Communists have always been jumpy about private property – which goes a long way to explaining why developers must still take care in the Czech Republic
There is a peculiarity in the way buildings and land are treated in the Czech Republic that developers should be aware of. Ideally, a developer would purchase land, then build on it. However, this is not always possible or convenient, as the right to sell the land may be restricted – for example, where the owner is a municipality. In the Czech Republic this is not an obstacle because a developer can build on someone else's land and even become the owner of the building, although it never becomes the owner of the land. This concept is allowed by the Czech Civil Code provision that a building does not constitute a part of the land on which it is built. However, the developer should be aware of some special issues raised by the separate ownership of the building and the land.
Any building needs certain administrative permits (a zoning decision and a building permit) before construction can start. Anybody constructing a building without these permits runs the risk that the Building Office will order the unauthorised building to be removed. Variations of this procedure are standard in most European countries.
However, a developer constructing a building on someone else's land in the Czech Republic must also ensure it has sufficient title to the land, giving it the right to construct the building. This cannot be granted by any administrative body, but only by the owner of the land. As it is not possible under Czech law to establish an easement allowing the developer to construct a building on the encumbered land, the only method regularly used when commercially developing a building on someone else's land is through the lease.
The period for which a lease is granted is important for tax reasons. If the land has been leased for an indefinite period, the standard depreciation period for buildings (30 years) applies. But if the developer has a lease for a definite period of time, the Building Office will declare the building to be a "temporary structure" and allow it to be used only for the period of the lease. The temporary structure then depreciates during the lease. So, if the lease is for less than 30 years, the building depreciates quickly. Conversely, if the lease is for a longer period, say 90 years, the building depreciates slowly; this is an important tax disadvantage of leases granted for a long definite period.
An unusual situation can arise if a building on someone else's land already exists and the title giving the developer the right to construct and maintain the building on the land expires prematurely or turns out to be void. Then, even if all the building's permits are in perfect order, the developer becomes a trespasser on the land. The owner of the land is entitled to ask the court to order the building to be removed.
Fortunately, the court is not limited to this remedy. If removal would be "inappropriate" and if the owner of the land agrees, the court can join the ownership of the building to the ownership of the land, awarding compensation to the building's owner. The court can also settle the dispute in other ways, such as by creating an easement in favour of the building owner.
But be warned, some simpler structures such as tarmac car parks, golf courses and pavements are not treated like buildings because they are not considered complex enough to constitute a separate object. They will simply be absorbed into the land. Therefore, investors should carefully consider the legal nature of what they intend to build.
Although substantially amended, the current Czech Civil Code will never be able to slough off its communist origins. The idea of replacing this code with an entirely new one has been a matter of debate since democracy was restored in the former Czechoslovakia and is now favoured by politicians. Recognising that the building should constitute part of the land is considered one of the main objectives of the re-codification of the Czech civil law. The legislators will be looking for ways to encourage building owners and land owners to have joint titles; the building owner's pre-emptive right over the land and various tax incentives are under discussion.
These various legal issues should not deter developers in the Czech Republic, but it is important to be aware of the pitfalls.
This piece was co-authored by Martin Bendik, a solicitor at Linklaters, Prague; Klara Stepankova, a partner at Linklaters, Prague, and Victoria McKinnell, a solicitor at Linklaters, London.