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Real Estate Due Diligence: Why It’s Worth It

In Slovakia, as in many other countries, proprietors of real estate are entered into the publicly accessible Land Register. Despite this, when purchasing real estate from the actual proprietor registered in the Land Register, one should be aware of the fact that there is no guarantee that this proprietor is the true and legitimate owner of the real estate. Without a prior title examination (real estate Due Diligence), the risk of future claims being raised by alleged proprietors of the acquired real estate cannot be avoided or minimized.

JUDr. Timotej Braxator, Nörr Stiefenhofer Lutz s.r.o. (Source: Courtesy of Nörr Stiefenhofer Lutz s.r.o.)

In Slovakia, as in many other countries, proprietors of real estate are entered into the publicly accessible Land Register. Despite this, when purchasing real estate from the actual proprietor registered in the Land Register, one should be aware of the fact that there is no guarantee that this proprietor is the true and legitimate owner of the real estate. Without a prior title examination (real estate Due Diligence), the risk of future claims being raised by alleged proprietors of the acquired real estate cannot be avoided or minimized.

According to Slovak law, there is no guarantee that the data on proprietors of real estate shown in the land Register is correct or accurate. The entries in the Land Register represent (only) a rebuttable presumption; in other words, this data is regarded as accurate and legally binding, as
long as no contrary evidence is provided. Thus, despite the registration in the Land Register, the
registered ownership title to real estate could be defeated by a third person with evidence that
the registered proprietor is not the true and legitimate owner of the real estate. As, pursuant
to Slovak law, nobody can transfer more rights to another than he himself possesses, it cannot
be ruled out that a third person successfully disproves the title of the real estate purchaser if
the title is not derived from the true and legitimate owner of the property. As the value of the purchased real estate generally increases after project investments are made by the purchaser, previous owners of the real estate and/or third persons could pay special attention to possible claims they may have against the investor. Thus, the prior identification of possible risks and their elimination or (at least) reduction is of major importance for the project’s successful realisation.

AIM OF REAL ESTATE DUE DILIGENCE

In the light of the above, the real estate Due Diligence should reveal, after the inspection of
the entire cadastral documentation (including transfer contracts, certificates of inheritance,
geometrician plans and original ownership deeds), any circumstances and/or irregularities that could affect the ownership title of the registered proprietor and/or that could give grounds to a challenge of the title by a third person. Such an irregularity may, for example, consist of the conclusion of an invalid real estate transfer contract, an ineffective representation of a contractual party or heir, or the violation of pre-emptive rights or statutory restrictions regarding real estate disposal etc. As outlined above, the invalidity or ineffectiveness of one particular real estate transfer automatically renders each subsequent transfer of that property invalid, as the ownership title did not effectively pass to the next party in the chain of title. For these reasons, special attention is to be paid to the examination of each particular real estate transfer.

RISK ANALYSIS

An inherent part of the Due Diligence is not only the identification of irregularities and/or discrepancies regarding real estate titles, but, in particular, the assessment of the severity of risks following from the irregularities discovered. Thus, the main purpose of the risk analysis is to focus on essential issues that are crucial for the project’s realization, leaving minor risks aside. In other words, not every discovered discrepancy regarding the real estate bears an essential risk in it. For example, if a real estate acquisition is found to be ineffective or invalid (for whatever reason) but the defect occurred more than ten (10) years ago and is followed by a continuous chain of effective acquisitions up to the present owner, one could argue that the current owner has acquired the title by prescription, provided that the current and every previous owner was in good faith (bona fide), i.e. had no doubt about his ownership. Similarly, the direct acquisition of real estate from a person (heir) in whom ownership was vested by a court decision (or court confirmation) is generally valid and effective even if the heir was not the legitimate owner of the property, again provided that the acquirer was bona fide (i.e. did not know that the heir was not the legitimate owner of the property).

