Real Estate Law in the Czech Republic | Deloitte Legal Germany

There is a complex legal system of maintaining real estate property in the Czech Republic. The Czech legal system is divided into two main subsystems–public law and private law–which are independent of one another. The application of private law is independent of the application of public law and vice versa.

Public law determines public regulation regarding the preparation and realization of construction, respectively permitting procedures and stipulation of use for construction, while private law modifies relationships among private individuals concerning property rights and the preparation and realization of construction. Private law is the governing law for determining real estate transactions.

Private law aspects regarding the realization of construction

As a result of Czech private law recodification, the Czech
Civil Code2 (CC) has been in force for its first decade, replacing the communist era civil law, which treated construction as independent objects, and paved the way for the return of the superficies solo cedit principle to the Czech legal system. The real estate practice is still acclimating to using the CC.

It is necessary to consider each building as part of the plot of land where it is located so, legally, these structures are considered one object. Regulations address situations where, due to historical reasons, the construction and the plot of land have different owners. In such a scenario, the statutory pre emption right of the owner applies. However, since the application of the recodification, it is possible to recognize the rights of a third party owner. Parties might arrange for the developer to exercise the right of construction and allow them to build on another owner’s plot of land. Importantly, the right of construction is temporary and can only be established for up to 99 years.

Restrictions to ownership

An individual’s right to ownership may be restricted by the rights of third, parties related to the real estate property or in the public interest. Restrictions, such as easements, pledges, pre-emption rights, and other rights of third parties to the real estate property may be stipulated. For these rights to be effective, they must be registered in the Cadaster of Real Estate, held in the Cadastral Office. Regarding public restrictions, these could be set up based on public acts or special laws, including expropriation, if the legal conditions are met, or a legal pre-emptive right of the state for certain property due to the public interest.

Restitution of property

Due to over 40 years of communist rule, the settlement of the injustices committed during this time has been implemented into Czech law. The so-called restitution of real estate within the Czech Republic is bound to property that was unlawfully escheated by the communist regime between 1945 and 1989. Restitution is provided for and primarily governed by the Restitution Acts. The restitution process is still ongoing, such as restitutions in favor of the church.

Due to the various restitutions, it is necessary for investors to thoroughly check the legal status of their intended property acquisition to assure that the property is not the object of restitution from the Czech State Land Office (Státní pozemkový fond) or the Office for Government Representation in Property Affairs (Úřad pro zastupovánístátu ve věcech majetkových).

Real estate transactions may be performed as a (i) direct sale of real estate property (asset deal), (ii) sale of the share of the real estate SPV (share deal), or (iii) sale of business as a going concern. Presently, in the Czech Republic, share deals are more frequent. In case a transaction is realized via an asset deal, the parties must be careful to transfer the whole set of rights embodied to the property, including licenses, permits, etc. If they choose the share deal, the whole company is transferred, and there is a higher level of certainty that nothing was left behind. Another option is the sale of business as a going concern. In this case, only part of the company is transferred, usually the most profitable part isolated from other unwanted property or to avoid any possible inhered threats.

In the Czech Republic, no general restrictions are currently applicable to foreigners or to specific areas of the country regarding the ownership of the real estate property.

Rights to real estate must be registered in the Cadastre of Real Estate, a public register which has a publicly accessible database. The effectiveness of agreements concerning real estate property is bound to the registration of the agreement in the Cadastre of Real Estate. Transfer of an individual’s ownership rights, or the establishment, change and termination of an individual’s property rights are effective as of the delivery of the motion to the Cadastre of Real Estate based on the decision of the respective Cadastral Office. Further, registering an individual’s rights with the Cadastre of Real Estate is important because of the principle of good faith or the material publicity principle to the Cadastre of Real Estate. If there is a discrepancy between reality and the entry in the Cadastre of Real Estate, then the protected entry is the one made by the individual who acted in good faith to demonstrate that the entry is right and true.

The notary can be very important once - with the assistance of lawyers - the share deal or sale of business as a going concern takes place. According to Czech law, if the transaction is in the form of a share deal or sale of the business as a going concern, the transfer must be registered in the Commercial Register. Registration can be done through an application to the register court or directly through a public notary. Registration by the notary is preferable for all parties since this method allows all parties to avoid any possible issues that may occur during court registration and is the fastest since notaries proceed with registration within one business day.

