Czech Republic, Hungary & Slovakia case studies

In the Central and Eastern European region, FAF International operates as First Title CEE, below we give details of recent risks insured in Czech Republic, Hungary and Slovakia.

The strategic importance of the Czech Republic, Hungary and Slovakia, together with their impressive transport links and relatively affordable development space has proved extremely popular with a broad range of international investors. Yet despite the rapid growth in these markets, the land registry systems have not responded to the increasing demand for property located in the Czech Republic, Hungary and Slovakia, so as to minimise the title risks, which may affect the property. For example, in 1995 there were only 3.3% of land parcels with clear ownership in Slovakia because part of the Slovakian cadastral documentation was destroyed or lost during the Second World War and was not updated by the land registry. In summary, this meant that changes in the ownership of Slovakian property were not registered. Again in Hungary the cadastre and Legal Registry (Grundbuch) was only integrated in 1971 on a legal and institutional level, which meant the title documents and registration of numerous Hungarian properties, is far from complete.

The incompleteness of the public records means that title defects such as instruments executed under an expired or fabricated power of attorney, the lack of competency, capacity or legal authority of a party, or a forged signature on title deeds are risks that could result in the sale purchase agreement or the transfer of ownership being declared null and void at any time. Furthermore, in the Czech Republic, Hungary and Slovakia the right to own property is subject to restitution claims by persons who had their property confi scated after the Second World War. There are various legal provisions which grant entitled persons to stake their claim for the return of the property that was confi scated from their relatives. In each of the three countries the restituted owners can request for a handover of the property by applying to the court for a declaration of ownership of the property. 

Restitution searches at the relevant land offi ce or municipality may be inconclusive. Given the problems with the land registers and the lack of state guarantee in the Czech Republic, Slovakia and Hungary, sellers' warranties are often of limited value and lawyers' due diligence reports can prove inconclusive because they are unable to review all the title documents. For this reason, title insurance is of vital importance to developers, lenders and lawyers, which is proven by the fact that, last year, First Title insured 10 billion euros worth of property in Europe.

Czech Republic
Failure to follow privatisation procedure
VALUE 25 MILLION EURO

Background:
A multi-national investor purchased land and buildings located in the Czech Republic. No buildings were constructed upon the land until 1999. The investor intended to use the existing buildings for commercial use.

A detailed analysis of the title revealed that the land used to be owned by a former state company who underwent privatisation in the early 1990's. Before the transformation of the state company into a private company, the assets of the state owned company should have all been transferred to the newly formed private company. However there was no record of the transfer of the land (the asset) in the title documentation or in the state company's list of assets and liabilities. For this reason the private company did not register the land so it could not be validly transferred to potential purchasers. At a later date the land was sold to another company who built two buildings on the land.

Risk:
There was a risk that title to the two buildings may be challenged by someone who had a "legal interest" in proving the non-transfer of the buildings to the privatised company. Czech law details that any of the companies who owned the land in the last 15 years could satisfy the requirements of the "legal interest" test. In this case four companies owned the land in the last 15 years, one of which was the Czech state, so there was a real risk that when the land and buildings underwent development, one of the potential plaintiffs could reclaim the land at any point.

First Title Solution:
Within days of receiving the due diligence report highlighting the title risks we were able to provide a comprehensive known risk and good title policy to the investor and the lender.
Legal Defects
First Title Case Studies Czech Republic, Hungary & Slovakia

Czech Republic
Failure to follow the correct privatisation procedure
VALUE 25 MILLION EURO

Background:
A multi-national developer bought land located in the Czech Republic from a private Czech company. The developer constructed two buildings, buildings A and B on the land. The developer wanted to sell the land and buildings to a German subsidiary of a multi-national real estate investor.

A thorough investigation into the title history of the land revealed that the Czech company was a private company formed from a state owned company. The privatisation of the state owned company was on the basis that the Ministry of State Property Administration approved the privatisation project.

Risk:
A document embodying all the terms of the privatisation project was a requirement under the Privatisation Act. This document had to include a list of all the property being passed to the private company. Any property that was not listed would not be vested in the private company. Buildings A and B were not listed in the privatisation document and therefore in the absence of any documentary evidence to the contrary, title to the buildings did not vest in the former owner of the land (the private Czech company) so the company could not have validly transferred title to the current owners.

First Title Solution:
First Title provided a policy of title insurance to the vendor of the land within days of receiving the due diligence report. Once the title insurance policy was in place the current owners of the land could complete the sale of the land and buildings, without the risk that the transaction would fall through, because the previous owners i.e. the Czech State, the state company could try to reclaim the land.
First Title Case Studies Czech Republic, Hungary & Slovakia

Czech Republic
Failure to follow Czech company law requirements
VALUE 40 MILLION EURO


Background:
The owners of an office building (company A), located in the Czech Republic, concluded a sale purchase agreement to sell the land to a real estate investor. A detailed analysis of the title to the land revealed numerous title risks. If these risks were not resolved the land would be unmarketable in the future.

