On 1 January 2014, the New Civil Code No. 89/2012 Coll. (the “New Civil Code”) and Act on Business Corporation No. 90/2012 Coll. (the “Act on Business Corporations”) shall become effective in the Czech Republic. This article presents a list of what we believe to be the most significant changes brought to the commercial real estate practice in the Czech Republic by the above statutes.
- Building as Part of Land
After 1 January 2014 if a person owns a building and the land on which it stands, that building shall become part of the land (the Czech real estate law will return to the principle that structures are part of the land on which they are built - a “superficies solo cedit” principle). Buildings established on land (except for temporary buildings, utility lines and some other exemptions) will no longer be objects of law and will only form a part of the land.
If the land owner and the building owner are two different persons at this time, the building will remain as real estate, but the land owner will hold a pre-emptive right to the building and the building owner will hold a pre-emptive right to the land. The building will then become part of the land when the building and the land first meet in the hands of the same owner.
Moreover, the building will not become part of the land if the building or the land is encumbered by a right in rem.
- Right to Build
Based on this new instrument in Czech law it will be possible to construct a building on a third party’s land. The right to build is a temporary right (99 year maximum) established by an agreement between the land owner and the developer. From a legal point of view the right to build as a whole will be considered to be real estate and will be a subject to registration with a public register (currently Real Estate Register). The right to build can be subject to a transfer, mortgage, heritage or easement. The right to build is independent of the existence of the structure and can therefore be established even if the construction procedure has not yet started. The right to build is not terminated even if a building is destroyed.
After expiry of the right, the building becomes a part of the land (i.e., title to the building passes to the land owner); unless the parties agree otherwise the land owner shall pay one half of the value of the building as consideration.
- Good Faith and Public Registers
The New Civil Code emphasizes the importance of public registers in relation to the rights in rem. It shall not be possible to claim a lack of knowledge of rights registered in the public register. Rights in rem registered in the public register shall precede the rights that are not registered. If the registration in the public register is inaccurate, the New Civil Code protects the acquirer (i) who was in a good faith as to such registration, (ii) who acquired the right for the consideration and (iii) who acquired the right from the person registered in the public register. Application of the increased protection for good-faith acquirers shall be postponed by one year (i.e. it applies from 1 January 2015).
Easements shall be newly divided into servitudes consisting of a passive obligation to bear something or to refrain from something and real burdens consisting of an active obligation to give something or to perform. The owner may newly establish servitude of one of his own lands to another land he owns. The New Civil Code only defines specific types of servitudes, but servitudes not expressly defined by law can also be established.
- Dwellings Ownership and Community of Owners
The New Civil Code also regulates the ownership of dwellings, which is currently contained in a separate act. A dwelling unit remains a separate piece of real estate and does not form part of the land. The community of owners no longer originates automatically by law; it is newly founded by approval of the statutes and it comes into existence when entered into a public register. The new regulation will apply only to newly constructed dwelling units. Units established under the previous legislation will continue to be governed by the previous law.
- Lease and Tenure
There is a new distinction between lease, a letting of an object for temporary use against payment, and tenure, the letting of an object for temporary use and consumption. On proposal or with consent of the owner, the lease or tenure can be registered in a public register (the registration will however not establish right in rem).
As opposed to any other agreements, lease agreements concluded prior the effectiveness of the New Civil Code are governed by the new law from the date of effectiveness of the New Civil Code, except where the creation of a lease and rights and obligations are formed prior to the date of effectiveness.
The New Civil Code continues to distinguish between the lease of business premises and the lease of dwellings. With respect to the lease of business premises, the main changes relate to the termination of the lease (the New Civil Code for example introduces a new instrument for objections to the termination notice).
With respect to the lease of dwellings, the consent of a court for termination by notice is no longer required; the obligation to provide a housing substitute is revoked. The New Civil Code extends the grounds for termination of the lease of dwellings. At the same time, however, the tenant has the right to request a review of the eligibility of the termination notice. Arranging for an obligation to pay a contractual penalty to the landlord and imposing disproportionate duties are expressly forbidden by the New Civil Code.
- Main corporate changes
The Act on Business Corporations also brings significant changes which will affect companies owning real estate. The most significant changes are the following:
- Assets transferred between related parties in limited liability companies will no longer need to be evaluated by the expert opinion;
- Provisions of the current Commercial Code which are contrary to the provisions of the Act on Business Corporations will cease to apply from 1 January 2014. The Act on Business Corporations provides an option to choose whether the relevant company will be subject to the new Act on Business Corporations or whether it will be subject to dual legislation;
- Memorandums of association containing provisions contrary to the Act on Business Corporations will need to be amended in accordance with the requirements of the Act on Business Corporations and filed in the Collection of Deeds maintained by the Commercial Register by 30 June 2014;
- Agreements for the performance of position of a member of company’s body concluded before 1 January 2014 shall be reviewed and if not complying with the Act on Business Corporations amended before 1 July 2014.
We recommend beginning preparation for the new legislation well in advance. It is crucial to consider the impact of the New Civil Code and Act on Business Corporations both on the documents concluded prior the New Civil Code (in particular we recommend reviewing lease agreements, memorandums of association, existing contracts on the performance of the executive director’s office etc.) and any future development and acquisition of the Real Estate.
It should be stated that many documents will need to be amended in advance in cooperation with a notary or changed with the assistance of the business partner.