When negotiating contracts for the transfer real estate in the Czech Republic (whether in the form of an asset deal or a share deal), it is important to bear in mind one of the provisions introduced by the new Czech Civil Code (which came into effect at the beginning of last year) governing the assumption of assets.
Under the relevant provision of the Civil Code, if any entity (the purchaser) takes over the entire assets of any seller, or a “proportionally specified” part thereof (in Czech: “poměrně určená část”), the purchaser becomes (together with the seller) a debtor with respect to any and all debts of the seller relating to the transferred assets.
In practice this means that any creditor of the seller is allowed to ask the purchaser to settle the seller’s debts, provided that the purchaser was aware (or must have been aware) of such debts. This assumption of debt is limited to the value of the transferred assets, regardless of whether the purchase price was duly paid and was in compliance with market standards.
What type of real estate transfer may give rise to the application of the assumption of a seller’s assets?
(i) Any and all assets of the seller
Unfortunately, the Czech courts have thus far not ruled on whether (and to what extent) a purchaser is liable for a seller’s debts in any particular set of circumstances. However, under the practice followed by courts in Germany (on whose law the relevant Czech legal provision was modelled), a transfer of approximately 85%–90% of a seller’s assets shall be deemed to constitute the transfer of the seller’s entire assets. This implies that as far as real estate transactions are concerned, almost every SPV or subsidiary will transfer its entire assets in the case of a share deal.
(ii) A “proportionally specified” part of a seller’s assets
“Proportionately specified” means either a) a part defined as a certain percentage or fraction (such as one-third), or b) a certain standalone or identifiably separate unit comprising different individual economic assets. Typically, a standard commercial real estate transaction involves assets such as a logistics park, industrial park, shopping centre, or a collection of different assets that are located within a single country. Therefore, most transactions will fall under the legal definition of a “proportionally specified part of assets” – even if such assets are transferred in the form of a share deal.
From the above, we can conclude that real estate assets either (i) form individual economic units that are separable from the other assets of the entity in question, or (ii) constitute any and all assets of the relevant purchaser (e.g. SPV). Therefore, the above rules will apply to most real estate transactions.
The assumption of debt in this case is statutory – i.e. parties have no possibility to exclude the application of this rule in respect of any creditor. Even where real estate is transferred over several stages or phases, the law governing the assumption of assets will still apply.
Accordingly, contractual documentation should include additional representations and warranties covering debts that relate to the transferred assets (including intercompany loans). We also advise buyers to include in contractual documentation an indemnity clause up to the project value that is unlimited in time.