General liabilities of contractual parties

Unless otherwise stipulated in the contract, the seller and buyer of a property have rights that they are owed and duties that they owe each other. Also included are the warranties on the property, as stated in the CC. The CC provides the buyer with a five-year Statute of Limitations to bring in a latent property defect claim and, if proven, requires the seller to provide adequate compensation.

A special kind of liability is the pre-contract liability under the CC. Pre-contract liability applies whenever the party of a transaction is responsible for damages arising from the termination of ongoing negotiations without proper reason, abuse of confidential information, and breach the Real Estate Law in Czech Republic duty to disclose the information. This situation may be prevented by stipulating on any preliminary agreements that will be legally enforceable in case of breach and assures parties that their claims will be fulfilled without any back out by the other party.

Lastly, proper due diligence should be considered as a necessary step during real estate transactions.

Examples of a standard representations and
warrantees

There are various standard representations and warrantees (R&W) used during a transaction. The seller (and, to a very limited extent, the purchaser) should always stipulate regarding the R&W below. On some occasions, there may be some exceptions to the claim (other than as disclosed).

Asset Deal

• R&Ws concerning the legitimate ownership of the property for a period of at least 10 years;
• R&Ws concerning the absence of any challenges, litigations, arbitrations, and execution proceedings regarding the ownership of the property;
• R&Ws concerning the absence of encumbrances on the real estate property other than those disclosed; and
• R&Ws concerning the absence of contamination, pollution, or any environmental damage to the real estate property.
  

Share Deal

• R&Ws concerning the legal capacity to sell and transfer the shares to the purchaser;
• R&Ws concerning the accounting and tax obligations of the target company;
• R&Ws concerning the absence of any litigations, arbitrations, execution proceedings or administrative proceedings;
• R&Ws concerning the employees and obligations towards former employees; and
• R&Ws concerning the property of the company in the
  extension mentioned above.

Acquisitions of real estate property or shareholders’ purchase agreements are very often financed by the banks; therefore, loans are mostly secured by the property through a mortgage, and by pledges over business shares and bank accounts.

When the mortgage affects the real estate property, it is necessary to have the written contract with officially verified signatures. Real estate mortgages are created by recording the mortgage in the Cadastre of Real Estate. Therefore, their priority is assessed according to the time of the submission of the proposal for registration of such mortgage to the Cadastre of Real Estate. Mortgages recorded sooner are prioritized over the later ones in case of realization, which occurs when the debtor is unable to service the debt. To establish a pledge over the business share, a written contract with the officially verified signatures of the parties to be bound is obligatory. The pledge is effective after it has been recorded in the Commercial Register.

Besides a mortgage and a pledge, the prohibition of a disposition or encumbrance on the real estate property can be established in favor of the creditor. Those rights must be also registered in the Cadastre of Real Estate.

Leases of business premises

Czech law guarantees substantial freedom at the conclusion of a lease agreement for business premises. Except for a few mandatory provisions pursuant to the CC that cannot be excluded, there is a wide berth for individuals to formulate their own provisions. No stipulation regarding mandatory lease agreement forms for business premises is required. On the contrary, the lease of a residential apartment or house needs to be concluded in writing.

A lease may be stipulated for a definite or indefinite period. If not stipulated, then the legal assumption is that the lease has been agreed for an indefinite period. The same legal assumption applies for a period exceeding 50 years. Real Estate Law in Czech Republic

Subleasing is possible only with the consent of the lessor. Unless renewed by implication or notice was sent by one of the parties, the lease in such scenarios would expire according to the original lease agreement. The notice period is three months in case of leases for definite period and six months in case of leases for indefinite period, unless stipulated otherwise.

Break options

There are no legal limits for arranging any form of termination clauses. However, the termination clause cannot be against good manners. Further, the CC determines an individual’s legal options as to when the lease agreement can be terminated, including when there is a physical on-site defect, usage of the premises breaches the conditions of the lease agreement, or breach of obligations otherwise stipulated in the lease agreement.

Eviction of the tenant

The lessee could be evicted after a legally valid termination of the contract and based on prior notification (save for special exceptions or extenuating circumstances). It is common for eviction clauses within standard arrangements to allow the landlord to, for example, store the property of the tenant off-site. If the tenant refuses to cooperate or physically obstructs the landlord to exercise their right to evict, then the landlord may file a lawsuit to evict the individual from the property. The lease agreement is enforceable and governed by the action of the respective civil court, meaning, after a court decision, the lessee could be evicted by state authorities. Other damages or unpaid rent are also enforceable after a court decision.

