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How will the amendment to the Civil Code change the Czech residential property market?

On 1 July 2020, an amendment to the Civil Code will come into force which both property developers and apartment owners are well-advised to give their attention, as it will modify the co-ownership of apartments in significant ways. Other changes affect the right of first refusal of co-owners (which will be heavily curtailed) or apartment leases (which may newly include clauses on contractual penalties, if only in a limited scope).

Apartment co-ownership

The majority of changes brought by the amendment to the Civil Code concerns the co-ownership of apartments; in what follows, we want to mention the most important ones.

Changes to the owner’s declaration will become much easier and straightforward to implement. To date, such a change presupposed a written agreement among the affected unit owners, the written consent of a majority of votes of all unit owners in the building, as well as a decision taken by the general assembly of the Homeowners’ Association. The latter is being entirely done entirely away with, and in certain cases, it will suffice to obtain a majority of votes of all unit owners for the change of the owner’s declaration (e.g. if the change concerns common areas within the house that do not affect the relative size of the shares in these common areas).

The amendment also addresses the short-term accommodation of third parties. Unit owners must newly inform the building manager beforehand of any commercial or other activities that will be carried out in the apartment and are apt to disturb the regular peace and order in the building for a non-negligible time period. In this respect, we ought to mention a change of the terms for the court-ordered sale of a unit in response to a breach of obligations by the unit owner which substantially curtails or frustrates the exercise of rights by other unit owners in the building. In particular, it is no longer necessary to first present an enforceable court decision in which the unit owner was ordered to discharge its obligations.

The amendment also specifies with greater precision the categories of debt which passes to a transferee along with the apartment unit itself. Arrears in management fees, owed payments for performances in connection with the use of the apartment (i.e., utilities and services), and advance payments towards such services all pass unto the transferee along with the apartment unit.

Restricted right of first refusal of co-owners of notional shares

The amendment turns the clock back on the rules for co-owners’ rights of first refusal to the legal state of affairs that existed after 1 January 2014. In other words, a statutory preferential purchase option will only apply in special cases in which the co-ownership came into existence independent of the co-owners’ will (e.g. in the case of a last will and testament). This essentially abolishes the right of first refusal (the aforementioned extraordinary exemptions notwithstanding), which should make it much easier to transfer, in particular, fractional ownership titles to garage space when selling one’s apartment. After the re-introduction of the right of first refusal for the welfare of co-owners of shares in real property on 1 January 2018, such transactions became essentially an unsolvable puzzle.

Contractual penalties and apartment leases

Current law expressly forbids parties from agreeing on contractual penalties in apartment leases to secure the tenant’s obligations. The amendment lifts this prohibition, but the allowable amount of such contractual penalties will be severely limited, and where they are agreed, the security deposit will be affected. Specifically, the right to demand payment of a contractual penalty will be limited to an amount equal to three times the monthly rent – including, however, the deposit. If the deposit itself is already in this maximum amount, there is no room left to agree on a contractual penalty. Given that the landlord can use the deposit so as to immediately satisfy their claims vis-a-vis the tenant, it will be more advantageous for landlords to agree on a higher deposit rather than on a contractual penalty, which may have to be collected in court if the tenant fails to pay voluntarily.