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Why not underestimate the contractual lien?

When you hear the word lien, you may think of your mortgage and the apartment you struggled to buy and will be paying off for years to come. But liens are far from limited to real estate. And it doesn’t even have to be created by contract. Did you know that they can be ordered by a court or administrative authority, for example? Let’s take a closer look at the whole issue.

Rodinné domy se smluvním zástavním právem
8 minutes of reading

Chapters of the article

What is a lien?

In general terms, a lien can be defined as an institution through which another person can acquire rights to a thing that he does not own. The purpose of the pledge is to ensure that the creditor recovers his claim, usually of a pecuniary nature. The pledge then secures that claim in such a way that, in the event of the pledgee’s failure to fulfil its obligations under the contract, the creditor may seek to sell the pledged item and thus satisfy its claim using the funds it receives from the sale. However, the sale itself is usually the last resort. In most cases, an agreement between all parties involved is preferred.

There is nothing to prevent the pledge from being applied to a contingent claim (the creation of which is dependent on the fulfilment of a condition precedent) or a future claim (which does not yet exist and is yet to arise).

Tip: We’ll advise you on how to deal with overdue debt recovery so you can get your money back as soon as possible. What is the procedure and what to look out for? We offer the answer to this in our next article.

How is a lien established?

It is common to establish a lien by means of a pledge agreement, but a lien can also be created against the debtor’s will. In such a case, the right is theoretically created either directly by law or if the court or administrative authority so decides.

Tip: The Civil Code deals with statutory liens in more detail, for example, in the provisions establishing liens securing claims relating to leases or claims of the carrier.

The most common way of creating a lien is therefore a pledge agreement. Particularly in the case of real estate, it pays to pay very careful attention to its content and consult a lawyer. Any ill-considered and incorrectly worded clause can lead to you losing your property in the extreme. It is essential that the mortgage agreement is in writing.

In such a case, the right itself does not arise from the conclusion of the contract, but only from its registration in the Land Registry. In the case of multiple creditors, the entry in the public register gives the strongest position to the one whose claim is secured by the pledge entered in the public register and in the first place, as his claim will be satisfied first.

Tip: Do you need to submit a proposal for entry into the Land Registry? We will help you with the drafting of the application so that everything is in order the first time and you do not miss important deadlines or lose money.

It is very important to specify as precisely as possible in the pledge agreement what constitutes the pledge. In the case of a pledge over immovable property, the pledge must be defined precisely according to the information recorded in the Land Registry. Another important detail is to specify the specific debt secured by the pledge. It is a good idea to specify in detail the specific obligation from which the debt arose. Later on, confusion could arise as to the extinction of the debt and the associated extinction of the pledge. The pledge agreement should also specify what part of the debt the pledge secures. The pledge agreement may specify to what extent the creditor can be satisfied from the pledge on realisation. It is therefore possible to contractually agree that the pledge covers only the principal or that the entire debt is secured, including the accessories, i.e. interest and possible contractual penalties, if this is expressly provided for.

Are you dealing with a property transfer with a mortgage?

We will assess the risks of the situation and advise you on the best solution. In addition, we can provide a complete contractual and legal service related to the sale or purchase of the property within 48 hours. Professionally, flawlessly and online.

In the case of movable property, the creation of the pledge relationship itself may be completed by the next step, which is usually:

  • handing over the item to the pledgee
  • handing over the item to a third party
  • marking the property with a sign
  • entry in the register of pledges.

Tip: The lien recorded in the so-called public list is most often encountered in the case of the aforementioned land register. However, the law is also familiar with liens entered in the aviation register, the maritime register or the database of trademarks and industrial designs. In this case too, the right is created only by the entry in the register, not by the contract itself.

What may be covered by a contractual lien?

A pledge can be on all things that can be traded. They can be tangible or intangible, movable or immovable.
Typically, however, we encounter a lien on real estate. Specifically, it tends to be a pledge:

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.

What is the case with sub-constitutional law?

Subconstitutional law is relatively rarely used. Perhaps because its whole construction seems a bit complicated. A sub-pledge arises from the pledge of a claim secured by a pledge, if the pledge is a chattel.

As an example, consider Mr Železný, who is a creditor of Mr Modrý. Mr. Modrý owes Mr. Železný money and this claim of Mr. Železný is secured by a lien on Mr. Modrý’s flat. However, Mr Železný is also a debtor of Mr Chmelar, which he insures by pledging his claim against Mr Modrý. This makes Mr Modrý a sub-debtor and Mr Chmelař a sub-creditor. The consent of the owner of the original pledge is not required, but it is necessary to notify him of this fact. The sub-pledge creditor can then achieve the realisation of the original pledge instead of the original pledge creditor. In practice, we do not come across these constructions very often, but it is good to know about them.

What happens if the original debt is not met?

If the debt comes due and the debt is not paid, the creditor can satisfy itself by foreclosing on the collateral. This can usually be monetised at a public auction or by sale under a special law, for example by judicial sale of the pledge. However, it is also possible to negotiate a sale in another way with the debtor. The pledge may be monetised no earlier than thirty days after the creditor has notified the debtor of the commencement of the enforcement of the pledge.

Tip: Foreclosure by sale of the property is a very crucial step that should only be taken as a last resort if other foreclosure options have failed. Which properties can be affected by foreclosure and under what circumstances can it affect the debtor’s own home in which he or she lives? Find out in the next article.

What are the ways to delete a lien?

The following methods are used to delete a lien from the Land Register:

  • by taking over the loan,
  • by transferring the pledge to another property,
  • repayment of the loan from the purchase price (mortgage).

You will have to submit a petition for deletion to the Cadastral Office, together with a confirmation of the termination of the pledge. This must have certain requirements, including a certified signature of the lender. Therefore, the best solution is to use the form of the Czech Land Survey and Cadastral Office.

What happens after the debt is repaid?

In case the client repays the entire loan related to the property, the client will receive a certificate from the bank confirming the termination of the lien. This certificate is always issued in writing. Once this certificate is received by the land registry office, the latter is obliged to delete the title deed of the person who has encumbered the property with this right. The entire process takes place within thirty days of the date of receipt of the certificate and the request for deletion.

If the loan is extinguished, the pledge is also extinguished. However, not necessarily. Indeed, in most cases, if the borrower satisfies the debt secured by the pledge, the pledge becomes meaningless and is extinguished. However, it is sometimes possible to negotiate a so-called released pledge (in the Land Registry). This works in such a way that the holder (usually a bank) receives its claim back, but lends a new amount immediately. This new debt is then not secured by a new pledge, but the old – released – pledge is used. This is particularly advantageous in situations where several mortgages are tied to the property. In the event of problems, they are dealt with in the order in which the pledges were created. The new debt with the old pledge can thus gain priority.

Tip: The procedure for the deletion of a lien is a deposit procedure, so you should expect an administrative fee of CZK 2,000.

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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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