Risk 1:
The previous owners of the land concluded a swap agreement for a small parcel of the land with a public authority. Czech law details that every sale of land by the public authority had to be published in advance by an official of the public authority - the failure to do this renders the appropriate transfer agreement invalid.

Risk 2:
Company A acquired the land from company B. Company A was a subsidiary of company B therefore the following legal requirements had to be satisfied
1. The price had to be set by the court appointed expert valuer/appraiser. In this case the expert appraisal was dated one month after the execution of the purchase agreement and there is no evidence that the expert was appointed by the court for this special purpose - such deficiency would render the transfer invalid.
2. The agreement had to be approved by company A's and B's Supervisory Board Company X and
3. The agreement had to be approved by A's and B' s general meeting
of shareholders.
4. Company A became the owner of the land. However the land should not have been registered in the Czech Land Book because company A was associated with company B.
5. There was no evidence that requirements 2 and 3 were met this could render the transfer as potentially invalid.


First Title Solution:
First Title was able to offer title insurance to cover these defects.

Hungary
Public procurement defect
VALUE 31 MILLION EURO


Background:
A 50-year usage right was granted over land owned by a Hungarian public authority enabling the proposed insured to construct a building and then use a stipulated part of the building during the 50 year period of the usage right

Risk 1:
The Hungarian civil code required that there should be an exact term of years for the usage right to run. Although a term of 50 years was granted by the public authority, the land registry entry of the usage right against the public authority's title to the land does not specify a term of years and therefore may be challenged by the public prosecutor at any time requiring the right to be removed from the public register.

Risk 2:
The Fiscal Administration Act required the public tender procedure to be completed before the transfer of the usage right of property owners by the public authority. When the usage right was granted- no public tender procedure was undertaken.

Risk 3:
A public procurement procedure was required so that the building could be legally constructed. A further analysis of the title documentation revealed that the procurement procedure was not followed.

Risk 4:
The usage right is terminable by the public authority on 180 days notice for a material breach of its terms by the company - one important type of material breach specified in the Usage Right Agreement is if the "public use" nature of the premises are altered and is not operated for its intended public purpose or is only partially operated "without reason".

Risk 5:
The usage right agreement should have been vested in the proposed insured as a successor in title to the company who was originally granted the usage right. The proposed insured may not be deemed to be the legal successor in title because the company was created by a means which did not satisfy the legal requirements of a successor in title.

First Title Solution:
A comprehensive title insurance policy was provided to the purchaser of the usage right. The policy detailed that First Title would defend and reimburse any covered damage or loss.

Slovakia
Failure to satisfy requirements of Slovakian law - risk that former owners could try and reclaim the land
VALUE 4 MILLION EURO

Background:
A leading Slovakian development company purchased land from a Slovakian public authority. A detailed investigation of the title history of the land plots revealed that the public authority acquired the land based on an act relating to property rights. This act detailed that from a certain date, all plots of land that were (i) unregistered (ii) placed within a built up area of the city and (iii) not owned by the state would be owned by the public authority. In this case all the land plots were unregistered.

Risk 1:
There was a risk that each of the requirements of the relevant act was not satisfied and that the former owners of the plots could try and reclaim ownership of the land.

Risk 2:
The public authority acquired one of the larger plots of land on the basis of an exchange agreement entered into with a local entity. The lawyers who were involved in the sale of the local entity to the public authority did not check the title documents relating to the local entity, because only the owner of the property had access to the documents in the cadastre.

First Title Solution:
A known risk and good title insurance policy was provided to the Slovakian development company to cover the risk that the title to the land plots would be claimed by a former owner or third party.

Slovakia
Incomplete purchase agreements -risks that future transactions would be challenged
VALUE 12.8 MILLION EURO

Background:
The property was part owned by a company based in Lichtenstein. The current owner wanted to sell off part of their company, which included the land, within a few weeks. After careful inspection of the chain of ownership the following risks were apparent;

Risk 1:
The purchase agreement was made between two companies that possibly related to each other. In such a case the purchase price would need to be evaluated by an expert and the purchase agreement would need to be delivered to a commercial register. These requirements were not observed, which might result in a nullity of the sale.

Risk 2:
The purchase agreement in relation to two plots of land did not include documents proving that the purchase price corresponded to market value. If the two plots of land were not sold at their market value this would enable a third party to try and invalidate the sale of the two land plots.

Risk 3:
A purchase agreement relating to nine plots of land; each plot of land was co-owned. There is a risk that the purchase agreement is null and void, as the purchasing company was not properly represented; the person representing the purchaser (management board member) was dismissed prior to the execution of the agreement.

First Title Solution:
A Good Title and Known Risk policy was issued to the current owners of the Land to cover the problems.


First Title Insurance plc is authorised and regulated by the Financial Services Authority and its products are available throughout the European Union.

 

United Kingdom:
London International Press Centre,
76 Shoe Lane, London, EC4A 3JB
Tel: +44 20 7832 3100
www.firsttitle.eu

 

Central and Eastern Europe:
Szent Istvan ter 11/B,
1051 Budapest, Hungary
Tel: + 36 1 472 2891
Email: new.business@firsttitle.eu
www.firsttitle.eu