Selling a property without risk or the necessity of a lawyer’s escrow

The transfer of ownership of a property that is registered in the Land Registry does not take place immediately after the signing of the contract from hand to hand. The Land Registry examines the accuracy of the information in the purchase contract and other circumstances of the entire property transfer and has about a month to do this. 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 before the Land Registry takes, the more the risk increases that the whole real estate transaction will not be carried out to the full satisfaction of both parties.

But how to insure against the risks?

Quite simply. There is a so-called attorney’s escrow of the purchase price, which is beneficial for both parties – the buyer and the seller.

The solicitor opens a special bank account with a money institution, where the buyer deposits the purchase price. This account must be segregated from the lawyer’s other funds to avoid confusion with other clients’ money or even with the lawyer’s own money.

Upon signing the purchase contract, the buyer shall transfer the amount of the purchase price for the property to the account described above. When the purchase price has been deposited with the lawyer and the seller is assured that he will be paid for the property, the lawyer will file a petition to register the title in the Land Registry. The money is held in escrow until the title in favour of the buyer is actually registered in the Land Registry.

Once the title is registered in favour of the buyers, the lawyer releases the amount of the purchase price to the seller. On the other hand, if 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 lawyer will return the purchase price to the buyer and the seller will keep his property.

Types of escrow of the purchase price

Escrow does not have to be attorney’s only. There are several types. The most common ones include:

• Attorney’s escrow – This escrow is provided by attorneys. They are required to take out professional indemnity insurance for an amount of at least CZK 7 million. If the value of the funds invested exceeds this amount, the lawyer must provide additional insurance for the total value. This insurance covers situations where the lawyer would incorrectly or with delay disburse the funds, which could complicate the process of selling the property. The rules for legal escrow are strictly defined and a separate account must be created for each escrow, separate from the lawyer’s personal assets. All transactions are subsequently recorded in the Electronic Book of Escrows of the Czech Bar Association.

At Dostupný advokát, we charge for custody regardless of the amount. Although professional indemnity insurance must be taken out for a minimum amount of CZK 7 million, as stated above, we are insured for CZK 50,000,000.

• Notary Protection – Similar to attorneys, notaries are required to have professional insurance. The terms and conditions are very similar to those of attorney’s escrow, but notary services tend to be more expensive and have less room to adapt to your specific circumstances. The price for the custody is based on a tariff set by law, to which notaries often add an additional 21% VAT.
• Banking protection – With banks, you need to take into account restrictions such as the impossibility of custody of the purchase contract and the application for registration in the Land Registry, which requires a special agreement with a lawyer or notary. Banks also use standardised contract forms which may not always meet your specific needs. In practice, there are also cases where banks do not allow the purchase price to be deposited without arranging a loan.
• Escrow with real estate agents – In some cases, real estate agents may offer escrow services for the purchase price as part of their services in arranging the sale of the property. However, this option may involve certain risks and it is important to check the credibility and insurance cover of the estate agent.

The process of paying the purchase price from the attorney’s escrow

1. The lawyer shall open a special bank account designated solely for the purposes of the escrow, which is separate from the lawyer’s other accounts and is established for the purpose of holding client funds in accordance with legal and ethical standards. The account is secured so that the funds are protected and used only in accordance with the agreed terms.
2. The buyer and seller sign a purchase agreement for the property. This specifies the terms of the sale, including the price, property description, and other relevant details. Alternatively, they may also sign a contract for future sale or reservation agreement, which is a commitment to enter into a purchase agreement at a future date on agreed terms. They will then sign a solicitor’s escrow agreement with the solicitor, which sets out the terms and conditions for holding the purchase price in a special account, including the circumstances under which the money will be released.

1. The buyer deposits the purchase price into a special escrow account. The money remains in this account until all conditions for its release are met (in particular, the registration of the title to the property in favour of the buyer).
2. Once the title to the property is registered in favour of the buyer, the lawyer releases the purchase price to the seller, otherwise the money is returned to the buyer and the property is retained by the seller.

The attorney’s escrow can also be highly 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. Again, there is an intermediate period and therefore a similar risk as in the case of registration of the ownership right in the Land Registry.

Please note that the real estate acquisition tax has been abolished and the effective date in this respect is 31 March 2020. For more information, see the article Abolition of real estate acquisition tax.