If you are considering purchasing a flat together with your partner, with the financial resources for this purchase to be paid by means of a mortgage loan, it is advisable to be aware in advance of certain circumstances relating not only directly to the purchase, but also to any subsequent sale of the flat or separation from your partner.

A mortgage loan is a loan the repayment of which is secured by a lien over immovable property (including property under construction). It is necessary to distinguish carefully between (1) the obligation relationship arising from the loan agreement, (2) the lien over the immovable property, and (3) the ownership right to the immovable property being acquired.

The obligation legal relationship arises between the bank providing the mortgage loan and the debtor, on the basis of the concluded loan agreement. The debtor may be one person or several persons at the same time. A guarantor or guarantors may also appear in this relationship. A guarantor is a person who undertakes to pay the debt to the creditor in the event that it is not paid by the debtor.

The lien over immovable property, established to secure repayment of the loan, is a conceptual feature of a mortgage loan. The immovable property to be charged must be located in the territory of the Czech Republic (or a Member State of the European Union or another state forming the European Economic Area). However, it may be different immovable property from that which is being purchased from the mortgage loan resources; indeed, the immovable property to be charged may be owned by a third person (that is, a person different from the debtor or from the acquirer of the property being acquired). Thus, for example, a lien may be established over the grandparents’ recreational cottage to secure a mortgage loan provided to finance the purchase of a flat by their grandson.

The owner of the immovable property may become one of the debtors, all (or some) of the debtors (in which case it will be co-ownership in shares), or a third person who is not a debtor. In practice, it will of course be common for the debtor under the loan agreement and the purchaser of the immovable property under the purchase agreement to be the same person. However, fairly often we also encounter cases where co-debtors or guarantors (siblings, parents, etc.) will appear on the debtor’s side who will not be acquiring the immovable property being purchased.

Let us now outline how the process of obtaining and repaying a mortgage loan might proceed for two young people, partners, who have decided to purchase a flat and to use for this purchase financial resources obtained by means of a mortgage loan (I note that in the case where the immovable property would be acquired by spouses, the situation is somewhat different). The immovable property to be charged will be the flat being purchased, as this security solution is by far the most common in practice.

Purchase of immovable property

Banks commonly provide a mortgage loan of up to 70% of the value of the charged immovable property, but some mortgage programmes enable resources to be obtained by loan of up to 100% of the price of the immovable property. However, it is necessary to realise that this is 100% of the value at which the flat is valued by a court expert (the bank only cooperates with a certain circle of experts and it is therefore not possible to obtain one’s own expert report). The value thus assessed will generally be lower than the market value. Therefore, it is almost always necessary to obtain part of the resources from sources other than the mortgage loan.

The bank assesses the so-called creditworthiness of the debtors, on the basis of many indicators (amount and source of income, education, age, required repayment period, possible amount of instalments, etc.). In our case, let us consider that the debtors would be both partners. The bank would therefore assess the creditworthiness of both of them together and in the event that they met the bank’s conditions, the loan could be provided to them. In the opposite case, a possible solution would be to seek other persons who would be willing to become further debtors or guarantors (however, it is clear that the person of a co-debtor or guarantor takes on a large obligation for many years without having any direct economic benefit from it, and therefore finding such a person is naturally difficult).

For the acquisition of immovable property and payment of the purchase price, three basic contractual documents must be concluded, namely (1) the loan agreement, (2) the lien agreement, and (3) the purchase agreement (usually in that order).

The loan agreement is concluded between the bank, which will provide the mortgage loan, on the one side and the debtors (in our hypothetical case, both partners) on the other side. In this agreement, the bank undertakes to provide financial resources in favour of the debtors (most commonly by transfer directly to the account of the seller of the immovable property or into the custody of a third person) and the debtors undertake to return the financial resources provided within the agreed time (most commonly from 10 to 30 years) and to pay interest.

By the lien agreement, a lien over immovable property is established in favour of the bank serving to secure its claim against the debtors in the event that their debt is not properly performed. The lien agreement is concluded between the bank (as lien creditor) on the one side and the owner of the immovable property (as pledgor) on the other side. Here, two possible solutions come into consideration.

