Deposit of the purchase price when buying a property

How is the transfer of the property carried out?

The transfer of ownership of a property that is registered in the Land Registry does not take place immediately after the contract is signed from hand to hand.

The cadastre examines the accuracy of the information in the purchase contract and other circumstances of the entire transfer and has about a month to do this (the minimum period is 20 days). However, if there is a problem, the registration of the ownership of the property can drag on for several months. Until then, the buyer is not the owner of the property. The longer the procedure at the land registry takes, the more the risk increases that the whole real estate transaction will not proceed to the full satisfaction of both parties.

What are the options regarding the escrow of the purchase price?

It is quite easy to insure against such a risk. There is a so-called purchase price escrow, which is beneficial for both parties – the buyer and the seller. Can you choose from several options?

1. Attorney’s escrow – every attorney is required by law to have professional liability insurance in the minimum amount of CZK 7,000,000. If the amount to be deposited is higher, the solicitor must be insured for the total amount. The insurance covers cases where the solicitor pays out money wrongfully or late, thereby disrupting the process of selling the flat. The terms of the attorney’s escrow are then strictly determined by regulations, where a separate bank account is set up for each escrow, separate from the attorney’s assets, and everything is registered with the Czech Bar Association in the Electronic Escrow Book.

The AffordableLawyer advises. Although professional indemnity insurance must be taken out for a minimum of CZK 7 million, as we state above, we are insured for CZK 50,000,000.”

2. Notarial Custody – As with solicitors, notaries are required to have professional indemnity insurance. The conditions are almost identical to the previous case, however, notarial escrow tends to be on average more expensive and less flexible. The custody fee is usually based on a rate set by law and in most cases notaries add 21% VAT to the final price.

3.Bank escrow – you will need to take into account that the bank does not allow escrow of the purchase contract and the proposal for entry into the land register, so you will need to arrange it separately with a lawyer or notary if it is needed in the transaction. At the same time, it uses standardised contract templates which often do not correspond to the specific situation. In practice, we also see that banks do not allow escrow of the purchase price without a loan agreement.

The buyer sends all or part of the purchase price for the property to one of these special accounts (after first concluding an escrow agreement). When the purchase price is in the account, the seller is assured of being paid for the property. The solicitor or seller then applies to register the title in the Land Registry. However, the money is held in escrow until the title in favour of the buyer is actually registered in the Land Registry.

Once the title has been registered, the escrow is released and the money is transferred to the seller. If, on the other hand, anything goes wrong, the registration of the title in favour of the buyer does not take place and the whole real estate transaction fails, the purchase price is returned to the buyer and the seller keeps his property.

Escrow may also be recommended in the case of a transfer of a cooperative apartment, as this transfer is only effective against the cooperative when the purchase contract is delivered to the housing cooperative. Here, it is ideal to link the payment not only to delivery but to confirmation from the housing association that it agrees to the transfer. Again, however, there is necessarily an intermediate period between the signing of the contract and the actual transfer, and therefore a similar risk as in the case of the registration of title in the Land Registry. In addition, the fact that the cooperative “ownership” is not registered in the land register makes it easier for fraud to occur and for one membership share to be transferred to several people.

In the escrow agreement, it is important to ensure that the funds are paid into the correct account only after the transfer of ownership and also after previous liens or other rights have been cleared. This could be forgotten, yet such a mistake would cause significant problems.

Sellers and buyers should also be prepared for the lawyer, notary or bank to require accurate identification of both parties to the transfer to combat terrorism and money laundering. Indeed, if someone accepts custody of someone else’s funds, they need to know the true owner of the funds as well as who they are intended for. Therefore, if you do not enter into a contract directly at a law firm, you need to identify yourself in a formal way at the post office or at a Czechpoint office. This is done simply by signing a special declaration and identifying yourself with your ID card or passport.

We prepared this article for the Lidové noviny series “Law & Housing”. See also other articles from the series:

1. What to watch out for when buying a property
2. How to get a mortgage
3. What to check before buying a property
4. Who pays the property transfer tax and how?
5. What should be included in the property purchase contract
6. The most common mistakes when drafting a proposal to the Land Registry
7. Buying a property from a developer
8. Keeping the purchase price when buying a property
9. The difference between a condominium and a freehold
10. What is an annuity?
11. How to properly gift a property
12. What is the purpose of an easement or servitude?
13. Making a will and settling an estate
14. What is a collation
15. What shouldn’t be missing from a lease agreement
16. When rent increases can be made
17. Termination of the lease
18. Agreement to end the tenancy
19. How to draw up a work contract with a tradesman
20. Hidden defects and cancellation of a work contract
21. When do you need planning permission to renovate a property?
22. Home Rules
23. What does serving on a condominium board entail?
24. Why not underestimate the bylaws in a condominium
25. Common areas in a block of flats
26. What is involved in refurbishing a block of flats
27. Can a condominium or housing association go into debt?
28. How to renovate a house or cottage
29. What to watch out for when dealing with a construction “company”?
30. Building a house on a “green field”
31. How to remove land from the agricultural fund