Even though most sellers and interested parties may not be aware of this, the reservation contract is a very important document. This contract protects the seller and also the buyer.
The owner of the property is protected, among other things, when the buyer arranges a mortgage loan and the conditions for its approval are not yet fully known. If the financing does not work out in the end, the owner of the property is entitled to a reservation fee, unless otherwise specifically stated in the contract. Likewise, the seller is protected in the situations where the interested party changes his mind about the purchase of the real estate and cancels. The buyer, on the other hand, has the certainty that the seller will not offer the property to another interested party during the processing of the necessary paperwork.
However, always think twice about signing a contract. Both buyers and sellers should know all the conditions of the purchase, and the all steps should be well thought out. Thoughtless signing of a reservation contract (especially by buyers) often leads to many complications. At the same time, the contract must be written in such a way that it is really good for all parties involved.
As regards to the requisite paperwork, the contract should always include:
- Information about all parties (seller, buyer, or intermediary, i.e. the real estate agent).
- The amount and method of payment of the reservation fee, or the time during which the reservation will be blocked in favor of the interested person.
- The reasons which would lead to the return of the reservation deposit (typically, for example, the concealment of important defects by the seller).
- A detailed description of the property that is the subject of the sale – it is important to mention:
- The condition of the house
- House equipment
- House defects
- Burdens (in the case of selling house, it can be, for example the material burden of the driveway, which is used by several property owners although it is owned only by one of them)
- The method of financing by the interested person (for example, financing by a bank in the case of an application for a mortgage loan)
- The date when the transfer of the real estate will be completed (unless there is a delay, for example at the Land Registry due to an incorrect proposal)
Real Estate Purchase or Sale
We provide a complete package of legal services related to real estate sales and purchases, including reservation contracts and escrow services. We will also help you with all tax and land registry issues. Our work is fast and accurate, ensuring a worry-free transaction. You’re also welcome to pay after services are provided.
Buying or Selling Real Estate
We provide a complete legal service related to the purchase or sale of real estate, including the reservation contract and the escrow of the purchase price. We will also help with Land Registry issues and proper tax filing. We work quickly and precisely so you can feel confident and don’t have to worry. You can also pay after the service is provided.
House Purchase Contract
The next step, which needs special attention, is the purchase contract for the real estate itself and the contractual conditions stated in it. If this document contains errors, the consequences can be really dire. Be sure to never download suspicious model contracts from the Internet, or use “proven” templates from your friends. Each property is different, as is the contract for its sale. There can be many pitfalls in preparing a purchase contract which can easily be overlooked by even the most attentive seller. For example, a clause on the transfer of real estate which works against you, the seller, or possible penalties you are unaware of.
The transfer clause is an integral part of the contract, because it clearly specifies when the new owner can start using the home. It should be clearly stated when the keys to the real estate will be taken over. There should also be a transfer of obligations related to the use of the real estate. Don’t forget to mention when the new owner will pay the fees for the provision of services (such as energy or utilities), and what are the current status of the relative meters. If this information is not provided, situations may arise where the original and new owners are arguing over service bills or other fees. In order to perform a proper property turnover, a so-called handover protocol should be drawn up, which you both will follow.
Also, you should pay attention to the clear specifications of what the new owner will receive. Will kitchen appliances remain in the property? And what about garden furniture? All this should be written in the purchase contract, preferably in the form of a list. Remember that verbal agreement is not enough. By including these details, you will avoid many future inconveniences.
Contractual penalties are a separate issue that needs to be well thought out. Penalties should be set clearly and fairly for both parties. Penalties must not be too high or too low. If the penalties do not even cover the time costs of the seller, or on the contrary, the penalties are set to the disadvantage of the buyer, there has been an incorrect setting which you will potentially cause multiple complications.
What other mistakes do we often encounter in our practice? Many times, even seemingly banal things can be a problem, such as the basic data of the sales participants. For both the seller and the buyer it is necessary to state their:
- name and surname
- personal identification number (or date of birth)
- permanent address
- verified signature
Furthermore, there is often a mistake in defining the subject of the sale, when for example missing data from the real estate land registry can lead to a complete cancellation of the contract.
There are also often obscure issues or information present when partners buy a house. What if you break up and have to pay your mortgage? How will it be with the house? All this should be resolved in the beginning, not after the problem has already come up.
What if you own only part of the house and decide to sell it? Before 1 July 2020, it was necessary to resolve the „first right of offer“ in the case of a co-ownership, but since July the situation is different. However, it is still necessary to resolve the first right offer if the land on which the house stands is owned by another owner. You can find more about the right of first offer in another of our articles.
