Quick Overview
- A contractual lien arises based on a lien agreement, but for real estate, the agreement alone is not sufficient—the right arises only upon registration in the real estate registry.
- A lien may secure a current, future, or contingent debt.
- If the debtor fails to make payments, the creditor may proceed to foreclose on the collateral after meeting the legal requirements.
- After the debt is repaid, it is necessary to file a motion to remove the lien; otherwise, the lien may continue to complicate the sale or refinancing of the property.
Are you dealing with a lien agreement, the transfer of a property subject to a lien, or the removal of a lien? We’d be happy to help you with everything related to buying or selling a property.
What is a lien?
From a general perspective, a lien can be defined as a legal mechanism through which another person may acquirerights to an asset they do not own. The purpose of a lien is to ensure thatthe creditor recovers their claim, typically of a monetary nature.
A lien secures this claim in such a way that, in the event the debtor fails to fulfill their obligations, the creditor may request the sale of the pledged property and satisfy their claim using the proceeds from the sale. The sale itself, however, is usually a last resort.An agreement among all parties involved is generally preferred.
There is nothing to prevent a pledge from also applying to a conditional claim (the existence of which depends on the fulfillment of a suspensive condition) or a future claim (which does not yet exist and is only to arise in the future).
In practice, we often encounter situations where the debtor views the lien merely as a “formality for the bank.” In reality, however, it is a very powerful security instrument. Once the security interest is properly established and the debt remains unpaid, the creditor may have a significantly stronger position than other creditors, and the debtor may face the risk of having their assets sold.
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Tip: We’ll show you how to collect overdue debts so you can get your money back as soon as possible. What’s the process, and what should you watch out for? We’ll answer these questions in our next article.
How is a lien established?
Typically, a lien is established througha lien agreement; however, a lien may also arise against the will of the lien debtor.
In such a case, the right arises either directly by law (statutory lien), or if so decided by a court (judicial lien), or by an administrative authority (lien arising from an administrative decision).
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Tip: The Civil Code addresses statutory liens in greater detail, for example, in the provision establishing a lien to secure claims related to leases or claims by carriers.
The most common way to establish a lien is therefore through a lien agreement. Especially when it comes to real estate, it is worth paying very close attention to its content and consulting with a lawyer. Any ill-considered or incorrectly worded provision could, in extreme cases, result in you losing your property. The pledge agreement must be in writing.
In such cases, the lien itself is not created by the signing of the agreement, but only upon itsregistration in the real estate cadastre. Similarly, the removal of a lien from the land registry requires the fulfillment of certain conditions, such as filing a motion to remove the lien and providing confirmation of the lien’s termination.
It is precisely at this stage that it pays not to sign a pledge agreement without reviewing it first. A single imprecise phrase can determine what debt the pledge actually secures, the order in which the creditor will be satisfied, and whether the pledge can be removed later without complications. If you are buying, selling, or encumbering a property with a lien, we will review your agreement and the application for registration in the land registry and alert you to any risks before you sign.
In the case of multiple creditors, an entry in the public registry gives the strongest position to the creditor whose claim is secured by a lien registered in the public registry and listed first, because that creditor’s claim will be satisfied first.
In a pledge agreement , it is very important to specify as precisely as possible what is being pledged. In the case of a lien on real property , the pledged property must be defined exactly in accordance with the information recorded in the real estate cadastre.
Another important requirement is to specify the specific debt secured by the lien. It is advisable to detail the specific obligation from which the debt arose. Otherwise, ambiguities could later arise regarding the extinction of the debt and the associated extinction of the collateral.
The pledge agreement should also specify what portion of the debt the pledge secures. The pledge agreement may stipulate the maximum amount the creditor may recover from the pledge upon its liquidation. It is therefore possible to contractually agree that the pledge covers only the principal, or that the entire debt is secured, including ancillary obligations, i.e., interest and any contractual penalties, provided this is expressly stipulated.
The most common mistake we see in pledge agreements is an overly broad definition of the secured debt. The debtor sometimes believes that the pledge covers only a specific loan, but the agreement may be drafted in such a way that it also secures future obligations, incidental charges, contractual penalties, or other claims of the creditor. That is precisely why it is important to read not only the principal amount but also the definition of the secured claim and incidental charges.
Not sure if the pledge agreement secures more than you originally intended? Send it to us for review. We’ll verify whether the collateral is properly defined, whether it corresponds to the secured debt, and whether the agreement contains any provisions that could harm you in the future.
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In the case of movable property, the creation of the security interest may be finalized only by a subsequent step, which is typically:
- delivering the item to the secured creditor
- delivering the item to a third party
- marking the item with a sign
- entry in the pledge register.
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Tip: A lien entered in a so-called public registry is most commonly found in the land registry mentioned above. However, the law also recognizes liens entered in the aircraft registry, the maritime registry, or the database of trademarks and industrial designs. In this case as well, the right arises only upon entry in the registry, not by the contract itself.
What can a contractual lien apply to?
Any property that can be traded may serve as collateral. This may include both tangible and intangible property, as well as movable and immovable property.
Typically, however, we encounter a lien on real estate. Specifically, the following are often used as collateral:
After the lien has been extinguished, an application must be filed to remove the lien from the land registry, to which a confirmation of the lien’s extinction must be attached.
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Tip: The topic of liens naturally goes hand in hand with the topic of mortgages. Read our guide to mortgages. You’ll learn how liens work in this context and what to watch out for.
What is a sub-pledge?
A sub-lien is used relatively rarely. Perhaps this is because its entire structure seems a bit complicated. A sub-lien arises from the pledging of a claim secured by a lien, provided that the collateral is a tangible asset.
