estate be transferred directly, it would be necessary for the origin of the legal effects of the transfer contract to wait for a positive decision from the cadastre office.

Due to the administrative burdens and responsibilities of legal entities it is necessary to  consider carefully when you think about choosing this possibility for the acquisition of real estates in the Czech Republic.

 

12. Cooperative, and membership of it

A cooperative is a partnership of unlimited (not stipulated in advance) number of persons established for purpose of entrepreneurial activity or securing economic, social or other needs of its members. This is to acquaint the readers with the basic characteristics of the cooperative and provide information about rights and duties and connected questions resulting from the title of membership in the cooperative.

Cooperative

As stated above, the cooperative is a partnership of an unstipulated number of persons established for the purpose of entrepreneurial activity or securing of economic, social or other needs of its members. A cooperative must have at least five members, which is not valid if its members are at least two legal entities. Each cooperative is a legal entity and for by obligation guarantees its whole property. Generally the members of a cooperative do not guarantee the  obligation of a cooperative, but the exception may be adjusted in the statutes of a cooperative and meeting of members may then decide about a certain amount of compensation fees for certain members for the coverage of losses of a cooperative.
As far as the name is concerned – commercial firm, it must be included the indication "cooperative".

The basic capital of cooperative is formed by summation of members´ deposits. The members of the cooperative bind themselves to this. Statutes determine the amount of basic capital of the cooperative that is recorded in Trade Register and has to be at least 50 000 CZK.

Cooperative is managed by its statutory body, the Board and the highest authority is the meeting of the members of the cooperative that may elect and recall the members of the Board, to decide about distribution and utilization of profit or loss, to decide about the   transformation, distribution or cancellation of the cooperative, etc.

Simultaneously the law stipulates that members of the Board and Supervisory Board of the cooperative, proxies and the director are not allowed to be entrepreneurs or members of statutory and supervisory bodies of legal entities with similar subject matter of the activity. But  this may be adjusted  in the statutes.

From the point of view of the difference between a cooperative and a company it is necessary to differentiate the number of its members that is not fixed in the cooperative. It means that in the course of its duration it is possible that further members may enter or leave without the necessity to change the statutes. This allows simple changes to  the membership. A leaving member will not influence the cooperative. But if the number of members falls under  5 members or at to at least two legal entities, then the court may cancel the cooperative and order a liquidation.

Types of cooperative

It is possible to differentiate betwwen several types of cooperatives, namely on the basis of the purpose for which they have been established. It is the common entrepreneurial activity of members, support and securing of entrepreneurial activity of members and securing of other needs of members.
The first group is represented by such cooperatives to which their members have gathered for joint entrepreneurial activity. By means of this joint activity the members manage with joint property.
The second group is represented by cooperatives in which the members have gathered, not because of joint entrepreneurial activity, but in order to be supported by these cooperatives materially, by services, financially or otherwise during their own entrepreneurial activities.
The third group is represented by cooperatives in which their members have gathered in order to secure the established cooperative by satisfaction of their social, cultural, educational and other similar needs and interests including similar needs and interest of their families.
It is necessary to point out that in practice the individual types of cooperatives may rather blend together because securing of above mentioned needs may relate to each other.

Housing cooperative – special kind of cooperative

The significant type that does not fall into any of the above stated category is the housing cooperative. Housing cooperatives are such cooperatives for  buildings construction which have had financial assistance according to special regulations designated as building housing cooperatives. They are  cooperatives established on the basis of law on peoples´ cooperatives and on cooperative organizations and on cooperatives that have originated for the purpose of purchasing the building from the municipality, so called privatised housing cooperatives.
Furthermore, it includes such cooperatives that have been established for the purpose of the construction of houses with flats and ,because of eventual transfer of units into ownership of members, so called investor housing cooperatives and cooperatives established for construction and administration of garages.