RISK ELIMINATION OR REDUCTION

After the major risks are identified, their effective elimination or reduction should be considered. Depending on the irregularities and/or discrepancies identified, one of the
following remedies may apply:

Provision of additional (missing) documents to eliminate or reduce the uncertainties/risks. In
a large number of cases, the risks identified during the due diligence can be eliminated by
the provision of additional documents (that have not been available so far) that disprove
any claim made. For example, a real estate purchase contract is, on behalf of the owner, concluded by a proxy without presenting an existing authorization. As such, the effective acquisition of the real estate is in question. The Real Estate Due Diligence:Why It’s Worth It Legal View 39 investigation in the files of the parties to the contract and the presentation of a valid authorization (e.g. power of attorney) can clarify this issue and eliminate the risk.

Further, in a number of cases the applicable formal requirements for real estate transactions
(of which the parties to the transaction might not be aware) are not fulfilled or are fulfilled
only partially. As a result, the real estate transfer is voidable and can be challenged in court. By the subsequent fulfilment of the necessary formal requirements, the effectiveness of thereal estate transfer may be achieved. For example, the real estate was sold to the investor by a seller who was married at the time of the sale without the consent of his/her spouse (which is generally necessary if the real estate forms part of the joint property of spouses). The subsequent provision of a written consent by the spouse eliminates the risk of invalidity of the real estate transfer.

In other cases, inaccurate description of the real estate and/or its proprietors are registered in the public records and need to be rectified in order to clarify the legal situation. For example, the entry in the Land Register features two owners of the real estate with slightly different names who are, in fact, the same person. Without the correction of this registered data, the ownership to this real estate remains unclear, and the transfer of ownership could give rise to difficulties.

IRREMOVABLE RISKS ANDIRREGULARITIES

Naturally, not every identified risk or discovered irregularity regarding the real estate
and its proprietors can be eliminated or reduced. For example, an 80% ownership share to the property was transferred without the approval of the co-owner owning the residual 20 % (such approval is necessary pursuant to law). In addition, it is impossible to contact the minority owner due to objective circumstances (e.g. address unknown) for purposes of clarifying the issue. In this and other cases, the due diligence serves the purposes of providing the investor with a clear picture of the legal risks of the contemplated transaction that can further serve as a basis for the decision-making process (as to whether to invest or not) or for the subsequent negotiations with the counterpart on the terms of the transaction. Bearing this in mind, the impossibility of remedying certain risks should not be a reason for not carrying out the due diligence. On the contrary, the irremediable risks should be taken into account for the accurate determination of the terms of the transaction and the inclusion of various representations and warranties into the transactional documentation.

CONCLUSION

Real estate due diligence is recommended for anumber of reasons. It first gives the investor the
opportunity to eliminate or at least reduce legalrisks which otherwise could (in the worst case
scenario) endanger the entire investment, and,even if the identified irregularities cannot be
removed, the due diligence serves as a basis for the project’s evaluation and the subsequent
negotiations on the terms of the transaction with the counterpart. Neither the time and costs necessary for the due diligence should give reasons to skip the due diligence, as experienced advisors can examine the real estate titles in short time, and, if required by the investor, it is possible adjust the focus of the examination on selected issues and particular needs of the investor which reduces the costs effectively. Otherwise, if no due diligence is carried out and if, at a later time, a legal problem disables or postpones the investment (or its part), the costs related to the solving of such a problem or the loss of time can and will most likely exceed many-fold the costs of due diligence. To sum up, real estate due diligence should always form an integral part of any real estate investment.

Timotej Braxator is Associate with Nörr Stiefenfoher
Lutz s.r.o.

This article is only intended for informationpurposes. For more information, please contact Nörr
Stiefenhofer Lutz s.r.o., tel. +421 (0)2 5910-1010,recepciaba@noerr.com; www.noerr.com 11117
JUDr. Timotej Braxator Nörr Stiefenhofer Lutz s.r.o.

Topic: Real Estate


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