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Buyer beware: real property may come with transferor's debt

Czech Republic: What to watch out for in real estate transfers

It may appear at first glance that the rules on the change of the debtor have no bearing on real property transfers, but nothing could be further from the truth. As a part of those rules, the New Civil Code contains two provisions which may have impact also on real property transfers. The potential consequences of these "obscure" provisions are extremely dangerous and must be paid special attention by those who engage in real property transactions.

The first of these provisions is Sec. 1888 (2) of the New Civil Code, governing the assumption of debt, which stipulates the following refutable assumption: if, within the context of a transfer of the ownership title to a thing that is entered in a public record of some kind, a registered pledge title passes unto the transferee (and this is always the case in real property transfers), then so does the debt that is secured by the said pledge title. In such a case, the transferee acquires not only the real property encumbered by the pledge title, but also the transferor's debt. This particular provision in the New Civil Code is optional; i.e., the parties may deviate from it by way of a contractual understanding. Given the legal consequences associated with this provision, it is advisable to make use of the option and rule out the application of this provision in the agreement on the transfer of real property.

The second provision which deserves special mentioning is Sec. 1893 of the New Civil Code, on the assumption of assets. The rules on the assumption of assets presume that if the buyer takes over all assets of the seller or a prorated portion thereof, then the buyer becomes a joint and several debtor alongside the seller with respect to the debt related to the thus assumed assets, on the condition that the buyer knew (or had to know) of the seller's debt at the time at which they entered into the contract. Given that this provision is meant to give comfort to the seller's creditors, it cannot be effectively ruled out vis-a-vis the seller's creditors. The above-cited provision raises a number of questions. In particular, it is unclear (and will remain unclear until we have settled case law to guide us) how to interpret the "prorated portion of the seller's assets". Real property, in particular, could well qualify as a prorated portion of the seller's assets within the meaning of the cited provision, which is why one should take proper precautions in real estate transfers to verify whether the seller has debts in connection with the transferred property.

Source: New Civil Code (Act No. 89/2012 Coll.)

Tereza Chalupová, Lawyer