| After almost 10 years of substantial change in Czech society which were triggered by the Velvet Revolution, various legal issues in the Czech Republic remain unresolved. One such issue, important for real-estate developers, banks, investors and all others involved in the real estate business, is mortgage foreclosure. Traditionally, mortgages have been governed by the Czech Civil Code, as well as other laws and regulations which set forth the conditions for establishing a mortgage and registering it with the Cadastral registry. In addition, the 1991 Czech Commercial Code provided guidance for securing liens, mortgages, or encumbrances in cases where the creditor may later sell the mortgage, either by public sale or in some other manner, if the parties have so agreed. These provisions have sparked a debate as to whether public sales or other forms of foreclosure are possible under the Commercial Code. Earlier legislation had provided that liens on movable property could be foreclosed through public auctions, whereas liens on immovable property could be foreclosed through court-organized public auctions. Thus, where a mortgage loan was secured by immovable property, a mortgagee had to file a claim with a court, which then requested that the debtor pay the amount due. If the debtor did not pay the amount owed, the mortgagee could then request a foreclosure action organized by the court. This procedure was not time or cost effective, and presented a significant burden for real estate financing and Czech banks which subsequently had to carry a larger number of bad debts on their books. In the beginning of 1999, the government, aware of these problems, presented Parliament with a draft of new legislation which provided rules for public auctions of both movable and immovable property. The draft of the Act on Public Auctions provides that a public auction may be organized only by a physical or legal entity licensed by the government. These entities are required to maintain liability insurance and the draft law limits the auctioneers compensation to a maximum of CZK 1,000,000. Any legal entity or any person over the age of 18 may bid in an auction. The state may also bid in an auction. The law prohibits persons affiliated with the bankrupt from bidding. Therefore, the debtor cannot use related parties to protect itself. To attend the auction, bidders must pay an auction fee, which may be up to 30% of the bidding price and may not exceed CZK 1,500,000 (though this amount increases by 10% if the bidding price exceeds CZK 5,000,000). In cases set forth by the law, certain assets are excluded from the auction, i.e. (a) intellectual property rights, (b) assets which are subject to a state lien or assets subject to pre-emptive rights (such as co-ownerships), (c) flats and other real property where tenants may have priority purchase rights under the law, or (d) movable or immovable property where others may have pre-emptive rights on the property. There are extensive rules relating to auction organization, and if a bidder can prove that it has a priority right to an item being auctioned prior to the auction, the bidder receives priority with regard to that object in the auction. Ownership is transferred with the banging of the gavel, and the winning bidder must pay the purchase price within 10 days, though if the winning price exceeds CZK 5,000,000, the bidder has thirty days to pay. Bank guarantees are accepted as well. Any easements and liens on the property are transferred to the winning bidder. Where a debtor has not agreed to a non-voluntary auction, an auction should be organized on the basis of an enforceable court decision, an award in arbitration, or a notarized agreement of the debtor (in which the debtor agrees that the agreement will be enforceable against him). This auction is organized by creditor(s), who may be mortgage creditors, creditors who may have the right to retain or take possession of the property, the internal revenue office, the social security administration, and the health care insurance agencies. Each creditor seeks to settle their claims through the auction. The debtor, any member of his family, directors or officers of the debtor, or any other parties representing the debtor may not bid at the auction. The draft includes extensive rules relating to the organization of a non-voluntary auction, similar to the rules for voluntary auctions. Within ten days after the proceeds from the auction are received, such proceeds are distributed to those creditors who registered their claims before the auction. If their claims are not settled out of the auction's proceeds, the proceeds are distributed in the following order: (a) claims secured by a priority lien or retention rights, (b) claims relating to construction mortgages, (c) liens which eliminate ownership transfer rights, which are settled according to the time they were established, and (d) taxes, fees, insurance and other payments which have been due for at least three years prior to the date of the auction, provided that these have been registered by the creditors. Although the draft of this legislative measure has been criticized by real estate professionals, it is widely thought that the concerns of these professionals will be addressed quickly, so that this much-needed legislation can be adopted as soon as possible. |
Mortgages and Public Auctions in the Czech Republic
This article was edited and reviewed by FindLaw Attorney Writers | Last reviewed March 26, 2008
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