Investors have a number of key issues to consider before making any final decision to acquire real estate in Slovakia. It is common practice in Slovakia that investors take measures to limit exposure to contractual claims by acquiring real estate, including requiring the production of formal discharges and waiver of claims. It is, however, important to know that under Slovak law, a waiver of a future right is not enforceable, so the protection afforded by this type of discharge and waiver could be challenged.

In addition, it is possible to obtain indemnities and guarantees from sellers in connection with the purchase of real estate. Investors should be aware that if any claims arise out of illegal acts, it is unlikely that an indemnity for losses arising from them could be enforced.

Ownership

Under Slovak law, a title deed cannot be considered incontestable evidence of legal title to immovable property. According to the law in force, entries in the Cadastral Registry, which is the primary source of information regarding real estate, are not guaranteed by the state or the Cadastral Registry, but only reflect the state as entered in the Cadastral Registry. Under these circumstances it is possible to acquire immovable property on the basis of a purchase contract or other legal title from a non-owner, even if such a non-owner is entered in the related deed of title in the Cadastral Registry as the rightful owner.

If the current possessor of immovable property can prove continuous bona fide possession of the immovable property for the previous 10 years, that possessor can be confident of its ownership right to the property. Therefore, it is recommended that a title search be performed to track chain of title and ownership rights of the real estate for the previous 10 years.

The prescribed period of 10 years incorporated in the Civil Code (Act 40/1964 Coll, as amended) is still disputable because persons that acquired property in this way have to prove the basic prerequisite of their acquisitions and show that they acted in good faith. Generally, in accordance with the Cadastral Act, the data entered into the Cadastral Registry are deemed reliable, unless the contrary is proved. The risks mentioned above relating to ownership of immovable property may also be covered by title insurance.

As in the case of ownership title entry in the Cadastral Registry – which investors may not fully rely on since the court has the right to review the validity of prior transfers – the registration of a security interest in real property does not provide full assurance that the registered pledgee has obtained a valid security interest in the real estate property, since the courts have discretion to review the validity of the pledge agreement, and even to order the appropriate change in the Cadastral Registry.

Often, the sale of real estate owned by a city does not take place on the basis of a public procurement and public tender, nor has it been shown that the selling price was based on the market price; therefore it is possible that a violation of legal regulations on provision of state aid occurs. If the sale violated the state-aid rules, then the buyer should return the provision of state aid (since the buyer is considered the beneficiary of the state aid). If the purchase price was agreed below the market price, the difference between the market price and below market price value may be considered state aid. The court may then decide that the buyer should pay the city an additional provision of the purchase price (difference) corresponding to that amount. Furthermore, under specific circumstances the argument can be made that the court may rule the purchase contract invalid.

Restitution claims

Based on Slovak law effective from November 1 2005 churches and/or religious communities may raise restitution claims if certain conditions of Slovak law are met. On the basis of the claim, the present owners of the real property defined by law are obliged to return the property. It is not possible to quantify what percentage of land could be affected by restitution claims. It is important to note that if structures have already been erected on the land affected by a restitution claim, and the land is under construction, it is not in compliance with Slovak legislation to release that land to the third party (the restitution persons). Pursuant to applicable law, the land authority may give substitute lands to those persons, or may offer the affected person monetary compensation.

There is no public register to allow confirmation of the type of the filed restitution claims. No central registers exist to help determine the existence of litigation relating to particular real estate. Court records are only made available to the parties to litigation, not to third parties. The District Land Offices maintain a database of the filed restitution claims; however, in our experience, such databases may not have an exhaustive list of restitution claims.

Matrimonial rights

Certain steps are recommended if the real estate is acquired from co-owners. Co-ownership is regulated by the Civil Code and provides that more than one person may share ownership of real estate. If a co-ownership interest is being transferred to a third party or another co-owner, the other co-owners have a statutory pre-emptive right to purchase that interest (Section 140 of the Civil Code). The transferor's failure to offer co-ownership interest to the other co-owners does not make the transfer automatically invalid; however, the other co-owners may assert invalidity of the transfer at court within three years of the date of transfer. Pursuant to the decision of the Slovak Supreme Court as of October 25 2005 the pre-emptive right applies if a co-ownership interest is transferred to a third party not only by a purchase agreement but also as a gift.

