Purchase through a Legal Entity

A legal entity as a contractual party

Expats.cz Staff

Written by Expats.cz Staff Published on 05.08.2008 11:17:03 (updated on 05.08.2008) Reading time: 10 minutes

Written by Richard Gürlich
of GÜRLICH & Co.


Purchase through legal entity The acquisition of real estate by a purchase contract is covered by the Civil Code. When it comes to the acquisition itself, the Civil Code assumes not only acquisition by a physical person but also it defines this option for a legal entity. This means that, for example, a company with limited liability or an incorporated company has the option to own almost any form of real estate in the Czech Republic, based upon the purchase contract. Also it is possible to find a number of particulars which discriminate the acquisition of real estate between physical persons and legal entities. For the sake of practicality the entering into real estate purchase contracts between foreigners, allow for a kind of assignation of ownership that holds whole range of possibilities which should make this acquisition easier for foreigners.   Legal entity as a contractual party The Purchase contract for transfer of real estates may be concluded only by an entity having the competency to perform legal acts. The Civil Code stipulates that legal acts of a legal entity in all matters are made by those being entitled by contract relating to the establishment of the legal entity, by deed of foundation or by Law. Generally the statutory bodies cover this. But in the name of legal entity, others may act. This includes its employees or members provided it is stipulated so in the internal regulations of legal entity or it is a usual function of an employee´s employment contract. In the case of conclusion of purchase contract by a person having no competency to perform legal acts, the contract is invalid. A statutory body is determined by the Commercial Code and whether the company is recorded in the Trade Register, the statutory bodies of individual concrete companies are recorded here. In name of public commercial company, all associates may negotiate. If the associate of such a company is a legal entity, then the rights and duties connected with participation in the company are performed by the statutory body, and ultimately by its entitled representative. A statutory body may only be physical entity that fulfils all conditions of performing the business according to the law on business entrepreneurial activity and that shows no obstacle to performing the business. Indication of a statutory body is included in the Articles of Association. A company obligation guarantees the associates jointly and severally by their whole property. The statutory body of a limited partnership are the unlimited partners, the list of which is included in the Articles of Association. If not stipulated otherwise, each partner is entitled to negotiate in the name of the company independently. Should the unlimited partner be a legal entity, it is the same as with the above stated company. The company guarantee is via the limited partners up to the amount of their unpaid deposit recorded in Trade Register and one or more associates (unlimited partners) guarantee by their whole property. But if the firm includes the name of a limited partner, then he guarantees the obligations of the company as the unlimited partner. A limited liability company can have one or more executive heads. If there are more executive heads, all of them may act in the name of the company independently provided the Articles of Association or the Statutes did not stipulate anything else. By the Articles of Association, the Statutes or General Meeting the authorization may be restricted. An executive head may be elected by General Meeting and any associate or other physical entity can be nominated. Associates guarantee jointly and severally obligations of the company up to aggregate of unpaid parts of deposits of all associates according to the record in Trade Register. The statutory body of a joint stock company is the Board of Directors that negotiates in the name of the company. Provided nothing else comes out of the Statutes of the company, each member of the board negotiates externally in the name of the company. The members of the Board of Directors are stated in the statutes of the company. For a breach of its obligations the joint stock company is liable up to its whole property, but shareholders do not guarantee the obligations of the company. A Purchase Contract that is concluded by a cooperative also has a board that acts in the name of the statutory body of the cooperative. For breaching of its obligation, the cooperative is responsible up to all of its property, the members do not guarantee the obligations of the cooperative. There is strict separation of property and members. Member of the Board are stated in the statutes. Furthermore it is necessary to point out that physical entities in the contract are identified by name, surname, domicile of permanent residence and personal identification number (birth number). Some contracts include; titles, birth name and other things. The most important is the personal identification number (birth number) that is used also by cadastre of real estates. Provided the contract party is a legal entity, the purchase contract includes its name, office, identification number and person entitled to negotiate in the name of a legal entity. A legal entity has to substantiate to the respective cadastre office with the contract itself the abstract from Trade Register (or other register determined by the Law) that is submitted in original or as officially verified copy. It is necessary to point out the fact that nondisclosure of a trading firm next to the signature of the negotiating person does not cause invalidity of the legal act. It is important that one can express free will (not under duress) for the conclusion of Purchase Contract, otherwise the contract remains absolutely invalid. Last, but not least, it is also necessary to strongly emphasize the legal presumption that the expression of will to conclude the contract was in the purchase contract for the transfer of real estate on one document. *** Purchase contracts about transfer of real estates property concluded by foreigners We would like to point out that subject matter of acquiring of real estates by means of legal entity is very carefully monitored by foreigners, the Foreign Exchange Act has certain restrictions during acquiring of real estates. After the entry of the Czech Republic to the EU, the significance of this question is not so extensive. Although the Czech Republic is, on the basis of international agreements, liable in principle to treat foreigners the same way as citizens of the Czech Republic, some areas may be found where such a principle does not apply. One of such area is the acquiring of real estates in the Czech Republic, where the