Jan 02, 2023

What to Look Out for When Entering Into a Reservation Contract for Purchase of Property in Czechia

Daniel Kotula

Daniel Kotula

I can say from experience that a reservation contract for the purchase of a property is as important as a purchase contract, but it’s often the case that buyers do not pay as much attention to this contract.

This does make some sense, as the buyer only wants to secure the purchase with his signature and the real estate agency is the mediator who drives everything to the earliest possible conclusion.

Therefore, the buyer is sometimes surprised by the conditions into which he or she is then pushed in the purchase contract. A proper reservation contract must have two characteristics:

  • the seller must also clearly agree to the terms in the reservation contract, 
  • the booking contract must clarify all the material terms of the sale so that there are no disagreements before the purchase contract is concluded.

Let’s take a look at what a proper reservation contract for the purchase of an apartment, house or land in the Czech Republic should look like.

 

Types of reservation contracts in the Czech Republic

You will come across the following contracts:

A contract concluded only with a real estate agent

According to a number of decisions of the Czech Supreme Court, both the seller and the buyer must commit to the purchase contract in the reservation contract – otherwise the provisions of such a reservation contract are not valid.

A reservation between a prospective buyer and a real estate agency lacks any meaning for the prospective buyer. As a rule, this type of contract is used by real estate agencies that do not have an intermediary contract with the seller.

They just wait for someone to put down a deposit and then go to the seller saying that they have found a buyer and try to convince him to sell the property to that particular buyer.

Often the deal fails, and the deposit is returned to the buyer in the best-case scenario. In the worst-case scenario, however, it has to be claimed back in court. I strongly recommend not to conclude this type of contract.

 

A contract concluded only with a real estate agent, with the seller also being named in the contract and the real estate agent signing for the seller on the basis of a power of attorney

This option is already better, there is a high probability that the real estate agent has an exclusive brokerage contract and a mandate to act for the seller.

However, the problem is that these booking agreements are usually simplistic and do not cover all aspects of the sale that should be agreed with the seller. These contracts are used by the major Czech real estate networks and take the form of a standardised form.

 

A contract concluded with a real estate agency and with the seller in person

Such a contract is ideal for all parties, the sale is confirmed by the seller’s signature and there is a high probability that everything will work out. At the signing, you also have the opportunity to discuss your questions with the seller and fine-tune the process. 

Terms and conditions of the booking contract 

Purchase price

It should be clear what all the purchase price includes. In particular, whether the price includes the estate agent’s fee and any furnishings for the property. For equipment, if it is valuable and you have agreed that it will be part of the purchase, I recommend including an inventory of the equipment in an attachment to the booking contract.

The specification of the purchase price should be for condominiums with the quantification of the annuity, for development projects with the quantification of the work for client changes, etc.

Seller’s obligations

The first obligation is to sign the purchase contract by a certain date, usually 1 month from the signing of the reservation contract in case of self-financing, 1.5 months in case of mortgage financing. The second obligation of the seller is to ensure that there are no restrictions on the property in question that would either devalue the property or prevent the transfer of the property.

If there are any restrictions on the title, a procedure for dealing with them should be described in the contract. Typically, this will be a lien on the seller arising from his mortgage.

Another obligation of the seller is to provide you with a certificate from the property management that the property is debt-free to the HOA or cooperative before signing the purchase contract. In the Czech Republic, when you buy an apartment, all debts related to the property are transferred to the buyer.

And the last, very important obligation is to cooperate in the conclusion of a mortgage agreement with the bank providing the buyer with a mortgage loan. The seller may not be keen on signing a mortgage agreement and it is advisable that he or she is aware of this when signing the reservation agreement.

Handover date

Another detail that should not be missing from a proper reservation agreement is the handover date, when the seller agrees to hand over the property and the buyer agrees to take possession. This date is usually 5 to 10 working days after the registration of the ownership right in the Czech Land Register in favour of the buyer.

However, if the seller requires more time, he may require more time. This is relatively common, and it is a good idea to agree this in advance. 

Payments and custody

The booking contract should have specified the method of payment of the purchase price and the date of payment of the purchase price. The full amount should certainly be held in escrow throughout the transfer of the property and subsequently paid out of escrow to the seller once the title has been successfully transferred to the buyer, while the property will be free of any restrictions on title associated with the seller. Here, particular attention should be paid to the escrow money.

I certainly do not recommend escrow with a real estate agency, although some Czech real estate agencies promote it. Bank escrow is the safest, but attorney or notary escrow is also acceptable. You can also choose the method of escrow directly in the contract.

A number of other aspects of the purchase need to be addressed in the reservation contract. These include the term of entitlement to the realtor’s fee, determining the party who pays the transfer costs, penalties for breach of contract, setting a reasonable escrow amount, and more.

 

 

Are you selling a property and want to take the hassle out of the transaction? Put the sale in the hands of our experienced real estate brokers. At Kotula Real Estate Agency, we will guide you through the entire process and make sure you get the maximum amount for your property. Contact us!

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