New Real Estate Brokerage Act in Czech Republic starting from July 1, 2020
Czech Real Estate Brokerage Act
On 1 July 2020, a new Act No. 39/2020 Coll., on Real Estate Brokerage and on an Amendment to Related Acts (the Czech Real Estate Brokerage Act), will come into effect. This Act introduces into Czech law a tighter definition of the rules for real estate brokers’ and real estate agencies’ activities, and also stricter conditions for those who want to become real estate brokers. Before this Act came into effect, there had been no act in the Czech legal system that would directly regulate the performance of real estate activities; matters in this area were only dealt with in general in the Trades Licensing Act.
1. Real estate brokerage includes the sale, as well as the lease of real estate
The Act defines real estate brokerage as activities aimed at intermediating the conclusion of a real estate agreement, and also defines the term “a real estate agreement”. The real estate agreement that may involve brokerage includes, inter alia:
(a) an agreement under which the ownership of immovable property is transferred to another (a gift, purchase, or barter agreement);
(b) an agreement providing for the acquisition of a shareholding in a housing cooperative, as well as a shareholding in another commercial company, provided that such a shareholding entails the right to use or usufruct the immovable property, non-residential premises or flat. It also covers the servitude (in Czech: “služebnost”) of habitation, use or usufruct of the immovable property, the construction right, as well as various sorts of obligations established by different agreement types (including unnamed agreements).
Real estate brokerage in Czech Republic will not apply to short-term accommodation (accommodation services under §§ 2326 - 2331 of the New Civil Code) in the form of so-called ‘shared services’, such as Airbnb or Flatio services. At the same time, the exception to the application of this Act to accommodation is expressly provided for.
The law focuses exclusively on real estate brokerage, not on the sale or lease of one’s own real estate (usually development activities).
2. What is real estate brokerage in Czech Republic?
The Act deems real estate brokerage to be the finding of someone who is interested in concluding a real estate agreement with an interested party, whereas this activity usually includes:
a) providing advertising services (mere advertising as such shall not be considered as real estate brokerage, unless it is linked to a commission);
b) the assessment of the condition of the immovable property, and preparation of the asking price;
c) marketing the immovable property;
d) arranging for the viewing of the immovable property;
e) procuring the construction and technical documentation related to the immovable property;
f) intermediating legal services;
g) intermediating escrow in order to ensure the consummation of the real estate agreement.
Conditions for operating as a real estate broker in Czech Republic
The conditions for performing activities as a real estate broker include a clean criminal record and fulfilment of the requirements specified in the Trades Licensing Act for a new regulated Czech trade “real estate brokerage.”
The Czech Real Estate Brokerage Act requires that persons engaged in real estate brokerage be of unimpeachable integrity (i.e. have a clean criminal record). A person who has been “convicted, in a non-appealable manner, of a criminal offense committed intentionally, or a criminal offense committed by negligence, in connection with the provision of real estate brokering activities” is not considered to be unimpeachable under criminal law. Furthermore, the Act details the requirements for unimpeachable integrity of owners and members of statutory bodies of legal entities performing this activity.
DAn important novelty introduced by the Real Estate Brokerage Act into the Trades Licensing Act is the necessity of adequate education, qualification, or experience in the field concerned, for those who want to perform activities as real estate brokers.
3. Real estate brokerage as a regulated trade in Czech Republic
The performance of activities of a real estate broker will no longer be possible on the basis of an unregulated (free) trade, but will become a regulated trade. Those interested in pursuing this activity will therefore have to have:
- a Master’s (university) degree in the field of “Law; Economic branches with a specialisation in economics, finance or marketing and trade, or in the field of education in Construction with a focus on civil engineering or the preparation and construction of buildings, or a similar university education;”
- Bachelor’s (university) degree with 1 year of practice, and completion of a course referred to in § 60a of Act No. 111/1998 Coll.,
- university, higher vocational, or secondary education with a school-leaving examination and 3 years of professional practice; or
- professional qualifications for the activity of a real estate broker pursuant to the Act on Recognition of Further Education Results.
The original branch of the free trade styled “Purchase, sale, administration and maintenance of real estate” will not disappear, but it will no longer be possible to perform the activity of a real estate broker thereunder.
4. Transitory period for obtaining the licence for regulated trade “real estate brokerage” in Czech Republic will last until 1 January 2021
Current real estate brokers who wish to continue operating as real estate brokers must report this fact to the Trades Licensing Office no later than 6 months after the Act comes into effect, and, at the same time, must prove their professional competence to perform the trade. By 1 January 2021, all existing brokers and real estate agencies will have to obtain the licence for this regulated trade in order to continue performing real estate brokerage activities.