In practice, it is much more common for the lien agreement to be concluded with the bank by the seller of the immovable property (that is, the original owner) before the immovable property is sold to the interested parties - the future owners. This solution enables (unlike the case where the immovable property would be charged only by the purchaser - the new owner) the bank to release the financial resources at the beginning of the entire transaction and not only after entry of the ownership right to the immovable property in the cadastre of immovable property (see below).

Finally, a purchase agreement is concluded between the owner of the immovable property and the interested parties in the immovable property - in our example, both partners would become the new owners, each with one half of the co-ownership share.

For completeness, I note that the ownership right to immovable property does not pass upon conclusion of the purchase agreement, but only upon entry of the ownership right in the cadastre of immovable property. Similarly, the lien also arises only upon its entry. Entry of the right is performed by the relevant cadastral office upon the application of a party to the agreement (purchase or lien). For the period until the entry of the right is permitted by the cadastral office (this period ranges in practice from approximately one month to half a year depending on which cadastral office has local jurisdiction), it is possible to keep the financial resources in the custody of a third (independent and trustworthy for both the seller and the purchaser) person.

Acquisition of immovable property into co-ownership in shares and the existence of a joint debt may bring considerable complications in the event of later disagreements between the partners. Therefore, it is always necessary to consider such a transaction very carefully.

Sale of the flat

In the event that the new owner decides after some time to sell the immovable property, the price of which was paid by a (still unpaid) mortgage loan, it is necessary to resolve not only the transfer of the ownership right to the immovable property, but of course also the legal relationship arising from the loan agreement.

If the new interested party in the flat has the required financial resources at their disposal, the situation is simpler. The new interested party pays the purchase price to the sellers. They pay from this price in a lump sum the still unpaid part of the mortgage loan (whereby their obligation to the bank ceases) and keep the remainder of the purchase price. In this case too, it is necessary to recommend consulting the entire transaction with the bank and ascertaining all the conditions of early repayment (that is, in particular, whether this is possible at all, whether it is penalised in any way, etc.).

The situation is more complicated when the new interested party in the flat does not have all the cash resources at their disposal and is interested in “continuing” to repay the mortgage. Here, agreement must be reached in tripartite negotiations between the seller, the purchaser and the bank. In practice, it will depend mainly on the bank whether it is willing to agree to the substitution of debtors. The bank will therefore have to assess the creditworthiness of the purchaser and in the event that they meet the bank’s requirements, nothing prevents the purchaser from becoming the bank’s debtor, the seller’s obligation to the bank ceasing and a purchase agreement being concluded.

Disagreement between partners

In practice, it is often necessary to resolve the case where, during the period of a still unpaid loan, a disagreement arises between the partners (co-owners of the immovable property and at the same time co-debtors to the bank) resulting in these persons no longer wishing to live together. It is advisable for them to reach an agreement regarding further legal relationships to the flat.

Two basic possibilities present themselves. The first of them is the sale of the flat to a third person (see above). This results in the cessation of the obligations of both partners to the bank and they divide the remaining financial resources obtained from the sale (that is, those resources which exceed the final lump-sum repayment of the loan to the bank).

The second possibility is that the flat will be transferred to one of the partners. As in the case of sale, however, it is necessary to deal thoroughly with the relationship to the bank. If the flat is to become the exclusive property of one of the partners, this partner must be prepared and able to assume the entire debt “on themselves” alone. This is not possible without the bank’s consent, as it thereby weakens its position (instead of two of its debtors, only one will appear in the relationship). Negotiations are therefore again necessary between the partners and the bank, where the bank will assess whether even one of the partners, if they were to appear as the sole debtor, would meet the creditworthiness conditions. If so, settlement is possible; if not, a solution might be to find a new person who would be willing to become a further co-debtor with the partner (a sibling, new partner, parent, etc.).

If agreement were not reached between the partners, the co-ownership would be terminated and settlement carried out by the court, upon the application of one of the partners - co-owners. However, this is a situation considerably more complicated and a more detailed description of the court proceedings already exceeds the scope of this article.

This text was translated from Czech to English using an AI translator.