Major Legislative Changes Regarding Real Estate in the Czech Republic Introduced by the New Czech Civil Code
A complex recodification of Czech private law will become effective in 2014
As of January 1, 2014, a substantial and complex recodification of Czech private law will become effective. This recodification is the largest change in Czech legislation in over two decades and presents a huge challenge to the Czech legal community and the Czech population at large. It is based on the adoption of three new fundamental laws - namely, the new Czech Civil Code (the "New Czech Civil Code"), the Czech Business Corporations Act, and the Act on Private International Law. The New Czech Civil Code will replace the current Czech Civil Code, the Czech Commercial Code, the Czech Family Act, the Czech Act on the lease and sublease of non-residential premises, the Czech Act on the ownership of flats, the Czech Securities Act and many others as of January 1, 2014.
Below we provide a brief summary of the most significant changes in Czech real estate law introduced by the New Czech Civil Code:
1. REAL ESTATE
1.1 Buildings as Part of Land
The New Czech Civil Code reintroduces the classic Roman-law principle of "superficies solo cedit" according to which buildings are considered a part of the land on which they are built. Buildings will thus no longer be considered a separate object of the law (with certain exemptions, such as temporary structures or utility lines), but merely be a part of the land underneath. For those cases in which land and buildings are still owned by different owners as of January 1, 2014, the New Czech Civil Code grants a statutory pre-emptive right to the owner of the land with respect to the building, and vice versa.
1.2 Surface right
The surface right (in Czech "právo stavby", sometimes literally referenced as a "building right") is a temporary right (with a maximum limit of 99 years) established by an agreement between the landowner and the developer; in other words, this new legal tool makes it possible to build structures on a third party's land. From a legal point of view the right to build will in and by itself be considered a form of real estate and as such will be subject to registration with the Czech Real Estate Register. It may be transferred, mortgaged, inherited or encumbered and may be established for consideration or free of charge. The surface right is independent of the existence of the structure and it may therefore be established even if construction work has not yet begun (and does not expire even if the building were to be destroyed). For the duration of the right, both the builder and the landowner have mutual pre-emptive rights. After the expiry of the surface right, the building becomes a part of the land.
1.3 Reinforcement of Principle of Protection of Good Faith in the Czech Republic
The New Czech Civil Code emphasizes the importance of Czech public registers in relation to rights. Specifically, if an entry in a Czech public register is found to be inaccurate, the New Czech Civil Code protects the acquirer who relied on the entry in good faith, provided that they acquired the right for consideration and from the person registered in the public register. It is thus possible for an acquirer in good faith to acquire real estate from the non-owner; if the rightful owner does not take action against the registration in the Czech public register within three years from the date of entry (and within one month from having been made aware of the change of registration), then their right to challenge the transfer lapses. This concept of good faith is slated to come into force as of January 1, 2015.
According to the current Czech Civil Code, joint owners have statutory pre-emptive rights vis-a-vis each other (with certain exceptions). The New Czech Civil Code does not recognize this arrangement, which will thus cease to exist from January 2015 onward.
1.5 Adjunctive Co-ownership
The concept applies where separate owners own in 'adjunctive co-ownership' a thing without which the subject matter of separate ownership could not be used. The subject matter of separate ownership and that of adjunctive co-ownership form together a unified item defined by its location and common purpose; for example, a shared driveway to several houses. The share of adjunctive co-ownership will be transferable only along with the transfer of ownership of the real estate whose purposes it serves.
1.6 Easements in the Czech Republic
The New Czech Civil Code differentiates between real easements and servitudes; the difference being that in the case of a real easement, the owner of the servient estate is obliged to actually actively act in favor of the owner of the dominant estate. Real easements may be created for a limited time period or in perpetuity. In the latter case, a buy-out option (and the terms of the same) must be agreed.
The New Civil Code contains no exhaustive list of servitudes, and it is possible to negotiate servitudes of a type other than those which are explicitly listed. Owners of several land plots may newly decide to create a servitude over one of their properties for the welfare of another; in so doing, they preempt any future complications for the event that they should later wish to transfer the erstwhile land plot to a new owner.
1.7 Extraordinary Prescription
The new concept of extraordinary prescription ("mimořádné vydržení", in Czech) is based on the principle that the possessor will not have to prove the legal title to their real estate if they held it in continued possession for 20 years; this does not apply in cases of nefarious intent on the part of the possessor.
1.8 Purchase Agreement
The parties to a purchase agreement may agree on various proviso clauses, such as the retention of title, the reservation of reverse purchase, the reservation of a registered ban on selling or encumbering the given real estate, the reservation of a better buyer, or a provisional 'trial purchase'. The existence of such rights is based on their registration in the Czech Real Estate Register.
2. LEASE OF REAL ESTATE IN THE CZECH REPUBLIC
2.1 Change of Owner of Leased Property
If the landlord transfers the ownership title to their property, the new owner is not bound by the contractual obligations of the original lease agreement unless they were expressly made aware of them. This provision protects the purchaser from any disadvantageous conditions of the original contract of which they did not know. The new owner has the right to terminate the lease within three months from the moment at which they learned (or should have learned) of the fact that the property is leased and who is the tenant, provided that they had good reason to believe that the purchased property was not leased.
