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Security transfer of rights

Czech Republic: The security transfer of rights accommodates creditors' interest in better security and easier realization

The essence of security transfers of rights within the meaning of Sec. 2040 et seq. of the new Civil Code may be described as follows: the obliged party (or a third party) transfers its right - e.g., an ownership title - to the creditor so as to secure the discharge of its debt. The defining feature of this institution is its conditional and temporary character, for the transfer of rights is typically tied to a condition subsequent (namely, that the debt will be discharged).

Security transfers of rights essentially operate under two different regimes. In one class of cases, the security transfer of rights concerns a thing that is recorded in a public register (for instance, a piece of real estate that is entered in the cadastral register). In such a case, the security arises upon entry in the said public register (do note, though, that the mutual rights and obligations between the parties come into existence right away, as soon as the agreement on the security transfer of rights takes effect).

In the second class of cases, the subject matter of the security transfer is a thing which is not part of the public record. In those cases, the security transfer takes effect immediately upon execution of the agreement.

The new Civil Code contains an important new concept - that of a contractually agreed "fiduciary" security transfer of rights (though, truth be told, it is not quite clear whether this new concept came into existence by design or because of a mistake on the part of the lawmaker). The parties may thus agree that the discharge of the secured debt does not result in the automatic restoration of title for the welfare of the previous owner of the transferred item, but that the secured creditor must - by way of a new and separate legal act - procure the retransfer to the original owner. The fiduciary security transfer of rights must be expressly agreed between the parties. Where this is not the case, the (refutable) assumption holds that the parties wished to transfer the right subject to the condition subsequent of a discharge of the secured debt.

The security transfer of rights no longer requires the written form. Of course, it is none the less highly recommended to use the written form, given the parties' interest in legal certainty and the potential future need of proper, incontrovertible evidence.

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