Stricter business conditions for real estate agents

Until this year, the field of real estate brokerage lacked a separate law. As a free trade, real estate brokerage could be carried out by virtually everyone, regardless of education or experience, and without any liability insurance. On 3 March 2020, Act No. 39/2020 Coll., on Real Estate Brokerage and on Amendment to Related Acts (the “Real Estate Brokerage Act”) came into effect, finally specifying requirements for real estate agents and laying down other obligations that they must comply with.

Therefore, if you plan to buy or sell a property through a real estate agency or rent an apartment or commercial premises, read carefully what news the Real Estate Brokerage Act brings.

What is real estate brokerage and what contracts does the law apply to?

According to the Real Estate Brokerage Act, real estate brokerage means any activity whose purpose is to arrange the conclusion of a real estate contract. Anyone who carries out such an activity for profit is then a real estate agent. A real estate contract is a contract whose object is the acquisition of ownership of immovable property (typically a purchase contract or exchange contract), or a contract for the transfer of the right, which is associated with the right to use an immovable thing, an apartment or a non-residential space (usually a so-called “real estate contract”, the “purchase” of a cooperative apartment or a lease, but it can also be a rental). On the other hand, the arrangement of short-term rentals (e.g. through Airbnb) is not considered real estate brokerage.

The new law defines the real estate brokerage contract as a brokerage contract that the real estate agent undertakes to arrange for the parties to conclude a real estate contract. The real estate brokerage contract must be in writing, while the law introduces the so-called relative invalidity in case of non-compliance with the form. Thus, the contract will not be automatically invalid in the event of non-compliance with the requirements, but the objection of invalidity for the lack of form must be raised by the interested party. The real estate brokerage contract must also contain certain other mandatory information, so if you plan to enter into any real estate brokerage contract you should consult a lawyer in advance.

While the new regulation is largely beneficial, it does not explicitly include under the concept of real estate brokerage contracts other unnamed contracts that are commonly used in real estate brokerage, i.e. various reservation contracts or blocking deposit agreements (the so-called reservation fee). In practice, only sellers tend to have a brokerage contract with real estate agencies (not those interested in buying the property). The reservation contract is often concluded with the interested parties, which is both bilateral (interested party – broker) and trilateral (interested party, seller and broker). Due to the absence of explicit regulation in this area, various controversies arise, such as whether a real estate brokerage contract is considered a tripartite reservation contract between the broker, seller and buyer, whose object is no longer mediation but rather confirmation of interest in a contract (and, of course, securing this obligation with a contractual penalty). Considering the reasons and purpose for adopting the new legislation, we tend to conclude that the obligations under the new Real Estate Act should apply (especially in relation to consumers) to these unnamed contracts. However, only the decision-making practice of the courts will show if this will indeed be the case. The solution to this issue will have significant practical consequences, especially in situations where a purchase contract is not concluded or if the real estate agent fails to comply with the obligations under the new Real Estate Brokerage Act and the buyer seeks a refund of the reservation fee.

Real estate agent – professionally educated, insured and irreproachable

Real estate brokerage has now become a so-called “notifiable trade”. Real estate agents must report the notifiable trade no later than 12 months after the law expires (i.e. by 3 March 2021), otherwise, at the end of this period, their authorization to provide real estate brokerage within the original free trade ceases.

Notifiable trades are also associated with increased qualification requirements. In addition to integrity, brokers must have a university degree or higher vocational or secondary education with a school leaving exam and three years of experience in the field.

Real estate agents now also have a legal obligation to arrange liability insurance if they cause damage to the client in the performance of their brokerage activities. The amount of the insurance coverage is set at a minimum of CZK 1.75 million for one claim and CZK 3.5 million for concurrence of multiple claims in one year. This is certainly a positive change, but considering that current housing prices often amount to several million crowns, it is questionable whether the statutory insurance limit of CZK 3.5 million is sufficient.

Escrow – only if you ask!

The Real Estate Brokerage Act expressly prohibits the agent from actively offering the escrow of funds for the purpose of securing the performance of the real estate contract or offering it to someone other than authorised persons (e.g. a lawyer, notary or bank). The only exception to the above rule is a situation where the lead (most often the buyer) submits a written request for escrow to the broker on a separate document. For these situations, the law lays down additional conditions to prevent tampering with clients’ funds:

  • enter into a written escrow agreement with the client;
  • set up a separate escrow account at the bank for each interested party;
  • inform the bank that the owner of the funds in escrow is a third party;
  • receive funds for escrow only by wire transfer;
  • keep a record of each escrow according to the conditions laid down by law.

Obligation of brokers to provide information about defects and other notification obligations

An important positive of the amendment to the real estate law is the obligation of the broker to inform clients about specific defects or encumbrances on the real estate, if he or she knows about them or should know about them. Likewise, the real estate agent must provide information about the amount of his or her commission. If the broker does not provide this information upon the conclusion of the real estate brokerage contract at the latest, you can withdraw from the contract. As a party interested in acquiring title to an immovable property or a right consisting in or associated with the right to use or enjoy it, the broker will hand over to you a statement from the Land Register not older than three business days upon the date of conclusion of the real estate brokerage contract at the latest. If the broker does not hand over this statement to you, you have the right to withdraw from the agreement within 14 days.

Although the Real Estate Brokerage Act sets out some rules that, in theory, should help the market weed out unqualified brokers, only time will tell if that will happen.

If you require further information, please contact Henrieta Hovanová or your contact person in our office.

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