2.2 Length of Lease
A fixed-term lease for a time period in excess of 50 years will be considered an unlimited lease. In such a case, the termination of the lease during the first 50 years will only be possible on such terms as agreed between the parties.
2.3 Termination of Lease of Business Premises in the Czech Republic
The parties to a lease agreement on business premises - which does not even need to be made in writing - are at liberty to decide on the terms of their lease relationship. Aspects not governed by the agreement between the parties will be governed by the general provisions of the New Civil Code. The New Czech Civil Code sets out the circumstances under which a lease of business premises for a definite period of time may be terminated before the agreed expiry date. Specifically, the lease may be summarily terminated in the event of a gross violation of duties of either party if significant damage was thus caused to the other party. The tenant may also terminate a fixed-term lease if the circumstances under which the lease agreement was concluded have changed to such an extent that the tenant cannot reasonably be required to continue the lease. The party receiving notice of termination may raise a written objection within one month from delivery; this is a prerequisite for having recourse to a judicial review of the termination notice.
2.4 Objections to Notice of Termination
The New Czech Civil Code introduces a significant change to the process of giving notice of termination in the case of leases of business premises. In such a case, the party receiving the notice of termination is entitled to raise objections in writing within a period of one month from the date of receipt of the notice. Failure to raise timely objections means that the party can no longer seek a judicial review of the legitimacy of the notice of termination. This new concept serves to enhance legal certainty with respect to the validity of termination of lease agreements on business premises.
2.5 Compensation for Takeover of Customer Base in the Czech Republic
The New Czech Civil Code recognizes the value of a business's customer base. There are situations in which a new tenant may benefit from taking over the customer base created by the previous tenant after the termination of a lease of business premises. If the terminating party in such a case is the landlord, the former tenant is entitled to compensation for the benefits which the landlord or the new tenant derive from 'inheriting' the customer base developed by the outgoing tenant. This is a new concept and one will have to wait and see how it will be applied in practice.
2.6 Transfer of Lease of Business Premises
Another new provision specifically addresses transfers of a lease of business premises. Subject to prior approval by the landlord, the tenant may newly transfer the lease in connection with the transfer of their business activity for which the leased premises are used. Both the landlord's consent and the agreement on the transfer of the lease must be in writing. The New Czech Civil Code also explicitly allows for the assignment of the agreement.
2.7 Possibility to register the lease in Real Estate Register
The New Czech Civil Code introduces the possibility of having one's real estate lease entered in the Czech Real Estate Register. This is an option rather than an obligation, and the decision to register is at the discretion of the owner of the given real estate. This is a new concept and it remains to be seen how it will really work and whether it will at all become widespread practice.
2.8 Signpost and Sign Board
Tenants of business premises may put up a signpost or sign board (in Czech "návěstí" and "štít") upon obtaining approval from the landlord. The New Czech Civil Code introduces the fiction of landlord's approval if the tenant asked for approval in writing and the landlord did not answer within one month.
3. TRANSITIONAL PROVISIONS
3.1 Real Estate Transfer during Transitional Period
Whereas the majority of contracts will be governed by the legislation in force at the time of their conclusion, lease contracts (and bank account contracts) will be subject to the new legislation as of January 1, 2014, regardless of the date on which they were concluded. Real estate transfers recorded in the Czech Real Estate Register before December 31 2013 will be governed by existing regulations (e.g. the Act on Inheritance Tax, Gift Tax, and Real Estate Transfer Tax). Submissions to the Czech Real Estate Register based on documents which were filed before January 1, 2014 will be processed according to the law effective on the date of submission.
4. OTHER CHANGES
4.1 Reinforcement of Parties' Will
Significant changes include the reinforcement of the principle of autonomy of the parties' will to contract, and the preference of relative nullity over absolute nullity; in connection with this, it will be possible to retroactively remedy certain defects of contracts such as a failure to observe the requirement of the written form.
4.2 Pre-contractual Liability
Another important change is pre-contractual liability, i.e., a liability imposed for undue behavior at the pre-contractual stage; this also includes a liability for damage on the part of that party which walks away from negotiations without good cause at a stage at which the conclusion of a contract between the negotiating parties appeared to be highly probable.
For more information, please contact us.
Mojmír Ježek, partner
rutland ježek, law firm
t: +420 226 236 600
The rutland ježek law firm in Prague focuses mainly on business law, real estate law, litigation, finance and banking law; the firm is ready to provide adequate comprehensive consulting thus offering an alternative for clients of international law firms. The international dimension of the provided services is guaranteed by its track record and cooperation with leading law firms in most European countries, the USA and other jurisdictions. Czech lawyers of the rutland ježek team have long experience in providing legal consulting to transnational corporations, large Czech companies as well as medium size firms and individuals, acquired in leading international law and tax firms. More on www.rutlandjezek.com.
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