Author: Mgr. Daniel Macek, 26. 11. 2021
Our attorney Daniel Macek gave an interview to NEMO Report, specialists in screening and detecting risks when buying real estate. In the interview Daniel Macek discusses the topic of pledge which is a relatively common legal restriction in case of an apartment, house or land. In the interview, he describes different types of pledges and their use and he explains how to find out if a property is encumbered by a pledge. He also advises on what to look out for when buying a property encumbered by a pledge.
A transcript of the interview is included in our article, and the interview was also published on the NEMO Report blog.
A pledge is one of the so-called rights in rem and it serves to secure a debt in an agreed amount in case the debt is not paid on time. The object of the pledge is a thing, usually real estate, but it can also be another tradable item which can be monetized in the event of default so that the creditor gets the proceeds. The purpose of the pledge is therefore to ensure that the creditor recovers his claim.
There are several types of pledge, for example:
contractual pledge – this type of pledge is the most common, it is established on the basis of a contract concluded between a creditor and a debtor,
statutory pledge – this type of pledge is typically established in case of default on debts owed to the state (most often tax arrears). Therefore, the Ministry of Finance is most often referred to as the creditor,
multiple pledge – in this case, several items are pledged for one debt, therefore the creditor may claim any or all of them until his claim is satisfied,
sub-pledge – in this case, a claim that is already secured by a pledge is pledged; this type of pledge is not very common,
judicial pledge – judicial pledge is ordered by a court within a judicial execution of a decision,
executor’s pledge – similar to a judicial pledge, it is established by a bailiff’s decision.
You will most often encounter a pledge when buying a real estate and financing it by a mortgage loan. Alternatively, the real estate you want to buy may already be encumbered by a pledge of a seller’s bank. A pledge is also often used when providing loans to companies or individuals.
It always depends on the text of the pledge agreement as it states the specific rights and obligations of the owner. In our experience, pledge agreements vary from bank to bank; for example we encountered cases where the owner was prohibited from renting out the property or carrying out construction work, or more precisely, these activities were subject to the bank’s consent. Therefore, when choosing a mortgage bank it is necessary to carefully study the pledge agreement and to consider the conditions set by the bank. For example, the above-mentioned prohibition of renting or carrying out construction work is not registered in the Land Register so we recommend that you read the draft of the pledge agreement in advance. You may face sanctions from the bank in case you dispose of the real estate in contradiction with the pledge agreement.
Pledge agreements usually have in common that the owner may not alienate the property (sell or donate) or encumber it with another pledge or encumbrance without the bank’s consent.
The pledge on a real estate must be registered in the Land Register, or more precisely it is created only after the registration in the Land Register. The Land Register is a public online register; anyone can search it and find out whether a real estate is encumbered by a pledge or other restriction.
I always recommend checking the Land Register to find out who is the beneficiary of the pledge (whether it is a bank, a company or an individual), for what amount it is established and what other restrictions the owner has (e.g. prohibition of alienation, prohibition of encumbrance).
If you want to sell or buy a real estate that is encumbered by a pledge the bank must give its consent with the purchase and to the issuance of an early mortgage repayment calculation. The bank’s condition usually is that the early mortgage repayment is paid directly to the bank’s account and not to the attorney’s custody account. Once the bank has received the funds, it will issue so-called acquaintance; a certificate that the pledge has been extinguished and authorisation to delete the pledge from the Land Register. On the basis of the application, the Land Register office will delete the pledge from the Land Register.
The pledge is not independently transferable, it is therefore firmly linked to the pledged item. In case that the mortgage is not repaid, the pledge will not be deleted from the Land Register and it will be automatically transferred to the new owner of the property.
A pledge established in favour of a bank is a common case. As already mentioned above, it is necessary to obtain a bank’s consent to sell the real estate, repay the mortgage and then delete the pledge from the Land Register. The second option is to transfer the claim to another property; this alternative implies a delay of several months in the sale and the length of the transfer depends mainly on the seller.
If a pledge is established in favour of an individual or a legal entity (e.g. a company) we recommend buying the property only after the pledge is deleted from the Land Register. In case of a purchase with a mortgage loan, the bank will require this procedure to be followed.
NEMO Report is an online service providing a fast and complex screening of real estate. It helps to gain necessary information and identify potential risks before buying a real estate. NEMO Report is suitable for both laymen and specialists in this field. Among other services, it can also provide technical inspection of a real estate, expert opinions, professional consultations, project preparation, necessary statements and permissions as well as tax and legal services.
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