Quick overview
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The purchase price is normally paid only after the land registry permits the registration.
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Attorney’s escrow is the most common.
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The money must be kept separate from the custodian’s assets.
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Identification of the parties is mandatory under the AML Act.
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The terms of payment must be precisely defined in the escrow agreement.
If you wish to set up a secure escrow for the purchase price, we will prepare complete contract documentation and an attorney-supervised escrow
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.
That is why we recommend having not only a properly set up escrow, but also a well prepared purchase contract and a proposal for registration. If you want an error-free conveyance, we will check the contract for you as well as provide a secure escrow for the purchase price.
What are the options when it comes to escrowing 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. The attorney’s escrow is governed by the Law on Advocacy and the regulations of the Czech Bar Association.
You can 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 attorney must take out liability insurance 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. Bank escrow may be appropriate, but the bank’s conditions are often rigid. We have encountered cases where the bank has refused to modify the standard model contract, which has complicated the transfer.
The buyer sends all or part of the purchase price for the property to one of these special accounts (after first entering into 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 will then apply 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.
In our practice, we prepare the escrow so that the terms of payment are precisely defined – for example, only after the lien has been cleared or the bank’s confirmation has been provided. Want to make sure the terms are set up correctly? Contact us.
Are you solving a similar problem?
We provide escrow of the purchase price when buying the property
Hundreds of thousands to millions of crowns are at stake when you buy a property – the wrong escrow setup can lead to loss of money or complications with the transfer. We can help you set up a secure escrow for the purchase price and contract documentation to ensure that the money leaves after the deposit has been authorized and all conditions have been met. Trust us to check contracts, identify clients and communicate with the Land Registry and be confident that your money is safe.
More information
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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.
In practice, we often see that the escrow agreement lacks precisely the condition of the deletion of the original lien. This may mean that the buyer pays but the property remains encumbered. We deal with such mistakes quite often.
Sellers and buyers should also be prepared that the solicitor, notary or bank will require accurate identification of both parties to the transfer to combat terrorism and money laundering. After all, 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.
Summary
The escrow of the purchase price is a safe way to protect both the seller and the buyer during the period between the signing of the purchase contract and the authorisation of the registration of the ownership right in the Land Registry. Because ownership is only established by registration in the Land Registry, the purchase price is usually deposited in a lawyer’s, notary’s or bank escrow and is only paid out after the fulfilment of precisely defined conditions – typically after registration and possible deletion of liens. Both attorney and notary escrows are subject to legal regulation and professional supervision, while bank escrows are based on the bank’s internal rules. The process also includes the mandatory identification of the participants according to AML regulations. The key to a secure transaction is a properly set up escrow agreement, clearly defined payout terms and coordination with the land registry to ensure that the money goes to the right person at the right time.
Frequently Asked Questions
Is attorney's custody mandatory?
No. It is not required by law, but it is a common safety standard in real estate transfers.
Who submits the application for entry into the cadastre?
Usually a lawyer or one of the parties to the contract. Depends on the agreement in the purchase contract.
Can a lawyer pay out money without the consent of the parties?
No. They must follow the exact terms of the escrow agreement.
What if the Land Registry refuses the deposit?
The funds are returned according to the terms agreed in the custody agreement.
Is it possible to keep only part of the purchase price?
Yes. Often the entire purchase price is put into escrow, but partial escrows are also possible.
How long does the escrow last?
Usually pending final approval of the deposit and fulfilment of other conditions specified in the contract.
