The Supreme Court of the Czech Republic has expressed its opinion on the practice of real estate agents with respect to so-called reservation contracts, under which prospective buyers are bound to pay a contractual penalty to the real estate agents corresponding to the reservation fee if a property purchase agreement is not finally entered into for reasons on the prospective buyer’s side. The court’s decision is crucial for those property developers who use an intermediary for the sale of their real estate projects, as well as for buyers and real estate agents.

Case background

In its decision of 24 July 2013, Reference No. 33 Cdo 3448/2012, the Supreme Court of the Czech Republic expressed its opinion on the practice of real estate agents who, in so-called reservation contracts, incorporate an obligation of prospective buyers in property acquisitions to pay a contractual penalty corresponding to the reservation fee if the property purchase agreement is not entered into for reasons on the prospective buyer’s side.

In the present case, the prospective buyers of a property (plaintiffs) entered into a reservation contract concerning a family house with a real estate agent (defendant) in which they undertook to enter into a property purchase agreement with the seller (i.e. third party) by the end of the reservation period. The plaintiffs paid a "reservation fee" as a part of the purchase price in favour of the defendant as an intermediary for the sale of property. In case that the purchase agreement was not entered into within the duration of the reservation period due to circumstances caused by the plaintiffs, it was agreed that the plaintiffs - as the prospective buyers of the property – would have to pay the contractual penalty in the amount of the reservation fee to the defendant. The contracting parties entered into the purchase agreement, but the plaintiffs subsequently withdrew (still within the reservation period) due to substantial defects associated with the property. Following this development, the defendant refused to pay out the reservation fee to the plaintiffs.

The court of first instance and the court of appeal did not uphold the plaintiffs' claim. They both concluded that the reservation contract is a valid unnamed contract,[1] including agreement on contractual penalty.

Supreme Court ruling

The Supreme Court of the Czech Republic confirmed the opinion of the lower courts that the reservation contract indeed represents an unnamed contract. The contract contained, inter alia, the defendant’s obligation not to offer the property for sale for the duration of the reservation period, to engage in activities aimed at the plaintiffs concluding a purchase agreement with a third party or an agreement on the conclusion of a future contract, and to provide legal services.

The Supreme Court of the Czech Republic subsequently continued with the assessment of the relevant agreements. The plaintiffs (i) undertook to enter into the purchase agreement within a specified period with the seller as the owner of the properties (i.e. third party); (ii) undertook to pay the defendant the reservation fee which should form a part of the future purchase price; and (iii) expressed their consent to the agreement that if they breach their obligation to enter into the purchase agreement, the paid reservation fee will be "forfeited" as a contractual penalty.

After deeper legal analysis, the Supreme Court of the Czech Republic concluded unambiguously that if the intermediary does not act as a representative of the future seller, the agreement, in which the prospective buyer agrees to conclude the purchase agreement with the seller within a certain period, is invalid.

In a situation where the reservation agreement is invalid, or at least the agreement to enter into the purchase agreement is invalid, there cannot be a valid contractual penalty. The Supreme Court of the Czech Republic therefore annulled the decisions of the lower courts and returned the matter to further proceedings.

Conclusion

Regarding the practice of real estate agencies arranging a sale of property, the validity of the agreements regarding the contractual penalty in the reservation contract if the future contract of sale is not finally entered into clearly depends on the legal status of the real estate agent in relation to the seller.

The real estate agent must therefore ensure that it acts as the seller's representative in order to enter into a valid reservation contract, and thus to conclude a valid agreement on contractual penalty.