If you’re buying or selling property in the Czech Republic, you’ll come across the term “escrow of funds (úschova peněz)” or “escrow of the purchase price (úschova kupní ceny).” What does these terms mean, and why should you always make use of escrow? Let’s take a closer look in this article.
In general, when selling or buying property in the Czech Republic, you can choose from three basic types of escrow for funds. These are:
- Lawyer’s escrow,
- Notary’s escrow,
- Bank escrow.
There’s also a special fourth category, which is the real estate escrow, meaning funds are held directly by the real estate agency.
Each type of property escrow has its own advantages and disadvantages when selling a property. So what are they, and what factors should you consider before deciding on the one that suits both the seller and the buyer?
Do you really need it?
Are you wondering why escrow of funds is important when selling an apartment, house, or land? Well, the reasons are quite crucial, even though the buyer and the seller usually have different motivations for choosing the right type of escrow.
In the Czech Republic, escrows are mainly used because there’s a gap of approximately 30 days between signing the purchase agreement and registering the new owner in the land registry. Throughout this period, both parties need to be protected.
Buyers might worry that if they send money to the other party before their ownership rights are registered in the property registry, the seller could take the funds and disappear. In theory, the seller could keep offering the property and collecting money for it without actually transferring it to the buyer (though this scenario might be a bit far-fetched, as scammers can be quite inventive).
So, what prompts the request for escrow of funds when selling a property? The seller would take a significant risk if they signed the purchase agreement and initiated the transfer of ownership rights in the registry without being certain they’d receive the payment from the buyer. After all, in an extreme case, the buyer might never send the necessary funds (maybe they never even had them), yet still end up registered as the new owner.
It’s clear, then, that escrow of funds when purchasing property in the Czech Republic (or selling it) is essential for both parties. But which option should you choose?
Bank escrow of funds
Bank escrow comes with clear advantages – the risk of losing your money due to fraud or embezzlement, for example, is practically zero. Additionally, Czech banks are to a large extent covered, highly insured, and regulated by state institutions.
However, the downside of a bank escrow could be the cost. It’s usually higher than what you might pay, for instance, at a law firm. Also, you might have limited scope to negotiate the terms in the escrow contract – banks usually have their standard escrow contract template and are willing to make only minor adjustments to it.
Lawyer’s escrow of funds
This form of escrow is quite popular in the Czech Republic. One of the reasons is the cost, which is slightly lower compared to a bank or notary’s escrow. It’s also practical because the lawyer preparing the purchase agreement can package it together with the escrow agreement – therefore you only need to communicate about the property transfer with one person who’s well-versed in the entire case. Furthermore, lawyers can incorporate many more revisions into the escrow agreement than a bank or a notary might be willing to.
Unfortunately, there have been instances in the past where lawyers misappropriated the held funds. Therefore, it’s essential to consider which lawyer you’ll entrust with the property’s purchase price. The lawyer should meet a range of rules set by the Czech Bar Association, including having a separate account set up for escrow purposes, and they must also report each escrow to the bar association.
Although lawyers in the Czech Republic are mandatorily insured up to at least 5 million Czech Crowns, given current property prices, this insurance might not be sufficient for lawyer’s escrow. Moreover, the insurance doesn’t cover property loss or potential misappropriation. Therefore, it’s crucial to pay attention to the selection of the law firm you’ll trust with your funds.
Notary’s escrow of funds
Escrow of funds with a notary works on a similar principle as with a lawyer. Notaries are also legally insured in the Czech Republic, although even here, insurance has its limits. The cost of notary escrow is determined by the notarial tariff, which is regulated by the current decree. However, of all the different types of escrow, a notary’s escrow is the most expensive.
Similarly to choosing a lawyer, opt for a reliable notary for your escrow of funds to ensure your money is safety. It’s not true that a notary, being a state employee in the Czech Republic, is a “guaranteed” entity. In the case of escrow misappropriation, the state is not responsible for the lost funds – the same as with other types of escrow.
Escrow of funds with a real estate agency
It’s possible to deposit money with a real estate agency as well. However, according to current legislation, Czech real estate agencies cannot offer escrow on their own – they can only provide it if clients request it in writing.
For real estate agencies (similarly to other types of escrow), the money must be held in a separate account. As for the cost of escrow, many real estate agencies offer this service for free as part of other services related to property sales.
However, we generally do not recommend the escrow of funds with a real estate agency. While escrow has its rules, the official oversight of Czech real estate agencies is minimal – unlike the supervision of lawyers, notaries, or banks, which makes escrow through a real estate agency very risky.
In our real estate agency, we only arrange escrows with reliable law firms or banks, and this is included within the standard commission fee.
If you’d like to learn more about the tax implications when selling property, you can read about this topic in the articles “Property sales tax” or “Income tax exemption when using the money from a sale to buy another property.”
Escrow agreement for funds
It’s essential when buying/selling property in the Czech Republic to draft an escrow agreement for funds. What should you watch out for? The escrow agreement, or a template, is usually available from escrow providers, i.e., escrow specialists.
The escrow agreement must stipulate how and within what timeframe the buyer will pay the purchase price into escrow and under what conditions the escrow agent will release the purchase price to the seller. Additionally, the agreement must contain provisions for how the purchase price will be handled if the transfer of ownership rights to the buyer doesn’t occur.
Choosing the appropriate escrow of funds is one of the final steps in the property sales process. Another step is, for example, handing over the sold apartment or house. How can you make sure you don’t overlook anything? We’ll guide you through this in the article “How to Properly Hand Over Property.”
Do you need advice on how to proceed when selling an apartment or other property? Are you planning to sell, but you don’t want to go it alone? At Kotula Prague Realtor, we’ll take you through the apartment sale process from price estimation to the final contract signing, and we’ll make sure you get the maximum value for your property. Contact us!
Photo: SUWANNAR KAWILA via Canva.com