As an example, let’s imagine Mr. Železný, who is a creditor of Mr. Modrý. Mr. Modrý therefore owes Mr. Železný money, and this claim of Mr. Železný is secured by a lien on Mr. Modrý’s apartment. However, Mr. Železný is also a debtor to Mr. Chmelař, which he secures by pledging his claim against Mr. Modrý. As a result, Mr. Modrý becomes a sub-debtor and Mr. Chmelař a sub-lien creditor. The consent of the owner of the original collateral is not required, but it is necessary to notify him of this fact. The sub-mortgagee can then realize the original collateral in place of the original mortgagee. In practice, we do not encounter these arrangements very often, but it is good to be aware of them.
What happens if the original debt is not repaid?
If the debt becomes due and the debtor fails to pay it, the creditor may satisfy the debt by realizing the collateral. This is typically done through a public auction or, alternatively, by sale under a special law, such as a judicial sale of the collateral. However, it is also possible to agree with the debtor on a different method of sale. The collateral may be sold no sooner than thirty days after the creditor notifies the debtor of the commencement of enforcement of the security interest.
Tip for article
Tip: Foreclosure through the sale of real estate is a very serious step that a bailiff should take only as a last resort, if other enforcement options have failed. Which properties may be subject to foreclosure, and under what circumstances can it affect the debtor’s own home where they live? You’ll find out in the next article.
What are the ways to remove a lien?
A lien is removed from the real estate registry:
- upon assumption of the loan,
- by transferring the lien to another property,
- repayment of the loan from the purchase price (mortgage).
You will need to submit a request for deletion to the Land Registry Office, along with confirmation of the termination of the lien. This must meet certain requirements, including a certified signature from the creditor. Therefore, the best solution is to use the form provided by the Czech Office for Surveying, Mapping, and Cadastre.
We know from experience that people often consider the repayment of the loan to be the end of the matter. However, a lien registered in the cadastre does not usually disappear on its own. If the owner does not file a request for deletion or does not provide the proper confirmation from the creditor, the lien may continue to encumber the title deed and complicate the sale, gifting, or refinancing of the property.
Do you need to remove a lien from the land registry? We’ll prepare a motion to remove the lien, verify the creditor’s confirmation, and ensure the document meets all necessary requirements, including a certified signature. This will help you avoid having your motion denied, unnecessary delays, and repeated payment of administrative fees. Just send us a message.
What happens after the debt is repaid?
If the client repays the entire loan associated with the property, the client will receive a confirmation from the bank that the lien has been extinguished. This confirmation is always issued in writing. Once the Land Registry receives this confirmation, it is required to remove the lien from the title deed of the person who encumbered the property with this right. This entire process takes place within thirty days of the date the confirmation and request for removal are received.
If the loan is extinguished, the lien is also extinguished. However, this is not strictly necessary. In most cases, it is true that if the debtor repays the debt secured by the lien, the lien loses its purpose and is extinguished. Sometimes, however, it is possible to arrange for a so-called “released lien” (in the land registry). This works such that while the holder (usually a bank) recovers its claim, it immediately lends out a new amount.
This new debt is then not secured by a new lien, but the old—released—lien is used instead. This is particularly advantageous in situations where several liens are attached to the property. In the event of problems, they are resolved in the order in which the liens were created. A new debt secured by the old lien can thus take priority.
Summary
A contractual lien is a powerful tool for securing a debt. It gives the creditor the option to satisfy their claim from the pledged property if the debtor fails to meet their obligations. You will most commonly encounter it in connection with real estate, mortgages, loans, or business obligations. The pledge agreement must precisely specify the pledged asset, the secured debt, and ideally also the extent to which the creditor may satisfy their claim from the pledge. For real estate, the lien arises only upon registration in the real estate cadastre. If the debtor defaults, the creditor may proceed to liquidate the collateral after notifying the debtor of the enforcement of the lien and the expiration of the statutory period. After the debt is repaid, the lien must be removed, typically by filing a motion for removal and obtaining the creditor’s confirmation of the lien’s termination. An unclear agreement or a failure to remove the lien can significantly complicate the sale, gifting, or refinancing of the property.
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Tip: The procedure for canceling a lien is a registration procedure, so expect to pay an administrative fee of 2,000 CZK.
Frequently Asked Questions
Can a lien be established even without the owner's consent?
A contractual lien generally does not arise without the consent of the owner of the collateral, as it is based on a lien agreement. However, there are other types of liens, such as statutory liens, judicial liens, or those established by a decision of an administrative authority. These may arise through means other than a voluntary agreement.
How can I find out if there is a lien on a property?
You can check for any liens on a property by reviewing the title deed in the land registry. You will find this information in Section C, which lists any encumbrances on the property. Therefore, it is always necessary to review the title deed before purchasing a property.
Can a property with a lien be sold?
Yes, a property subject to a lien can be sold, but the lien does not automatically expire upon sale. In practice, this is most often resolved by using the sale proceeds to pay off the loan, assuming the loan, or transferring the lien to another property. All of these arrangements must be clearly outlined in the contracts.
Who files a petition to remove a lien?
A petition may be filed by a person with a legal interest in the cancellation, typically the property owner. The petition must be accompanied by a document proving the termination of the lien, such as a confirmation from the bank or another creditor.
How long does it take to remove a lien from the land registry?
The Land Registry typically issues a decision in registration proceedings after the waiting period has expired. The entire process usually takes several weeks, provided the documents are properly prepared and the Land Registry does not request additional information or reject the application.