citizens of the Czech Republic are not restricted at all. In the case of foreigners the situation is a bit different. It is necessary to differentiate the foreigners between citizens of member states of the European Union, citizens of the other countries who on the basis of the international agreements are granted by some advantages and citizens of other states outside European Union, so called the third countries. Citizens of member states of European Union Provided EU citizens have the identity card for staying in the Czech Republic, then they can acquire the real estates in the Czech Republic. Their situation is further eased because it is not so difficult for them to obtain the permission for temporary or permanent stay on the territory of the Czech Republic. Moreover these citizens, on the basis of permission for temporary stay, are entitled to acquire ownership to real estates in the territory of the Czech Republic. It is necessary to point out the fact that according to the permission for stay, i.e. permission for temporary stay or permanent stay on the territory of the Czech Republic, the extent of possibility of acquisition of real estate differentiates. In case that they have identity card for permission for temporary stay, they may acquire all real estates in the Czech Republic with the exception of plots that form part of agricultural land resources or forest land. It means that they cannot purchase a garden next to house that usually agricultural land. They may purchase a flat, house, building plot, i.e. plot on which the house is built. Citizens of member state of European Union with permission for permanent stay in the Czech Republic may purchase any real estate on the territory of the Czech Republic. Therefore in case you belong to above the stated categories of foreigners, it is advisable before decision about purchase of real estate to find out if it is possible to purchase such real estate. Citizens of the third countries, with which the Czech Republic has an international agreement A special and rather divided group of foreigners are the citizens of several e countries with which the Czech Republic has international agreements. It refers to the countries of the European economic area, United States of America and Switzerland. Such countries have so called most favoured nation clause. Interested parties for the purchase of real estates from such countries are provided at least the same advantages that have been, or will be provided to interested parties from other countries. By such other countries it is necessary to understand the third countries. Citizens of the third countries According to the present legal regulations the citizens of the third countries can acquire real estates only when fulfilling several requirements. It refers mainly to the condition of permission of permanent stay in the Czech Republic and eventually they can acquire real estates under situation when they acquire them into joint marital property with a citizen of the Czech Republic or with a physical entity that has permission for permanent stay in the Czech Republic. It means that they have, as a spouse, a citizen of the Czech Republic or a person with permanent stay in the Czech Republic and together with him/her they purchase real estate as joint marital property. Last, but not least, the law gives the possibility for citizens of the third countries to acquire real estates on the territory of the Czech Republic in case that it refers to acquisition from a relative in direct line, sibling or spouse, that it refers to construction on the own plot, on the basis of pre-emption right from the reason of co-ownership of given real estate or under situation when the given real estate is a plot that forms one functional complex with immovable construction in their ownership. In case that the given interested party does not fulfil the above stated conditions, the situation is usually solved so that the citizen of the third country in the Czech Republic will establish or will purchase a Czech legal entity, most often a limited liability company, and such a company will purchase the required real estate. Due to the fact that this subject matter includes a lot of pitfalls and controversial issues it is recommended that, in case you belong to above stated categories and you are interested in purchase of real estate on the territory of the Czech Republic, you find a lawyer with experience. Certainly you will save not only time but also eventual complications. Consequences of purchase of real estate through intermediary of legal entity Firstly, it is necessary to point out that for foreigners outside EU and for selected plots even for foreigners from EU the legal solution may represent the way how “to get around” the Foreign Exchange Act. Acquisition of real estate through a limited liability company may have for its acquirer substantial advantage in the sense that for eventual damage caused in consequence of operation of real estate to other persons (e.g. by fire) the Limited Liability Company will be responsible as it guarantees by its whole property. Provided the acquirer gets the real estate as physical entity, being responsible for its obligations by its whole property, then the part of such responsibility for damage could burden also directly the property of such acquirer. In relation to transferability of real estate and legal entity it may be generally pointed out that the transfer of legal entity is easier. Therefore, it is possible that the owner of such legal entity is changed (legal entity will be sold) with it that the record in cadastre of real estate remains unchanged because this legal entity still remains as owner of real estate. Typically it is necessary for a limited liability company to execute the contract about the transfer of trade shares that is effective the moment of signature by the parties, under presumption that it has been delivered to the company itself. The record into the Trade Register is only confirmation that such a transaction has been effected. Should the real estate be transferred directly, it would be necessary for the origin of the legal effects of the transfer contract to wait for a positive decision from the cadastre office. Due to the administrative burdens and responsibilities of legal entities it is necessary to consider carefully when you think about choosing this possibility for the acquisition of real estates in the Czech Republic.


Purchase of real estate

The question of real estate purchases is presently enjoying great interest,  due to the desire of many people to live in their own dwelling and ,for example, as a result of entrepreneurial activity. Additionally, relating to real estate contracts there could be a few legal pitfalls, that I will refer to. Due to the comprehensive nature of this subject it is necessary to split it up into several partial stages.

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