Real Estate Flash/Focus
15. 4. 2020
Source: BUILDING WORLD magazine
This year, the Czech real estate market will be significantly influenced by a new Real Estate Brokerage Act. It brings about new requirements for real estate brokers with a high impact on their clients and real estate market participants in the area of the previously unregulated real estate business.
The Real Estate Brokerage Act, which has been under discussion and preparation for several years, will come into effect on 3 March 2020. Although it contains “only” 27 sections, including transitional provisions and provisions amending some other related laws, its significance is truly revolutionary in terms of regulation of the real estate brokerage business. So far, there has been no legal regulation in the field of the real estate brokerage business in the Czech Republic.
According to the explanatory memorandum, the intention of the new legislation is primarily to cultivate the conditions for providing real estate brokerage services. Following the example of similar professions, such as insurance intermediaries or consumer credit intermediaries, the new legislation sets the conditions under which real estate brokers and real estate agencies will be able to do their business.
I. Real estate brokerage as a regulated trade
Real estate brokerage is currently ranked among the fields of activities classified as a notifiable unregulated trade with the object of business “Production, trade and services not listed in Annexes 1 to 3 to the Trade Licensing Act”. So far, no special conditions have been required to obtain a trade licence to operate a real estate business. Under the new legislation, however, real estate brokerage will be classified as a notifiable regulated trade which, in addition to fulfilling the notification obligation, requires professional qualification in the form of a certain level of education, length of experience or professional examination. For example, accountants, restorers, psychologists or driving school operators already belong to this group of trades.
Real estate brokers will be required to hold (i) a master’s degree in law, economics or construction. In these cases, previous experience is not required. Nevertheless, it will also be possible to meet the condition of professional qualification by holding (ii) a bachelor’s degree, one year of experience and completion of an internationally recognized real estate course, (iii) university, higher vocational or secondary education with a school-leaving examination and, in addition, three years’ professional experience, or (iv) passing a professional qualification examination.
Existing real estate brokers are obliged to document the fulfilment of the new condition for professional qualification to the Trade Licensing Office within 6 months of the effective date of the Real Estate Brokerage Act, i.e. by 3 September 2020. At the same time, they must notify the Trade Licensing Office of the commencement of the performance of the regulated trade “Real estate brokerage”. Otherwise, their trade license to provide real estate brokerage services will expire.
II. Clear criminal record of real estate brokers
Another increased requirement for real estate brokers will be their clear criminal record. Pursuant to the Real Estate Brokerage Act, a person with a clear criminal record means a person who has not been finally convicted of a criminal offense committed intentionally or for a criminal offense committed negligently in connection with the provision of real estate brokerage services. If the real estate broker is a legal entity, this obligation shall apply to a member of the statutory body as well as to the beneficial owner.
Municipal trade licensing offices will be responsible for checking whether real estate brokers have a clear criminal record or not. As a last resort, they will be entitled to revoke the trade licence of the real estate broker.
III. Compulsory professional insurance and its certification
Another obligation newly introduced by the Real Estate Brokerage Act is compulsory insurance. Real estate brokers will have to be insured for the entire duration of their activities in case they become obliged to compensate for damage caused in connection with the performance of their activities. The minimum insurance limits are set at CZK 1,750,000 per claim and at least CZK 3,500,000 in case of multiple claims occurring in one year. The deductible must be arranged so that it does not exceed CZK 5,000 or 1% of the insurance benefit amount.
In addition, real estate brokers will always have to inform the Ministry for Regional Development about the conclusion of an insurance contract, the change in insurance limits or the amount of the deductible and submit to it a copy or an officially verified copy of the insurance contract or its amendment within 10 business days. In addition, real estate brokers will also be required to submit an insurance policy confirming the conclusion of the insurance contract to the client upon his/her prior request.
IV. Essentials of a real estate brokerage contract
Under to the new Act, the purpose of the activities of real estate brokers is solely to mediate the conclusion of real estate contracts (contracts for the acquisition of ownership rights to real estate and contracts concerning the authorisation to use it), based on real estate brokerage contracts concluded between real estate brokers on the one hand and interested parties (clients) on the other hand. The Act lays down certain requirements for the form and content of such contracts.