5. Escrow with a Czech real estate broker
PUnder the new regulation, a Czech real estate broker may not offer escrow with anyone other than a bank, a notary, an attorney-at-law or an executor.
PHolding funds in escrow by real estate brokers has also been given stricter rules. According to the original bill, real estate brokers were not supposed to have the opportunity to hold funds in escrow at all. The approved wording of the Act sets out that a real estate broker may hold funds in escrow only on the basis of an explicit written request made on a separate deed and for the purpose of securing performance under a real estate agreement, provided that the escrow agreement is in writing, a separate escrow account is opened for each depositor, the broker informs the bank that the owner of the deposited funds is a third party, the receipt and release of the funds are made only via bank transfer, and the Trades Licensing Office is also informed of the escrow.
The Czech real estate brokers will be obliged to keep a record of each escrow in the log of escrows to be kept by them, which will include:
1. the identification of the depositor and beneficiary; if the depositor or beneficiary is a natural person, then the log shall include all names and surnames, birth registration numbers or, if not assigned, the date of birth, further the place of birth, sex, permanent or other residence, and citizenship; if the depositor or beneficiary is a natural person engaged in business (entrepreneur), then the log shall also include their business name, distinctive suffix or other designation, the place of business, and the person’s business identification number; if the depositor or beneficiary is represented, then the log shall contain also these details of their acting representative(s); if the depositor or beneficiary is a legal entity, then the log shall include the business name or a name including a distinctive suffix or other designation, the registered office, the business identification number of the entity or a similar number allocated abroad; as concerns a natural person who is a member of its statutory body, the log shall include the information to establish and verify their identity; where applicable, details of the representative of the legal entity who has acted in the case in question and, if the representative is a trustee of a trust fund, then the specification and identification data of the fund’s trustee, manager, or a person in a similar position;
2. the data concerning the amount of the funds and their currency;
3. the date of acceptance of funds into escrow;
4. the information about the term of escrow and, where applicable, the conditions for releasing the funds from escrow to the depository or beneficiary by the real estate broker, and the manner in which the fulfilment of such conditions is proven to the real estate broker;
5. the identification of the account(s) to which the funds are to be released from escrow to the beneficiary, and identification data of the account holder, if different from the beneficiary;
6. the date the funds were released to the depositor or beneficiary.
Accepting funds into, and releasing funds from, escrow is only possible by bank transfer; otherwise the funds cannot be handed over.
The real estate broker will not be entitled to use the funds held in the escrow account in any manner other than in accordance with the purpose of the real estate agreement.
6. Insurance coverage of a real estate broker in Czech Republic
The Act introduces an obligation for real estate brokers to take out insurance covering compensation for damage caused to the interested party by the performance of real estate brokerage. The limit of insurance proceeds must be at least CZK 1,750,000, and at least CZK 3,500,000 in the event of multiple insurance claims occurring in one year. However, this amount shall be reduced to 50 % for those real estate brokers who work under the auspices of a legal entity that is a real estate broker. Entrepreneurs in the field of real estate brokerage will have to obtain this insurance by 1 October 2020 at the latest.
7. Real estate brokerage agreement in Czech Republic
The Act requires that a brokerage agreement be concluded in writing, but only the interested party may raise an objection as to the invalidity of the agreement for a lack of form. The agreement must also include:
- the identification of the object of transfer or use;
- the amount of the purchase price or other consideration;
- the amount of the commission or the method of its determination (agreements of some real estate agencies do not currently include this, as they allegedly provide these services “free of charge;” so these agreements will have to be adjusted accordingly).
If the real estate brokerage agreement does not contain the above information, it is invalid. However, its invalidity can only be claimed by the interested party.
RReal estate brokers have to comply with another newly established obligation, which is to submit to the interested party a current extract from the Cadastral (Land) Register in respect of the immovable property concerned, at the latest on the execution date of the real estate brokerage agreement. The extract must prove the status entered in the Register that shall not be older than 3 business days before the execution date of the real estate brokerage agreement. If the broker fails to do so, the interested party may rescind the real estate brokerage agreement.
The duty of disclosure also imposes an obligation on the real estate broker to inform the interested party about the following:
- any defects in and restrictions on the subject of transaction, which are known from public registers or which the broker knew or should have known of; such information must be disclosed at the latest when the real estate brokerage agreement is concluded, or within 14 days of the date on which the specific subject of the transfer, or the subject of use or utilisation, has become known to the interested party and real estate broker;
- the amount of a commission agreed in the brokerage agreement for the same subject matter, concluded between the broker and a third party, i.e. it should not happen that a real estate broker takes a commission from both parties without the client knowing about it. One can assume that the advertising tricks of some agencies purporting that their clients do not pay any commission (although, at the same time, they take the commission on the purchase price at practically any amount from the buyer), will no longer be possible since the seller will be informed about the commission.