During due diligence of the transfer agreements or title records it is not always possible to determine whether the property was subject to matrimonial rights. If a property is registered in the name of one spouse only, it is still possible that the other spouse has a right to it. That spouse could initiate proceedings to have a transfer annulled. Such a risk should be mitigated by representations, warranties and indemnities.

Defects

A purchase contract must be executed in writing. Verbal or implied agreement is invalid. The signatures of the parties must be affixed in the same document. Failure to pay the purchase price entitles the seller to withdraw from the purchase agreement. Therefore, it is recommended that in certain instances an independent accounting firm conduct a review of the payment of purchase price.

The risk associated with the ownership shall pass on the buyer once the real estate is registered in the Cadastral Registry unless the parties agree otherwise. The buyer may claim a warranty only if it highlighted the defects in the real estate without delay after viewing the real estate. But such a claim can be made only within 24 months of the handover of the real estate. Defects identified through the Cadastral Registry, or apparent defects, may be enforced only if the seller provided representations and warranties that the real estate was free of defects. Such claims must be filed within three years of the date the buyer was able to view the real estate.

Lease contracts

There are three forms of lease contracts: general lease agreements, regulated by the Civil Code; non-residential lease agreements, regulated by the Act 116/1990 Coll as amended; and residential lease agreements. Slovak landlord and tenant law provides for only a few mandatory terms and the law is not as comprehensive as elsewhere in Europe. Non-residential premises may be leased only for the purposes for which they were constructed.

Under Slovak law if the investor purchases a retail centre or shopping mall and the rights and obligations arising from the existing lease agreements transfer to the investor (the new landlord), the existing tenants have the right to terminate or withdraw from the lease agreements by reason of change in ownership. Most lease agreements in Slovakia contain tenants' representations that they will not request termination of the lease agreements; but it has been deemed that such representations are not enforceable. Pursuant to the Slovak Civil Code (Section 680.3), upon change in the ownership of real estate, the tenant (but not the owner) has the right to terminate a lease agreement upon change in ownership by giving notice, even when the contract was agreed for a fixed period. The notice must be given during the earliest notice period.

Landlords' headaches

This means that if the investor purchases a building in which the subject of the lease is located and the rights and obligations arising from the existing lease contracts transfer to the investor as new landlord, the existing tenants will have the right to terminate the lease contracts by reason of the change in ownership. Although the buyer acquires the rights and obligations arising from the lease contracts upon purchase of the building (thereby acquiring the tenants as well), these advantages are weakened by the tenants' right to terminate the lease contracts on their leased premises by the lawful deadline.

The law does not sufficiently regulate the timeframe in which the tenant can terminate the lease contract. According to the Civil Code, notice of termination must be given in the closest period for giving notice unless otherwise set out by law or by agreement. However, the law does not unequivocally define the closest period for giving notice, or the manner in which the period should be determined, and the lease contracts contain no special provisions in this regard.

The period in which the tenant is entitled to give notice of termination of the lease in these circumstances remains in question. It is deemed that the following manners of determining the period may be considered:

a) Within three months: the period will begin on the first day of the month after the buyer's acquisition of title to the building, provided that the tenant was notified of the change in title. This period is based on the lawful three-month notice period set out by the Act on Leases for cases of notice of termination.

b) Without undue delay after the tenant is notified of the ownership change regarding the building. Because of the ambiguity in the definition of an exact period during which the tenant is entitled to give notice of termination, it is possible that the court would adopt this conclusion in a lawsuit.

c) Within three years: in a lawsuit the court could interpret the subject provision by deciding that in cases where the notice period is not exactly defined by law or contract, that period is not designated. Therefore the tenant's right to give notice of termination of the contract is subject to the general three-year statute of limitations.

