What debts are transferred to the purchaser of the dwelling unit?

Property prices are starting to fall, albeit slowly, but still. If you are going to buy an apartment or a cooperative share, you should be cautious, because you acquire not only rights but also obligations. For example, the obligation to repay the debts of the previous owner. How can this be avoided?

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In our law firm we have encountered several times the question or the need to resolve a situation where a new owner of a residential unit was approached by the committee of the unit owners’ association with a request or a call to pay the debts of the previous owner. If it was a few thousand, it may have seemed like a marginal item in the context of the total purchase cost. However, it is not uncommon for debts to run into tens of thousands of crowns and such a payment will hurt if the purchaser does not count on it in advance.

By the time such a moment arrives, it is usually too late to deal with it. It is therefore a good idea to know the legal provisions in this respect and to try to prevent such situations. Often it is a matter of ignorance of the regulations or inattention when signing contracts on the part of the buyer and, unfortunately, sometimes it is also a matter of intent or dishonesty on the part of the seller.

Buying a property?

Reservation contracts, contractual penalties and invalidity of the purchase contract are among the most common scares of our clients. Debts inherited from the previous owner can also cause wrinkles on their forehead. However, we are able to prevent this as well, as we pay special attention to contractual documents. Let us draw up the purchase contract and pass many of the problems on to you.

Tip: Sufficient information and thorough checking – this is what most sellers and buyers are already looking out for. In the end, however, the biggest complications come from what they couldn’t see or overlooked – and that’s the legal risks. Read our e-book on selling property to not only know about the pitfalls of buying or selling a property, but more importantly, how to prevent them.

The amendment to the Civil Code brought a change

Not so long ago, an amendment to the Civil Code came into force, which explicitly states that the debts that pass to the purchaser include payments for the management of the house and for services related to the use of the unit, as well as advances for this performance. The condition is that theoriginal owner had suchdebts and the acquirer could have discovered this fact.

We can distinguish between two contributions to the management of the house, namely:

  • payments for the day-to-day running of the house (e.g. refuse collection, electricity payments covering the lighting of the common parts of the house, house insurance, lifts, etc.),
  • payments to the so-called repair fund (money mainly earmarked for repairs and renovation of the house). Where the house is being saved for major repairs, such as a new façade or a complete renovation of the cellars, these payments or debts can amount to a very significant amount.

However, the law specifically excludes the responsibility or obligation of the house manager to settle the contributions and advances related to the use of the dwelling.

It is therefore primarily a matter of contractual agreement that the debts are settled in advance or transferred to the new owner of the flat with his full knowledge.

The original owner should provide a certificate from the administrator (i.e. the JVU committee or an external apartment building administrator) stating the amount of the debts or that there are none.

Relatively newly, the acquirer also has the possibility (with the consent of the original owner) to request a certificate from the building manager. If the administrator does not issue such a certificate, or if the real state of the debts does not emerge from it, then it is assumed under the law that the new owner could not find out the amount of the debts. In such a case, the debts would not be transferred to the purchaser.

Transfer of debts within a housing association

In the case of a housing cooperative, it is practically not the case that the acquirer acquires debts of which he had no knowledge together with the share in the cooperative. The transfer of a share does not take place without the consent of the cooperative, which usually ensures that everything is done properly and that a certificate of debt-free status or, conversely, of the amount of debts is issued. There is therefore a slight advantage in buying a cooperative share. However, everything is primarily a question of setting up contracts correctly, communication with the cooperative (or the SVJ committee) and careful control by a lawyer.

Tip: Buying an apartment whose original owner is in foreclosure requires special caution. Is it better to stay away from such a purchase, or is it possible to buy such an apartment without any worries? What to look out for in such a situation is described in our article.

From law practice:

Mr. Stanislav contacted our law firm with a request to mediate the purchase of an apartment in Prague Jinonice. The original owner of the apartment unit was also a member of the SVJ committee and provided a certificate of his debt-free status on his behalf. The transfer of the unit took place in order, however, Mr Stanislav was subsequently approached by the new SVJ committee, stating that the previous owner’s debt amounted to CZK 40,000. Mr Stanislav subsequently discovered that the members of the committee had agreed with the previous owner to issue a certificate of his debts on behalf of the committee, but had subsequently failed to check what the certificate looked like.

The original owner had tried to conceal the debt in this way in order to speed up the sale of the flat and obtain the asking price, but he had no idea that he would ultimately be liable for the debt himself, as the new purchaser could not have known the amount of the debt.

However, the transfer of debts would also occur in this case if the acquirer knew about the debts or learned about them from other sources (for example, from neighbors visiting the house) and the house manager would prove this “knowledge” in the eventual recovery of the debt (typically by witness testimony of a neighbor).

Settlement of contributions prior to purchase

The simplest situation is, of course, one where there are no debts or overpayments associated with the flat. If the original owner discovers that he or she has arrears associated with the repair fund, for example, there is nothing easier than to pay the exact amount and ask the JVU committee for a certificate of debt-free status.

Settlement of contributions in the purchase contract

It is extremely important for both the seller and the buyer to be aware of the exact amount of the debts (or, conversely, overpayments) and to agree on their settlement. Ideally, they will do so directly in the contract of sale.

As we have indicated, in principle, not only can the original owner be in debt, but also overpaid.

If the seller has saved e.g. CZK 50,000 in a repair fund, this may affect the price of the apartment (in the sense of increasing it). As we mentioned above, it is important to settle the amount directly with the buyer, because the HOA is not obliged to reimburse the seller for what he has already paid into the repair fund.

Similarly, it is important to settle the seller’s debts to the HOA in the purchase contract, as they will be transferred to the buyer with the transfer of the unit, if the seller knew about them. If he did not know about them, then the HOA can either pay the debts itself, but it can also recover them from the seller. Therefore, knowledge of the negative balance is important for both parties, but above all it should be of interest to the buyer. Beware, however, if the buyer did not know about the debts because he did not take any interest in them.

If he forgot about this part of the property purchase and did not get the certificate from the HOA, it is his responsibility and any debts of the seller will be transferred to him.

If the purchaser discovers that there are debts attached to the apartment, he should ideally negotiate for a reduction in the purchase price as he will have to pay this debt.

It is very important for the seller to have an express provision in the purchase agreement that the debt on the buyer’s contributions has been paid by way of a reduction in the purchase price, which will preclude the buyer from healing on the seller for the same reason in the future. Also, such a provision will give the buyer the ability to recover the amount of that debt from the buyer in the future if the HOA takes advantage of the language of the statute and pursues the debt against the seller as guarantor.

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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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