What to watch out for when concluding a reservation contract in the Czech Republic

Based on my experience I can say that a reservation contract for the purchase of real estate is as important as the purchase contract, nevertheless buyers don´t pay so much attention to it. It´s logical, the buyer wants to ensure the purchase with their signature and the in-between is the real estate agency which puts a lot of pressure on closing the deal as soon as possible. And then it sometimes happens that the buyer can´t believe their eyes when they see the conditions to which they are pushed in the purchase contract. A proper reservation contract must have two characteristics:

• the seller too must express their explicit consent to the conditions in the reservation contract,
• the reservation contract must clarify all the essential conditions of the sale so that no disagreement arises before concluding the purchase contract.

Let’s have a look at what a proper reservation contract should look like.

Types of reservation contracts

You can see these contracts:

1. Contract concluded only with a real estate agency

As per a large number of decisions of the Supreme Court, both the seller and the buyer must commit themselves in the reservation contract to concluding a purchase contract, otherwise the provisions of such a reservation contract are invalid. Therefore a reservation made only between the person interested in the purchase and the real estate agency lacks any meaning for the person interested in the purchase. As a rule, such a contract is used by real estate agents who don´t have a brokerage contract with the seller. They just wait for someone to put down a deposit and then go to the seller announcing that they found a buyer and try to persuade the seller to sell the property to this person. Often the deal falls through, so in the best scenario the deposit is returned to the potential buyer, in the worst case it´s necessary to go to the court to demand a refund. I definitely recommend not concluding this type of contract.

2. The contract is concluded with a real estate agency only, the contract also includes the seller and the real estate broker signs it on behalf of the seller on the basis of a power of attorney.

This option is better, there is a high probability that the real estate agency has an exclusive brokerage contract and a mandate to act on behalf of the seller. The problem, however, is that these reservation contracts are usually simplified and don´t include all aspects of the sale that should be agreed on with the seller. These contracts are used by large real estate networks and are presented as a unified form.

3. The contract is concluded with the real estate agency and personally with the seller too.

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

Terms of the reservation contract

Purchase price

It should be clear what the purchase price includes. It should be especially clear whether the price includes the real estate agency’s remuneration and possible equipment of the property. Concerning the equipment, if it is of good value and you´ve agreed that it would be included in the purchase, I recommend attaching a list of equipment in the annex to the reservation contract. With cooperative flats, the purchase price specification should include annuity quantification, for development projects it should include quantification of work for client changes, etc.

Obligations of the seller

The first of them is to sign a purchase contract by a certain date, usually  it is 1 month from the signing of the reservation contract when financing from one´s own resources, when financing with a mortgage it is 1.5 months. The second obligation of the seller is to ensure that the real estate in question is not subject to any restrictions on property rights that would either devalue the real estate or prevent the transfer of the real estate. If there are any restrictions concerning the right of ownership, it´s necessary to describe the procedure of solution in the contract. Typically, this is the seller’s lien arising from their mortgage. Another obligation of the seller is to provide you with a no-debt confirmation of the property management in relation to the Owners Association or the cooperative before signing the purchase contract. It´s because by buying an apartment, all debts related to the apartment pass onto the buyer. And the last, very important obligation is to provide co-operation in concluding a mortgage agreement with the bank providing a mortgage loan to the buyer. The seller may not be happy about signing the mortgage agreement and it is advisable for them to be aware of this when signing the reservation contract.

Delivery date

Another piece of information that shouldn´t be omitted from the correct reservation contract is the date of handover when the seller undertakes to hand over the property and the buyer undertakes to take it over. This date is usually 5 to 10 working days after the registration of the property right in the real estate cadastre in favour of the buyer. However, the seller might require more time to do this, it´s relatively common and it´s good to agree on it in advance.

Payments and safekeeping

The method of payment of the purchase price and the date of payment of the purchase price should be specified in the reservation contract. The entire amount should definitely be deposited during the whole course of the transfer of the property in safekeeping and then paid from safekeeping to the seller as soon as the transfer of ownership to the buyer is successfully completed and the property is free of any restrictions on ownership related to the seller. Here it´s necessary to pay particular attention to the safekeeping of the money. I don´t definitely recommend safekeeping with a real estate agency, although some real estate agencies promote it. Bank safekeeping is the safest and safekeeping with a lawyer or notary is acceptable as well. You can also choose the method of safekeeping to be included in the contract.

A number of other aspects of the purchase need to be dealt with in the reservation contract. These include the right of the real estate agency to remuneration, the determination of the party that will pay the costs of the transfer, penalties for non-compliance with the contract, the setting of a reasonable amount of deposit and others. If you´re interested in the topic of secure reservation contracts in more detail, you can download an ebook here or watch a recording of the webinar which took place on Wednesday, January 27, 2021.