If the new owner will finance the property through a mortgage loan, it is necessary to resolve the establishment of a lien, which banks require for the successful provision of the loan. The contract is concluded between the bank and the seller as soon as possible after signing the purchase contract, or even earlier.
After signing the mortgage agreement, the bank will provide a loan, which then in the most cases goes straight to an attorney´s escrow account. The lien must also be registered in the Land Registry, so you need to add one original copy of the contract to the Land Registry proposal. This is of course disadvantageous for the seller in principle, as it burdens his property in favor of the buyer. Therefore, the financing without the need for a loan is ideal.
Next steps to transfer the property
There are still a few necessary steps between signing the purchase agreement and handing over the keys of the real estate. They are, above all, the attorney escrow account and the proposal for changes to the Land Registry.
Attorney Escrow Account
The attorney escrow account protects the seller and the buyer equally, so we recommend it for every real estate sale. The seller avoids the uncertainty as to whether, and when, the money for the transaction will arrive. Likewise the buyer does not have to worry about becoming a victim of fraud and potentially losing both the money and the real estate.
It all depends on depositing the purchase price into the attorney escrow account. The attorney should have a special bank account set up for this purpose, so that there is no confusion and everyone is sure of the safety of the deposit. It is advisable to arrange the attorney escrow account in the reservation contract. As soon as the agreed amount arrives in the account, it is safe to submit a proposal of new ownership rights to the Land Registry.
Registration in the Land Registry
Mistakes are not forgiven in the process of selling real estate. And this is doubly true in the case of the proposal for new ownership rights. Make sure that your documents are legally correct and contain all the required information. To submit a proposal for new ownership rights, there is a general form to be used which you can deliver to the Land Registry noted in the proposal, or in person, by post or electronically. The proposal identifies the participants in the proceedings and the specific property. Along with the proposal, it is necessary to deliver the purchase contract and pay the administrative fee, which is 2.000 CZK from 1 January 2020.
Although at first glance it might seem that there is no mistake in making a proposal, the opposite is true. This is despite the fact that there is a possibility to fill in an interactive form, which will complete some information about the property by itself. One wrong specification of the real estate is all it takes to get your application back, unprocessed. Increased attention should also be paid to other title deeds in which the ownership of land or other details may be indicated. If the purchase contract contains different data than the proposal to the Land Registry, there will be serious complications. For example, even an interactive form cannot work with co-ownership shares, and this information must always be filled in manually, which many people forget to do.
If you make any of these mistakes, it is a so-called irreparable defect, which leads to the application not being approved by the Land Registry. It will be necessary to withdraw the proposal (if all participants agree), or wait for the rejection by the Land Registry. In this second case, there is still a period of two months before the case will be brought before the court, during which time it is not possible to file a new application. This is therefore a significant extension of the whole process. Each time you submit a new proposal, you must also pay the administrative fee again as well.
For completeness, we will also mention the so-called remediable defects, which can be corrected during the proceedings without having to be interrupted or terminated. Such defects include, for example, an unverified signature or non-payment of an administrative fee on the day the proposal is submitted.
The Land Registry has approximately one month (but at least 20 days) to process each proposal. However, each of the above mentioned mistakes can prolong the process or even stop it completely. As long as the proceedings are in progress, the buyer is not yet the owner of the property. This only happens after the change of registration in the Land Registry.
Who pays real estate transfer tax?
The property acquisition tax will most likely be abolished for all transfers made from December 2019. However, as the law has not yet been approved, it is still the case that the real estate tax is paid by the buyer. The seller has not been affected by this act since the beginning of 2017, and no problems await them, even if the seller does not pay the tax. The tax is not paid on the first transfer of a new house or apartment, but for all other paid transfers this tax payment is required. Within three months of the registration of the new owner in the Land Registry, a declaration of taxes must be filed. This is submitted to the tax office in whose district the purchased property belongs. In the case of this declaration of taxes, it is very important to follow the deadline because late filing can mean a penalty as well as the addition of interest because of the delay.
The tax rate is 4% of the purchase price of the property. However, this needs to be compared with the usual real estate prices in the area. The tax is then calculated from the higher price. If your price is considerably lower than the average price in the locality, the tax will be calculated from the average price or from the price determined by an expert opinion, and not from your purchase price.
Note: the real estate acquisition tax has been abolished and the relevant date in this regard is 31 March 2020.