Usufructuary lease

The Czech legal system has a long history of using usufructuary leases. These are a special form of lease that relinquishes an item to be used by an individual. Unlike a regular lease, the usufructuary lessee is also entitled to derive profits from the subject of lease. This kind of relinquishment has typically been used for farming and other agricultural land use; however, parties can also agree on using an usufructuary lease on a fully equipped hotel, restaurant, or operation of utility networks, all of which are more common. Administrative permits applicable to construction or restru

Public law and regulation

The most important public regulation for the preparation and realization of construction projects within the Czech Republic is the Building Act and its associated and implementing legislation. The Building Act regulates construction, land-use planning, and development strategy for the whole region.

From 1 July 2024, the new Building Act is in force. The new Building Act was adopted in 2021, but its entry into force has been postponed several times. The aim of the new Building Act is to, among others, speed up the permitting processes, digitize the administrative proceedings, and unify the administration under one proceeding.

However, proceedings initiated before the new Building Act comes into force will be completed according to the Building Act5 (i.e. the proceedings initiated by 30 June 2024), therefore in the following years, the Czech Republic can expect having a dual regulation of construction law.

Land use planning

The first step for every intended real estate project should be the proper examination of a land use plan. The land use plan determines areas that are available for building and specifies further requirements to develop those areas. The land use plan is issued by the municipal authorities and is legally binding for the builder and the building. Trying to change the land use plan is a quite time-consuming process with uncertain results; however, it is possible. The public has equally substantial rights in this process, and it may cause project delays since they may initiate changes and hinder preparations for the new land use plan.

Permits

The next step is obtaining a permit from the Building Authority. Since the new Building Act is in force, there is only one permit under which the Building Authority set out the conditions for the location of the building and the conditions for the construction of the building. The developer must attach documents proving their rights to the land in order to be entitled to proceed with the construction, project documentation or control plan. Further, the binding assessments requested by a special regulation, like environmental and health protection, fire protection, and opinion of owners of the public transportation infrastructure and utilities (if the construction is connected to the infrastructure) are needed. The developer can either obtain these binding assessments themself or, since the entry into force of the new Building Act, they can leave this obligation to the Building Authority, which is obliged to obtain these binding assessments on his behalf. For larger projects, the environmental impact assessment (EIA) procedure is needed.

Construction

A construction may be realized only by a building entrepreneur, who is an individual authorized to lead construction projects or assemble work as a scope of business pursuant to special regulations. Contractors are building entrepreneurs, and they ensure expert management of the building process through a site manager. Simple construction projects may be realized by the self-help of a developer.

After the successful completion of a project, the developer must obtain an occupancy permit. The occupancy permit is issued by the Building Office after the fulfilment of the criteria set for the building by the legislation, Building Permit, and other stipulated criteria, such as environmental and health protection, and fire protection. Operation of the construction project is possible only after obtaining relevant environmental permits.

Cultural heritage

There are many buildings located within the city centers of the Czech Republic that are designated cultural heritage sites. These buildings have stronger protections, and theirreconstruction (or even demolition) are a serious and timeconsuming issue for developers due to their special status.

Real estate property in the Czech Republic is subject to various environmental legislation. As such, it is crucial during real estate transactions to devote the necessary care to environmental issues to avoid any possible future problems that may arise once the transaction is completed.

Energy Performance Certificate of buildings

Due to European Union (EU) law requirements (transposed into Czech law through the Energy Management Act6 ); there is a duty to have an Energy Performance Certificate assigned to all new buildings. The certificate is valid for 10 years and contains important information about the energy consumption of that particular building and provides a quick summary of energy operations costs. The duty of having one also affects major reconstructions (exceeding 25% of the building area), every sale or lease of a preexisting building (the seller/lessor should hand over the certificate to the other party) and all building property owned by public authorities. The Energy Performance Certificate is not mandatory for buildings with a surface area of less than 50 square meters, cultural heritage buildings, buildings used for religious purposes, and for some other minor constructions. It is highly recommended to examine the Energy Performance Certificate and its validity properly during the transaction.

