There’s no rose without thorns and no transaction without risks

Can you rely only on a record in the Land Register when buying real estate?

It is not difficult to ascertain the owner of a property or to determine whether the property is encumbered, for instance by a lien or a ban on appropriation. You can find this information on the website of the Czech State Administration of Land Surveying and Cadastre, or you can obtain a title deed at a Czech POINT counter, a cadastral office, a notary or by remote access available for registered users (this is a paid service). But can you be certain that the record reflects reality?

The principle of material publicity

Entries in public registers / lists are generally trustworthy. This is the so-called principle of material publicity, which protects our good faith, i.e. “one’s internal belief that one is not acting unlawfully,”[1] that the data indicated in a public list are true and complete. But this is not always the case, as sometimes the entries in public lists or registers do not correspond to reality, i.e. the factual situation.

 

Good faith

If an entry recorded in a public list / register does not correspond to the actual legal status, then the recorded (registered) status shall benefit the person who acquired the right in rem in good faith from a person entitled to do so according to the registered status.”[2] In other words, if the buyer is in good faith that the entry in the Land Register is true, i.e. that the registered owner is the true owner of a property with all rights to freely dispose of it in any way, then in case of a transfer for consideration (not by donation) it is possible to acquire ownership of a property from an unauthorized person, i.e. from a person who according to the actual legal status (not according to the registered data) is not actually the owner. And all you need to have is good faith. How simple!

Good faith ain’t the panacea it once was

Sometimes, however, even good faith is not a panacea, and the transfer of ownership from an unauthorized owner, even for a consideration, does not actually take place. The Supreme Court examined this issue in more detail and defined the conditions under which the buyer’s good faith does not apply. The Supreme Court first recognized that when the buyer’s good faith was to be assessed, then it was necessary to assess “whether the contracting party, with ordinary (usual) precaution that can be expected from each person, did not have, or could not have reasonable doubts that the data recorded in the public register / list corresponded to the actual legal status,” but it emphasized that this routine caution did not mean to “actively investigate whether the status of entries in a public list was in line with the actual legal status”.[3] Simply put, if I act with the belief that all legal action (such as concluding a purchase contract for a house and the related transfer of ownership) is in line with the law and I do not have any doubts arising from the recorded entry on the ownership deed, then the ownership title passes to me, even if the officially registered owner was not in reality the factual owner of the house in question and therefore did not have the legal right to transfer the related ownership title.

Nevertheless, there is an exception to this rule, where good faith is no longer sufficient to remedy, let’s say, defects, if there are objective reasons that raise doubts as to whether the entry in a public list in fact reflects reality. The Supreme Court stated two specific objective circumstances apparent from the recorded data in the Land Register that should alarm a prudent buyer (and based on which one should carry out further investigations on one’s own initiative), namely a dispute note (where the entitled person seeks removal of the discrepancy between the registered state and the actual state and proves enforcement of their right in court proceedings) or a marked seal (an indication that proceedings have been initiated to register a dispute note). The buyer should carry out an active investigation even if the buyer discovers that the procedure for determining ownership was in progress but was halted because the lawsuit was withdrawn. Nevertheless, this will not prevent a new lawsuit from being filed and decided on its merits.

 

Pay attention to the warrant for distraint

Another nightmare scenario that you should watch out for, often not recorded in a public list, is defects of a legal action that cause its absolute invalidity (absolute in the sense that it cannot be remedied), for instance in the case of a warrant for distraint and the so-called general inhibitory, when the debtor is prohibited from disposing of the debtor’s property. Therefore, if you conclude a purchase contract for a house with a seller who is in foreclosure, and you have “only” obtained a title deed from the Land Register, which does not contain any reference to a ban on disposing of the property, the transfer of ownership will not occur due to the absolute invalidity of the transfer itself and of the purchase contract. The Supreme Court concluded that protection of the buyer’s good faith “does not apply to legal actions which are absolutely invalid due to violation of the prohibition to dispose of property, which arises from the law.”[4] According to expert commentaries, cases where the principle of protection of good faith does not apply include “lack of will, lack of autonomy or prohibition to dispose of things arising from the law or a decision of a public authority.”[5]

In such a case, for reasons of caution and legal certainty, all you have to do is play detective and check the seller in the records of foreclosures (a paid service), as it follows from the practice and case law of the Supreme Court that it is no longer possible to rely solely on the accuracy and completeness of data entered in public lists/registers.

 

Should you require more information, please do not hesitate to contact Kristýna Dubová Helešicová or your contact person in our law firm. 

 

This document is a general notice only and does not constitute legal advice in a specific matter.

[1] Decision of the Supreme Court No. 21 Cdo 4540/2018 dated 25 June 2019
[2] Section 984(1) of Act No. č. 89/2012 Coll., Czech Civil Code, as amended
[3] Decision of the Supreme Court No. 21 Cdo 4540/2018, Op.cit.
[4] Decision of the Supreme Court No. 22 Cdo 1980/2020 dated 9 December 2020
[5] Vrzalová, L. in Spáčil, J. and coll., Civil Code III. Rights In Rem (Articles 976-1474). Commentary, 1st edition, Prague: C.H. Beck, 2013, pg.  36-38

 

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