If the real estate broker does not provide the interested party with the above information, the interested party will be entitled to rescind the real estate brokerage agreement.
The Act will also prohibit objectionable provisions contained in some existing brokerage agreements, which force clients to enter into transfer agreements. The real estate brokerage agreement may no longer impose on the interested party that is a consumer any obligation to conclude a real estate agreement or an agreement for the conclusion of a future real estate agreement.
Although it has not been quite common in practice for real estate brokers to use bills of exchange and checks as collateral, the Real Estate Brokerage Act now explicitly prohibits their use to meet or secure the debt arising from a real estate brokerage agreement between a real estate broker and the interested party that is a consumer.
The notice period of a real estate brokerage agreement concluded for an indefinite period may not exceed one month for the consumer.
8. Exclusivity of real estate brokerage in Czech Republic for a maximum of 6 months only
Exclusive real estate brokerage consists in an arrangement between a real estate broker and an interested party regarding a specific subject, which restricts the right of the interested party to conclude a brokerage agreement on the same subject with another real estate broker, or to conclude a real estate agreement without any real estate broker at all.
Exclusive real estate brokerage may only be arranged for a definite period of time not exceeding 6 months; however, this period may be repeatedly extended.
9. Real estate broker’s commission in Czech Republic
The amount of real estate commission must form part of the real estate agreement, i.e. the intermediated purchase agreement, lease agreement, etc. Unless stated otherwise, the commission is payable from the execution date of the real estate agreement. The commission maturity date may be agreed before the effective date of the real estate agreement only if the brokerage agreement contains a provision that the commission maturity period is not bound to the conclusion of the real estate agreement. An advance on the commission may not be more than two thirds of the agreed commission for a consumer. The real estate broker may no longer require a commission from the interested party who is a consumer if the agreement that gave rise to the real estate broker’s right to a commission was entered into, due to any inactivity, error or failure to provide adequate cooperation by the real estate broker, only after the obligation under the real estate brokerage agreement has ceased to exist.
10. Real estate broker’s misdemeanours and fines in Czech Republic
A legal entity or natural person doing business as a real estate broker commits a misdemeanour by:
a) defaulting on any of the obligations regarding the provision of escrow by a real estate broker, where the fine may be up to CZK 500,000;
b) not being insured, where the fine may be up to CZK 1,000,000; or
c) failing to submit to the Ministry for Regional Development, within 10 working days of the date of conclusion of the insurance contract, a counterpart or an officially certified copy of the insurance contract or any amendment thereto, which entails a change in the insurance proceeds limit or the amount of the agreed deductible, and/or its termination or rescission, where the fine may be up to CZK 100,000.
11. Effectiveness of the Real Estate Brokerage Act and transitory provisions
The Act was supposed to come into effect on 1 January 2020; but since it had not been published in the Collection of Laws as at that date, it will come into effect on 1 July 2020, in accordance with § 3 (6) of Act No. 309/1999 Coll., on the Collection of Laws.
Any existing relationships and agreements concluded before 1 July 2020 will continue to be dealt with in accordance with the existing legislation, and the Real Estate Brokerage Act will not apply to them.
Insurance required by the Real Estate Brokerage Act will have to be taken out by entrepreneurs in the field of real estate brokerage by 1 October 2020 at the latest.
No later than on 1 January 2021, all entrepreneurs who intend to continue providing real estate brokerage in Czech Republic will have to report to the Trades Licensing Office the regulated trade “Real Estate Brokerage”, and submit documents proving the fulfilment of the condition of professional eligibility for the operation of this regulated trade; otherwise the authorisation to engage in real estate agency within the scope of the existing free trade will cease to exist on 1 January 2021. The obtaining of a licence for this regulated trade in lieu of the existing free trade will not be subject to any administrative fee until 1 January 2021.
For more information, contact us at:
JUDr. Mojmír Ježek, Ph.D.
ECOVIS ježek, advokátní kancelář s.r.o.
Betlémské nám. 6
110 00 Praha 1
About ECOVIS ježek advokátní kancelář s.r.o.
The Czech law office in Prague ECOVIS ježek practices mainly in the area of Czech commercial law, Czech real estate law, representation at Czech courts, administrative bodies and arbitration courts, as well as Czech finance and banking law, and provides full-fledged advice in all areas, making it a suitable alternative for clients of international law offices. The international dimension of the Czech legal services provided is ensured through past experience and through co-operation with leading legal offices in most European countries, the US, and other jurisdictions. The Czech lawyers of the ECOVIS ježek team have many years of experience from leading international law offices and tax companies, in providing legal advice to multinational corporations, large Czech companies, but also to medium-sized companies and individual clients. For more information, go to www.ecovislegal.cz/en.