Ecological burdens on the property

An integral part of doing one’s due diligence when surveilling a property should be the proper examination of land and buildings for the possibility of an inherited legacy of former activities on the property. According to Czech law, the new owner could be held responsible for old ecological burdens on his property and the authorities may force him to remove the burdens. Typical examples include contaminated land, dangerous asbestos placed in old buildings, or installment of inappropriate air conditioners. There are substantial costs to the purchaser, especially concerning the maintenance of former industrial properties. A land and building examination is usually carried out.

Environmental, social, and governance criteria

Environmental, social, and governance (ESG) has become an increasingly important driver across industries, including real estate. The most notable of the ESG regulations is the EU Taxonomy and Sustainable Finance Disclosure Regulation (SFDR). EU Taxonomy is, primarily, a classification system that establishes a list of sustainable activities. Both the EU Taxonomy and SFDR introduce new sustainability-related obligations for financial institutions and other financial market participants, such as real estate asset managers, that encourage transparency.

Under Article 8 of the EU Taxonomy, large public interest entities are obliged to report selected non-financial information in their annual reports. According to the SFDR, financial market participants must disclose how sustainability risks are integrated into investment decisions. In the Czech Republic, a new act came into effect on 29 May 2022, which amends acts governing the financial market and establishes offences and penalties for breaching the transparency obligations set out by the EU Taxonomy and SFDR.

ESG obligations are coming into effect gradually and real estate market participants should take the new regulations into consideration when planning new projects. It is likely that due to the ESG regulations there will be better financing conditions for investments and projects fulfilling the EU Taxonomy criteria.

With the effectiveness from 1 July 2024, the concept of “affordable housing” was established in Czech legislation8 as the response to long-standing demand from both the public and private sectors for the creation of the unified framework for investment opportunities in rental housing sector in the Czech Republic.

Affordable housing is defined as housing, where the rent will correspond to a maximum of 90% of the common rent in given places (the source will be the price maps prepared for these purposes by the Ministry of Finance). The landlord has the opportunity to index the rent in accordance with the index of consumer prices published by Czech Statistical Office, however only up to 4% per year.

Affordable housing will be only provided to defined groups of people, which primarily include low-income households, young households looking for starter apartments, public sector workers in health care, education, social services, and emergency services, and victims of domestic violence. The connecting element is always the condition that these people are not allowed to own property through which they would be able to satisfy their housing needs.

By the anchoring of the term “affordable housing” to the Czech legislation system, the possibility of construction while drawing the public funds with the participation of private investors and municipalities became another alternative to the existing social housing. 

Real estate tax

A real estate tax is levied on a plot of land, building or unit, both residential and non-residential. The taxpayer must submit the real estate tax return based on the conditions existing on 1 January of the given year, no later than on 31 January. As long as the conditions for the assessment of the real estate tax do not change, the taxpayer does not need to submit the real estate tax return again throughout the following years.

Value added tax

Generally, the basic value added tax (VAT) rate of 21% applies to the sale of real estate by the VAT payer, unless the conditions for a tax exemption are met. Since 1 January 2024, the reduced VAT rates have been unified and is currently at one rate of 12%. The reduced VAT rate of 12% applies to the sale of a real estate property related to the social housing (plot of land part of which is the building for social housing, unit, etc.) as defined by the VAT Act. The 12% VAT rate also applies to the provision of building and assembling work connected with the construction of a structure for social housing as well as to the provision of building or assembling work made on a completed structure for housing or for social housing. When providing a VAT payer with specific building or assembling work specified by the VAT Act, the payer applies the reverse charge scheme. The transfer of securities, including booked securities and shares in business corporations is VAT-exempt without entitlement to tax deduction. There are many exceptions to VAT, such as the sale of selected immovable property after the expiration of five years and others.

Income tax

Generally, certain types of income acquired by a tax nonresident of the Czech Republic (natural person or legal entity) on the territory thereof are subject to taxation in the Czech Republic.

The taxation of this income is executed either by the tax remitter via the withholding tax (or the tax security), or by the tax non- resident themselves via the submission of a tax return. The withholding tax rate amounts to 15% to 35%, which applies to the EU and EEA non-residents and residents of any third jurisdiction that has not concluded any of the international treaties specified by the Income Tax Act with the Czech Republic. The withholding tax rate of 5% is set for the consideration of a finance lease.

Download: Handbook for Real Estate Transactions