WHAT DOES THE PROHIBITION OF ALIENATION AND ENCUMBRANCE MEAN FOR REAL ESTATE AND IN WHAT SITUATIONS CAN YOU ENCOUNTER THIS RESTRICTION?

Author: Mgr. Daniel Macek, 4. 8. 2021

WHAT DOES THE PROHIBITION OF ALIENATION AND ENCUMBRANCE MEAN FOR REAL ESTATE AND IN WHAT SITUATIONS CAN YOU ENCOUNTER THIS RESTRICTION?

NEMO Report – specialists in screening and detecting risks when buying a real estate – asked our law office for an interview dedicated to prohibitions on alienation and encumbrances. In an interview with Daniel Macek they talked about the topic of alienation and encumbrance prohibitions and in what situations we may encounter these restrictions.

You are interested in buying a real estate and you find out that the prohibition of alienation and encumbrance is stated in the Land Register. What does that mean? Who is using this type of restriction and why? You will find answers to these questions in this interview.

We present a transcript of the interview in our article, the interview was also published on the NEMO Report blog.

We often see a restriction on the right of ownership called “prohibition of alienation and encumbrance”. To the average person, this may be a meaningless term. What can we imagine under it?

Simply said, the prohibition of alienation and encumbrance means that the owner is not allowed to transfer (i.e. sell or donate) or encumber (typically by an easement, a pledge or a pre-emptive right) the real estate in any way for an agreed period of time. Therefore, the prohibition of alienation and encumbrance represents a significant restriction for the owner of the property. Although this term is usually used together as a phrase, alienation and encumbrance can still be established separately, independently of the other restriction.

The prohibition of alienation and encumbrance always relates to specific real estate and not to its owner (although it restricts him in effect) and it is inscribed in the Land Register. These prohibitions can only be imposed for a certain reasonable period of time, so they cannot be established indefinitely.

Can you explain why prohibitions of alienation and encumbrance exist? Who uses them most often and where can we encounter them?

These prohibitions are most often established in the creditor-debtor relationship, i.e. mainly as an addition to the bank's pledge when granting a mortgage loan to the buyer of the real estate. The bank takes the establishment of the prohibition of alienation and encumbrance as an insurance for the satisfaction of its claim – they want to ensure that the owner will not sell or encumber the pledged real estate. Therefore, it is very common to find not only a pledge in favour of the bank in part C of the title deed, but also a prohibition of alienation and encumbrance in favour of the same bank.

If we follow the example of a mortgage loan with a bank, what does this mean for me in practice?

If a prohibition of alienation and encumbrance is established in favour of the bank, you are restricted in the disposal of the real estate. If you want to sell, donate or create an easement on the real estate, you must obtain written consent from the bank (with a certified signature of the authorized person), which you must submit to the Land Registry. The Land Registry will not make the requested change without the consent of the bank. In practice, this means that you cannot sell or donate the real estate, divide lands, establish a right of use or other type of easement or pre-emptive right unless the bank expressly agrees.

Can someone other than the bank use the prohibition of alienation and encumbrance?

Yes, but in our experience these are rather exceptions. We have encountered the establishment of prohibition of alienation in case of the sale of real estates by the municipality to support young couples - in this case the municipality wants to ensure that buyers are not just buying the real estate as an investment, but that they will indeed remain the owners. We also established prohibition of alienation at the request of parents when donating their real estate to their children – the parents wanted to make sure that the real estate will remain in the ownership of their children for a certain period of time. The prohibition of alienation and encumbrance can be deleted from the Land Register, but this must always be done on the application or with the consent of the person in whose favour the prohibition is established.

Finally, what would you recommend to people who encounter the prohibition of alienation and encumbrance?

It is important to distinguish between two situations. If you are buying a real estate that is subject to prohibition of alienation and encumbrance, be aware that the mortgage bank must authorise the disposal with the real estate – give its consent to the sale or to the repayment of the debt. In this case the seller must be proactive and sort these matters with his mortgage bank.

The second case is when you are buying a real estate and you will finance the purchase price or part of it with a mortgage loan. If the bank granting you the mortgage loan requires a prohibition of alienation and encumbrance, you have no choice but to accept this condition. Banks have their standardized procedures and fixed rules and in vast majority of cases they do not deviate from them. If you were to request that you do not want to encumber the real estate by way of an alienation and encumbrance, you are unlikely to succeed. In our experience, currently over half of Czech banks require the establishment of the prohibition of alienation and encumbrance.

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