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Properly Transferring a Czech Cooperative Flat

Selling a coop flat in Czechia is usually accompanied by a number of questions. What are the main differences from selling a freehold flat? And what peculiarities might you face? Read on to learn.

Družstevní byt a převod družstevního podílu
8 minutes of reading

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The difference between coop and freehold ownership

The main distinction would be the owner. While a freehold flat belongs to its proprietor, the cooperative owns a coop flat. The occupant of a coop flat is in fact a tenant, not the proprietor. However, you don’t have to rent a coop flat to be a member of the cooperative; members with no lease rights are no exception.

Also, the sale procedure differs: While by purchasing a freehold flat, its new owner takes possession of the unit itself, cooperative membership rights are the subject of a coop flat sale.

This has an advantage: As a sold coop flat technically doesn’t have a new owner, the ownership rights needn’t be transferred at the Land Register.

How to sell a cooperative flat (a share)

If none of the aforementioned options are available, the purchaser may take a bridge loan from a building savings account, which precedes taking a standard building savings loan. Alternatively, they may obtain consumer credit, which, however, means less loaned money (approx. 1-2 million crowns with a bridge loan, hundreds of thousands of crowns with consumer credit), a higher interest rate and shorter term of payment.

 

The transfer of a coop flat has its particularities

And, you may easily become lost among them. Familiarize yourself with what problems you could encounter, or leave the formalities and agreements up to us.

Financing the transfer

Prior to signing the agreements, you need to decide how to finance your purchase. Naturally, it’s best to have ready money; however, most buyers don’t have the whole sum on their hands and need to take a loan. With a coop flat, the standard lien (i.e., the flat is collateralized by the bank providing the mortgage upon signing the purchase contract) may not be applied, as cooperative statutes reject liens burdening their property, and individual members cannot force the issue.

The buyer is thus left with three variants of financing:

  1. A mortgage secured by another property: Taking out a mortgage represents the most advantageous option that, however, comes at the cost of having to offer another property as collateral to secure the loan. Our clients often pledge their parents’ house, as, owing to its usually higher value, they can obtain a significantly lower interest rate. However, not all relatives are eager to encumber their house with a lien.
  2. Pre-mortgage loan: Some banks offer this specific loan type to buyers who are able to prove (for example, by providing a confirmation written by the cooperative) that the property will be transferred to freehold within a year of its purchase. The pre-mortgage will then be converted to a standard mortgage, which carries with it a lower interest rate.
  3. Bridge loan from a building savings account and consumer credits: If none of the aforementioned options are available, the purchaser may take a bridge loan from a building savings account, which precedes taking a standard building savings loan. Alternatively, they may obtain consumer credit, which, however, means less loaned money (approx. 1-2 million crowns with a bridge loan, hundreds of thousands of crowns with consumer credit), a higher interest rate and shorter term of payment.

Documents necessary for a cooperative share transfer

Once you’ve secured the financing and the cooperative has no objections, you can proceed with signing the agreement, which in this case is not a purchase contract but a housing cooperative share transfer agreement. And, if you must pay annuities (which we’ll discuss shortly), you will also sign a financial settlement agreement.

Moreover, it’s highly recommended to place the purchasing money in escrow, just as you would with a freehold flat, which means entering into an escrow agreement. The difference from purchasing a freehold flat is that you needn’t transfer the ownership rights at the Land Register when you sign it – you simply wait until the cooperative receives the agreements and sends you your membership certificate. The escrow is necessary due to the period between signing the agreements and receiving the membership certificate.

 

Podpis dokumentů potřebných pro převod družstevního podílu

Annuity

This term is often associated with a coop share transfer, and denotes repaying a debt (a long-term loan) made while (re)constructing the cooperatively owned house. The coop then repays this loan through its members, who are bound to pay the agreed monthly or annual instalments. Once the debt is settled, the annuity no longer needs to be paid. This should be taken into account during the sale, as the value of a coop share is naturally higher if the annuity has been paid in full.

Taxes

You’ll be pleased to know that tax obligations are nearly non-existent. The real estate acquisition tax is not paid, as the cooperative retains ownership of the property. Neither must you worry about the real estate tax, as this only concerns the owner as well.

  • They’re selling a share that they have owned for over 5 years,
  • They use the profit to purchase or reconstruct a property within a year of the sale.

 

Please note: The real estate acquisition tax was abolished as of 31 Mar 2020. You’ll find more information in the Real Estate Tax Abolishment article.

The negatives and limitations of coop share ownership

Cooperative ownership includes several significant negatives. Among the prominent ones is the fact that the members of a housing cooperative don’t actually own “their” flats, but rather are allowed to occupy them as tenants. This is no mere detail, as the cooperative has extensive authority – it may, under certain conditions, go as far as to expel a member, thus giving them notice, which means losing the flat.

And some coops do claim this right, as demonstrated by the case of Jarmila, who turned to us. Jarmila has been suing her cooperative for several years now for unauthorized expulsion. She was expelled for renting out her flat, which was her right. Fortunately for her, the membership is protected. To expel a member, the coop must adhere to a strict procedure and allow the member in question to defend themselves at the members’ meeting. When all else fails, the member must take legal action, as in this case. Any irrevocably expelled member is entitled to a settlement share, which, however, is significantly lower than the market price of the flat.

The mentioned case clearly demonstrates another serious disadvantage of coop flats: They can’t be rented out, as their proprietors themselves are actually tenants. However, that doesn’t make the principle of letting entirely impossible; you’ll merely have to sublet your flat as opposed to renting it out. This may seem an insignificant detail, however, be careful, as  it carries a severe implication: The owner’s (i.e, the cooperative’s) written permission is required. Without it, you aren’t allowed to sublet your flat. Thus, Airbnb and similar platforms are effectively regulated.

Transfer to freehold ownership

A coop flat needn’t remain cooperative forever, its ownership may be transferred to freehold. To do so, you need to apply with your cooperative, which will then pass a resolution at a general members meeting. Unfortunately, cooperative members are granted no rights regarding such transfers, which means that unless these rights are explicitly stipulated in the statutes, the cooperative’s eventual refusal is definitive.

On the other hand, if the cooperative approves the transfer, it then enters into an ownership transfer agreement with you and, subsequently registers you at the Land Register, thus completing the transfer. Moreover, it’s possible for some new freehold owners to retain their membership in the cooperative even thereafter.

Perspectives of housing cooperatives

Although it may seem that cooperatives represent a mere remnant of the past, their benefits have recently been rediscovered in many countries. The community housing which is nowadays popular in Vienna may serve as an excellent example.

Similarly, many Czech developers have started opting for a cooperative when constructing new housing, owing to which they’re able to draw on the subsidies offered by municipalities that are often one of the joint owners. As a pleasant consequence, the purchasing price frequently drops.

Your Attorneys Online will help you with the transfer

Are you about to transfer a cooperative flat into a freehold ownership? We’ll gladly assist with the entire process, from drafting or examining the contracts, guidance on your financial options, to escrow.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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