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From law practice: entrepreneur obtained funds for non-residential premises by pledging an apartment
Mr. Lukáš wanted to buy a commercial space in Dejvice, Prague, because a very good opportunity presented itself. However, he had no free funds and as a sole trader he could not get a proper loan from the bank.
He originally approached us about something else, but on that occasion he complained about it. So I asked him why he didn’t try mortgaging his flat. He mentioned that he had good friends who had a lot of spare cash.
Indeed, that turned out to be a good solution. The acquaintances would not lend without security, but they were no longer afraid to go into business compared to mortgaging the flat. Mr. Lukáš has been paying back faithfully and thanks to this, the pledge has now been cancelled and the debt has been repaid. Or rather the other way around, because the pledge always ceases as soon as the debt ceases.
What is a pledge?
When you decide to borrow a large sum of money, the lender will probably ask for some additional security in addition to interest. Usually, you will pledge your property in exchange for the money you borrow. This should ensure that you will repay the loan, otherwise you will lose the property. Such pledges are not only common among acquaintances, but are also typical in banks. The most typical example of a mortgage is a mortgage. When you take out a mortgage, the bank usually pledges the property on which you take out the mortgage.
Tip: We would undoubtedly put foreclosure on the list of things we really don’t want to experience. It is important to remember that even bailiffs are not infallible and we don’t have to like everything. So read on to find out how to defend a foreclosure order on a property.
What property can be mortgaged
In theory, it is possible to mortgage any property owned by you or by another person with their consent. In practice, however, it is not so simple. For example, banks will usually only accept residential property and building land as collateral. The reason is that this type of property has a much higher value, and therefore a chance of a profitable sale, than, for example, property used for business purposes.
In some cases, it is also possible to mortgage a holiday home. However, this usually has to meet certain conditions. The most common are the need for a driveway, the possibility of year-round occupation and an assigned description number.
Tip: The topic of mortgages is naturally linked to the topic of pledging. Read how to get a mortgage. You will learn how liens work in this case and what to watch out for.
Particulars of the pledge agreement
Thelien is created by a pledge agreement. It is generally not required to be in writing. In some cases, however, it must be in writing. This is the case, for example, if themovable thing as collateral is not handed over to the pledgee or to a third party (i.e. if the pledgee does not take the thing away or does not have it taken away).
A written agreement is also required whenever the collateral is real estate. The parties must first of all agree in the pledge agreement what is pledged and for what specific debt the pledge is established. If it is a pledge of immovable property, it must be specified exactly what the immovable property is. The land registry will help you to do this, where you will find everything you need.
Tip: Do you need to submit a proposal for entry into the Land Registry? Have it prepared by an Affordable Lawyer. We will help you with the drafting so that everything is right the first time and you don’t miss important deadlines or lose money.
The debt itself also needs to be divorced. The contract should state the amount and how much of the debt is covered by the pledge. You can also specify how much the creditor can be satisfied from the pledge when it is realised. It is not only the debt itself, i.e. the principal, that can be secured by a pledge. But it is also possible to secure accessories and, if expressly agreed, contractual penalties.
It is also advisable to give a detailed indication of the loan or credit agreement so that there is no doubt as to which specific agreement is involved. Last but not least, it should be borne in mind that the pledge of real estate does not arise when the pledge agreement is signed, but only when it is registered in the Land Registry.
Are you planning to borrow money and mortgage your property?
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How the pledge is extinguished
A pledge can be extinguished in several ways:
- By assumption of the debt: If the debt is transferred to another person.
- By transferring the pledge to another property: if the pledge becomes another property.
- By repayment of the debt
- By enforcement of the lien: see next chapter.
Exercise of the lien or realisation of the pledge
What if the worst happens and the debtor does not pay? What to do with the pledge? The Civil Code offers the contracting parties a fairly wide range of options to prepare for this situation. It is therefore up to the pledgee and the debtor to decide which type of enforcement of the pledge right in the pledge agreement they choose.
In addition to a sale of the pledge at public auction or a sale pursuant to a special law (judicial sale of the pledge), the parties can agree on a so-called free sale (i.e. the best offer outside any auction), a public tender for the best offer, a voluntary auction or an imposed administration.
Tip: How does foreclosure by sale of real estate work? Which properties may be affected by foreclosure and under what circumstances may the borrower’s own home be affected? Find out in our next article.
However, prohibited provisions must always be respected (for example: the creditor cannot monetise the pledge in any way), the breach of which causes relative nullity. This means that the court can annul the foreclosure.
Enforcement of the pledge is mainly carried out by monetising the pledge against the debtor’s will (and so he may lose the roof over his head). However, everything can also end amicably and both parties can agree on a joint solution – there are no limits to this.
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