The investor will have to notify the tenants of the change in ownership of the building and respect the right of the tenants to give notice of termination of the lease contracts – but only in a reasonable period of no more than three months (see item a). The possibility stated under c would be unfair for the new landlord – it is unreasonable to provide a tenant with a legal right to terminate a lease contract due to change in ownership later than two years after that change, for example. The possibility of c applying is remote, but we cannot exclude it due to lack of case law in this respect.

The investor should keep in mind the tenants' right to terminate their lease agreements due to the ownership change. A waiver of the right to terminate lease agreement shall be obtained from the most important tenants.

Unclear costs

Under Slovak law, the landlord must provide all services and utilities related to the lease (water, heating, electricity) for a charge, in addition to rent. Thus, leases generally provide for a review of service charges based on a stable value clause. No specific rules specify which operating costs the landlord will bear, and which the tenant. The tenant is obliged to insure the premises only if agreed in the lease agreement.

Lease agreements often do not specify the method for calculating the total common operational costs by the landlord. Thus, the tenants are not given clear evidence to review whether the common operating costs are reasonable. Consequently, it can be argued that such provisions in lease agreements are invalid due to their ambiguity.

Premature occupancy

It is common practice that in some lease agreements the landlord promises that no third party shall conduct activities with the same purpose of lease as the tenant on the respective premises. The Slovak Anti-Monopoly Office may consider such limitations, preferring certain tenants to others, as restricting economic competition. Such an agreement is prohibited. The invalidity of this clause, however, would not affect the enforceability of the agreement as a whole.

After completion and before occupation of the building the developer must apply for a permit of use certifying that the building complies with the planning and building permit (the certificate of occupancy). Often tenants conclude lease contracts and begin using non-residential premises before making sure that the building was granted a certificate of occupancy.

Under Slovak law, the use of real property before granting the certificate of occupancy is prohibited and could be subject to penalties for breach of building regulations. The impact on the investor in this matter is evaluation of the validity of the lease contracts. Especially pursuant to the decision of the Supreme Court, there is a risk that such contracts will be deemed invalid, because from the legal perspective no subject of lease (non-residential premises) existed at the time the contracts were concluded.

Agricultural land

A major change in the legislation is related to the introduction of a fee (financial payment) for the exclusion of agricultural land from agricultural usage, with the aim of using the land for non-agricultural purposes, such as construction.

The Act which was passed on May 21 2008 allows the use of agricultural land for non-agricultural purposes solely based on a decision on the exclusion of such land issued by the District Land Office with jurisdiction in the place where the plots of land in question are situated (Act 220/2004 Coll on the Protection and Usage of Agricultural Land and on Amendment to Act 245/2003 Coll). Agricultural land may be excluded from agricultural usage permanently or for a limited period of time; a limited period of time means up to 10 years.

The Act does not specify a fee for the exclusion of agricultural land from agricultural usage. A government degree will stipulate the fee for permanent exclusion of land, which will depend on the so-called quality-rated soil-ecological unit.

The quality-rated soil-ecological unit is a "classification and identification mark expressing the quality and value of the production-ecologic potential of agricultural land". The Act distinguishes between nine groups of quality-rated soil units; the higher the quality of agricultural land, the higher the fee for its permanent exclusion.

The purpose of the fee is to protect the highest quality agricultural land in Slovakia. Developers should be financially motivated to focus on plots for which the fee is lower.

The new rules will become effective on January 1 2009. From a practical point of view, it is important to note that all proceedings commenced before the effective date of the amendment to the Act will be finished pursuant to the laws valid as of today. This means that if an application for excluding agricultural land is filed before January 1 2009, no fee will be paid for the exclusion of such land for construction purposes.

Author biography

Daniel Futej Futej & Partners Daniel Futej JUDr CSc LLM is the managing partner of the leading Slovak law firm Futej & Partners. He is responsible for the negotiation of a wide variety of transactions involving acquisition of pension companies, debt and equity financing and real estate investments. For the past 10 years he has been engaged in transactions in Central and Eastern Europe. He has been involved in a broad range of financing and joint venture projects including real estate projects. He has published various articles and is co-author of a book on EU law.