Legal Risks in Property Acquisition
In recent years, the Czech Republic has experienced a stable growth of real estate prices, especially with regard to apartments and buildings for commercial use, such as offices or business premises. As a result, the real estate market is offering ideal conditions for vendors at present. On the contrary, a weaker position stems in this situation for buyers, especially as to their negotiation strength and possibilities for affecting the form of transactions. To put it simply, buyers cannot dictate too much as there are not so many suitable offers. Contrarily, there are usually more interested parties. The above-mentioned circumstances then exert pressure on real estate investors to diminish their prudence regarding an appropriate treatment of potential legal risks related to the real estate acquired, in addition to other transaction parameters. However, we can by no means recommend such a concession from prudence in respect of legal risks.
Due to the lack of suitable properties on offer, real estate with an unresolved legal status is more often put on the market. Such real estate often represents a favourable investment as the existing owner, being aware of the flaws in the offered asset, is willing to sell it at a low price, whereby the unsatisfactory legal status can usually be resolved. Yet in a way demanding a considerable amount of time and money. If one handles this successfully, a risky investment immediately turns into a very good one. However, at first it is necessary to duly scrutinise the property on offer from a legal perspective so that the buyer is aware of the facts that should result in a decrease in the purchase price if they decide to proceed with the transaction.
Apparently, a thorough legal due diligence is currently essential in respect of real estate transactions, whereby it can often not only clarify the risks involved, but also reduce the purchase price of the selected real estate.
History of the property to acquire
A serious risk involved in purchasing property is a possibility that, in fact, this real estate is owned by a person other than the vendor, or that another person has justified claims thereon. There are a number of possibilities of how such a situation can arise. The property has usually existed for a long time (land has existed since time immemorial) and thus a number of various legal statuses and dispositions form its history, some of which – even those relatively old – always have an effect in these days. Typically, real estate has a long chain of owners, from the past ones to the current one. Each of these owners acquired an ownership right to the property based on a certain legal title.
However, if a legal title, based on which the property is to be acquired, is invalid for any reason, a person that was to acquire the property based on this invalid title does not become the beneficial owner. Accordingly, they are not entitled to transfer the relevant property to other persons. The affected persons do not have to be aware of this fact, which can give rise to substantial problems.
Principle of material publicity
Act No. 89/2012 Coll., the Civil Code, as amended, regulating the acquisition of property ownership strives to minimise the above-mentioned risk by the legal regulation of the so-called principle of material publicity. The principle of material publicity relies on a publicly accessible register of real estate, which is a land and property register in the Czech Republic. The land and property register lists plots of land and buildings, including registration of their owner according to the record in this land and property register.
Putting it very simply, the principle of material publicity means that legal protection pertains to the person who acts with reliance on the status registered in the land and property register. The Civil Code thus determines in Section 984 (1) that if the state registered in a public register is not in accordance with the actual legal status, the registered state is in favour of the person who has acquired the ownership right for consideration in good faith from the person authorised thereto according to the registered state. Accordingly, if a person acquires real estate from a person registered in the land and property register as the owner of the real estate for a consideration and in good faith that the transferor is the owner, he/she should acquire an ownership right independently of the fact whether the-above mentioned uninterrupted chain of legal titles is attached to this real estate.
The Supreme Court of the Czech Republic replied in its decision-making practice to the question when an acquirer can be in good faith as regards the state registered in the land and property register, ie when the principle of material publicity applies to the situation. In its ruling file no. 22 Cdo 4174/2017 the court expressed an opinion according to which it is necessary to investigate in the intended transaction not only the state of records in the land and property register, but also factual circumstances of the case and the actual legal state of the property. Thus, it is not possible to rely solely on the recorded state in the land and property register. This opinion corresponds to the existing decision-making practice before the effectiveness of the Civil Code and has also been confirmed by the Constitutional Court. The Constitutional Court, in its ruling file no. IV. ÚS 4115/17, evaluated a mere reliance on the accuracy of data registered in the land and property register to the detriment of complainants and refused that it would be possible in the given situation to admit positive effects of the principle of material publicity. At this point, it is necessary to state that Czech courts have construed the principle of material publicity too narrowly so far in order for it to represent the so much needed institute for real estate investors, bringing about the missing certainty in relation to the history of the property acquired.
Here the necessity to implement a thorough legal scrutiny of the real estate to be acquired turns out again, as only then the acquirer can determine whether justified doubts exist or not regarding the accuracy of the state recorded in relation to the relevant real estate in the land and property register and thus whether he/she is or not in good faith, given the circumstances of the case.
Another possibility for remedying potential historical flaws concerning acquisition titles in relation to real estate is a traditional institute of acquisitive prescription. Simply, this institute presumes that if a person treats an immovable property as if it were its owner for 10 consecutive years with no interruption and at the same time presumes in good faith to be its owner for the entire period, such person will acquire the ownership right to this real estate. A record of the person’s ownership right to the property in the land and property register is, obviously, the assumption of good faith.
However, the acquisitive prescription will probably newly find its application especially in transfers of real estate without consideration as the above-described principle of material publicity will be more useful for transfers of real estate for consideration, which also presumes good faith but does not require the lapse of ten years for the acquisition of the ownership right.
Extraordinary acquisitive prescription
The institute of extraordinary acquisitive prescription is a novelty introduced by the Civil Code. Extraordinary acquisitive prescription is defined in the Civil Code as follows: where a person treats an immovable property as if it were its owner for 20 consecutive years with no interruption, such person will acquire the ownership right on condition that their bad faith has not been proved. The Civil Code postponed the application of the extraordinary acquisitive prescription by five years. Accordingly, it has only been possible to apply new institute since 1 January 2019 (providing that 20 years have passed in the meantime).
Only time will tell to which extent this institute will be utilised. Nevertheless, a reasonable application by courts has, in theory, a potential to settle all historical flaws relating to acquisition titles in situations when the acquisition of real estate is not questioned but, due to formal deficiencies, the acquisition title may be considered invalid and, as a consequence, the acquirer cannot be in good faith.
This article did not aim to provide an exhaustive list of legal risks pertaining to the acquisition of real estate. This would not be possible after all. Instead, by providing several examples (as repetition is the mother of wisdom), we wanted to emphasise the crucial fact: A thorough due diligence is essential for making safe real estate investments! At any time.
The article is part of dReport – October 2019, Legal news.