Membership of the cooperative

 Membership of a  cooperative is based on the  principle of spontaneity , relating to an  origin of membership on the basis of free will. It means that this spontaneity in persists in such a relationship.

It is significant that the principle of equality  means equality of aspiring  members as equal to the  position of members during performance of mutual rights and duties of members.

 The only allowable difference between members derives from their functions or work engaged within the cooperative.

Origin of membership

Membership of cooperative may originate in connection with the origin of the cooperative, by admission of “pretender” into the  membership of the cooperative on the basis of written application for admission, by transfer of membership or by other way stipulated by the law.
Another way is  transformation, e.g. merger, eventual division of cooperative, and  the situation of so called detachment according to law on the ownership of flats. The intention of the  institution was the aim to remedy the situation having occurred as a  consequence of the former consolidation of a cooperative, either under pressure from above or directly by the decision of the respective union of cooperatives according to then valid legal regulations.
Membership does not originate before payment of initial investment. The origin may be also stated in the statutes that the membership originates only on the day agreed upon as a day of the origin of a working relationship. Further conditions of membership may be regulated by the statutes of the cooperative.

Extinction of membership

This  may be effected only by methods presumed  in the law. The law stipulates that the extinction of the membership of a cooperative may be realized by agreement, resignation, exclusion, by death of member, by extinction of cooperative, by date of extinction of legal relationship between the member and the cooperative, transfer of membership or in some other way.
Also it refers to a situation being connected with proceedings against the property of members of a cooperative for satisfaction of debts of its creditors.

This way of extinction is needed for creditors of a cooperative member  to enable them to reach  the capital participation of such cooperative member. It is  due to the fact that only by extinction of membership, the member may claim the settlement of his capital participation in cooperative.

Subject of membership

From the title of membership, members’  cooperative rights and duties are stipulated  by law  by statutes of the cooperative. Here is stated the right of a member to participate in meetings of cooperative bodies, to vote during meetings of such bodies and to make suggestions, to be voted to such bodies, etc. In this respect it is not possible to marginalize certain obligations, mainly obligation to  payoff  membership deposits or the obligation of proper discharge of the function in cooperative bodies.

Settlement amount

When cooperative becomes extinct its member may claim the settlement amount. It is basically a fragment representing part of capital that indicates the participation of former member in cooperative property. When stipulating the amount of settlement amount account is taken not only of the investment deposited by former member into the cooperative, but also the capital having been increased in consequence of its membership. When stipulating the settlement amount it is arrived at from the property that the cooperative shows in its closing accounts.

Claim for settlement originates from the day of extinction of membership. Claim for its payoff originates after three months from approval of closing of the accoounts for the year when membership became extinct.

Transfer of membership

In connection with transfer of membership it is advisable to point out that the rights and duties of members may be transferred to other cooperative member or to a third person. The statutes can determine the detailed conditions under which the transfer may be realized. Transfer to a third person indicates stricter conditions because such transfer has to be approved by the Board.

The acquirer of rights and duties of the member becomes a cooperative member to the extent of rights and duties of transferring member. There is the question whether it is possible to transfer only some rights and duties of the member. Even the law does not make this clear. In practice it will be important to judge if the full-value membership really originates by the transfer. For example the member of a building housing cooperative, whose membership is in relation to rights and duties concerning cooperative flats and  cooperative garages, would transfer to another person the rights and duties of member related to only one of the stated functions.

In such a case the transferee obtains a sufficiently wide sphere of rights and duties as a member in order to enable the origin of new independent membership – with only limited extent of rights and duties of a member. It is necessary to point out that the statutes of cooperative may exclude, in certain cases, the transfer of membership or they can also stipulate the cases when the approval of the Board with transfer of membership cannot be refused or such approval is not required.
Special arrangement may be found in the field of cooperative saving banks where according to the Law the membership is not transferable externally but only between members of cooperative saving banks.

 

Articles written by:

GURLICH & Co.
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