The real estate brokerage contract must be primarily in written form. At least in general terms, it must define the subject matter of the transfer or use and the purchase price or rent. The contract must always include the amount of commission for the real estate broker or at least the method how it is determined. Failure to meet these content requirements will invalidate the real estate brokerage contract. However, only the client will be able to raise an objection to the validity of the contract.
The new Act also addresses the interconnection of the real estate brokerage contract (between the client and the real estate broker) and the real estate contract (between the seller and the purchaser, or the tenant and the landlord). The real estate brokerage contract will not be included in the same document as the real estate contract. In addition, the commission is to be payable, in principle, not earlier than the conclusion date of the real estate contract, the intermediation of which was ensured by the real estate broker. However, the Act allows a claim for commission to arise before the conclusion date of the real estate contract when the maturity of the commission can be tied to procuring the opportunity to conclude the real estate contract.
V. Restrictions in relation to consumers
In the real estate brokerage contract, it will no longer be possible for a client who is a consumer to assume the obligation to conclude a real estate contract or a contract for the conclusion of a future real estate contract. Nor will it be possible to use a promissory note or check to settle or ensure the settlement of a debt in relation to the consumer.
The new Act allows for agreeing on exclusive brokerage, which will restrict the client’s right to conclude a real estate brokerage contract on the same subject matter with another real estate broker, or which will exclude the possibility of concluding a real estate contract without the cooperation of the real estate broker. However, the restriction comes again in relation to consumers, when exclusive brokerage can be concluded for a maximum of 6 months. The positive news, however, is that this period can be extended repeatedly.
Another restriction in relation to the consumer is connected to the termination of the real estate brokerage contract. If real estate brokerage with the consumer has been concluded for an indefinite period, the notice period may not exceed 1 month.
As for the commission, the new Act stipulates that in relation to the client – consumer, the advance on the commission may not exceed two thirds of the agreed amount.
VI. Fulfilment of partial information obligations towards clients
No later than on the conclusion date of the real estate brokerage contract, the real estate broker will have to submit to the client a Real Property Register extract in relation to the real estate that is the subject matter of real estate brokerage. This extract must not be older than 3 business days. If the real estate broker breaches the obligation to submit this extract, the client may withdraw from the real estate brokerage contract within 14 days of the date of its conclusion.
In addition, the real estate broker will be obliged to provide the potential acquirer with information on specific defects and restrictions that are attached to the subject matter of the transfer or use and which are entered in public registers, as well as those that the real estate broker knew or, given his/her professional qualification, should have known. Again, as in the previous case, failure to comply with this information obligation establishes the client’s right to withdraw from the real estate brokerage contract.
VII. Purchase price escrows and keeping an escrow register
The original draft Act did not provide for the possibility of holding escrow by real estate brokers. However, the final wording of the new Act has been affected by the amendments during the legislative process, so real estate brokers will thus be able to hold in escrow funds for the purpose of performing the real estate transfers they have mediated, subject to fulfilling several conditions.
First and foremost, real estate brokers will not be able to actively offer their own escrow to their clients. They will formally be authorised to hold such escrow only upon the client’s written request. In connection with holding escrows, real estate brokers will then be obliged to keep an escrow register, in which they shall record the statutory details: the parties’ identification details, total escrow amount, duration of escrow, date of receipt and release of funds, designation of escrow account that must be opened for each individual depositor. The escrow agreement will have to be made in writing and the funds will need to be deposited in a bank account, and it will be the obligation of the real estate broker to inform the bank that the funds are owned by a third party. Receipt and release of funds from escrow may only be executed by wire transfer, while real estate brokers must inform the trade licensing office about the first executed escrow.
The new Real Estate Brokerage Act entails many changes to the Czech real estate market. We recommend real estate brokers to make adjustments to their contracts and comply with all regulatory requirements within the statutory deadlines.