Category: Czech Republic

The COVID-19 pandemic undoubtedly hit the real estate market. In response, the government adopted a series of measures that included an extraordinary moratorium, often used by commercial tenants, and a rent reduction scheme in which the government subsidized the rent in cases where the landlord was willing to provide a discount. Most importantly, the crisis made the government abolish the 4% real estate transfer tax.

The latter actually paved the way for a new wave of asset deals. Most Czech real estate deals up until then were SPV-based share deals, in an obvious attempt to tax-optimize. Yet, tax exemptions granted to shareholders after the respective holding period may still be the prevailing tax-optimizing tool and result in a preference for share deals.

Nevertheless, what are the legal benefits of an asset deal? The buyer may principally rely on the title information recorded in the Real Estate Register, and their good faith in those records is well protected against third parties’ claims based on rights not duly recorded. This may significantly limit the need for extensive due diligence. On the other hand, the buyer must focus on other specific issues and make sure that these are carefully investigated.

While the scope of due diligence might be very limited or almost inexistent in respect to land plots with no permits attached, land under development, land with structures or tenants in the buildings will require more attention.

The buyer will, in particular, need to dig into what the relevant utility and grid connections are and whether there are any specific rights in order to get access to the property. Statutory pre-emptive rights may cause a lot of trouble, as they are typically not recorded in the Real Estate Register. At the same time, intellectual property rights do not automatically follow the property and their importance is often underestimated.

More attention is now being paid to often-overlooked lease agreement clauses, such as change-of-circumstances or vis maior clauses. Similarly, inflation brought by the COVID-19 pandemic also caused indexation to be a part of almost every lease – even short-term leases.

The transaction mechanics also vary. While share deals are pretty straightforward and the title to shares is transferred instantly, the requirement for a real estate title transfer recording in the Real Estate Register delays the actual closing and final settlement. There is a 20-day standstill period between the filing and actual recording and the title transfer is effective retroactively as of the date of filing. This may create discomfort, particularly when there is a need to amend or novate the leases during the stand-still period.

Speaking of leases, by law all leases are transferred with the land and any sale of land cannot trigger lease terminations. In the case of leases that deal with rights and obligations beyond the scope of the lease itself, it may however be disputable whether such rights and obligations are also transferred by law, or whether a specific assignment is required.

Both the seller and buyer must also be cautious when the property being sold is the substantive property of the seller, which is almost a tradition in the case of real estate SPVs. First, specific corporate approvals might be required. Second, the buyer bears the risk that it may become jointly and severally liable for the seller’s debts which are linked with the property. Finally, depending on what the property is used for, it may qualify as a business unit, where the actual title transfer conditions and the scope of assets being transferred are different, and much wider, than in the case of a pure property transfer.

In conclusion, the situation around COVID-19 helped to remove the disadvantageous tax treatment of asset deals and stimulated certain segments of the real estate market – particularly those related to vacant land transactions and apartment sales. At an institutional level, share deals still appear to be preferred due to their well-proven predictability, clarity, legal certainty, and associated financial benefits linked with an SPV takeover. Yet, if serious red flags are found that are linked purely to the SPV or if there is a lack of time to conduct extensive ownership title due diligence, shifting to an asset-based deal is now a much easier option.

By Jiri Hornik, Partner, and Jakub Porod, Lawyer, Kocian Solc Balastik

This Article was originally published in Issue 9.3 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Havel & Partners has, on a pro bono basis, helped the Vlcek Family Foundation organize an architectural workshop in which an expert jury selected the winning design for the reconstruction of the Cibulka estate in Prague. 

According to Havel & Partners, “the Foundation plans to build a children’s hospice with a palliative center there. The winning architectural studio, Petr Hajek Architekti, will design the new look of this historic complex in Prague’s Kosire district.”

“We selected the result because it best combines two main priorities: the best possible future use of the site for seriously ill children and their loved ones and the preservation of the entire existing part of the estate with the utmost respect for history,” said architect Frantisek Brychta of the Vlcek Family Foundation, the head of the Cibulka project.

Havel & Partners’ team was led by Managing Associate Kamila Kulhankova.

Hogan Lovells has successfully represented CPI Property Group and Radovan Vitek before the New York’s Appellate Division in a defamation dispute initiated by Kingstown Capital.

According to the firm, Kingstown Capital had alleged that Vitek obtained a minority stake in the Luxemburg-based real estate development company Orco, restructured it to form CPI, and through fraudulent transactions forced Kingstown to sell its shares at a loss. Kingstown brought its original suit against Vitek and CPI in the Southern District of New York, seeking in excess of USD 1 billion in damages.

“At the time the lawsuit was filed, CPI issued a press release stating that the plaintiffs had acted improperly in filing the federal action,” a Hogan Lovells press release stated. “In 2020, a team from Hogan Lovells won dismissal of that lawsuit, and the court issued an opinion characterizing Kingstown’s choice of New York for the lawsuit as forum shopping. However, Kingstown then brought suit against CPI and Vitek for issuing the aforementioned press release, alleging defamation, which the Supreme Court, New York County, dismissed for lack of personal jurisdiction.”

According to the firm, the Appellate Division affirmed an earlier ruling that the plaintiff, Kingstown Capital Management, had failed to establish personal jurisdiction under New York’s long-arm statute.

Founded in the Czech Republic, CPI Property Group is a family-owned company that owns and manages income-generating real estate. The company’s portfolio focuses on the Czech Republic, Berlin, Poland, and the CEE region. Radovan Vitek is the company’s founder and primary shareholder.

The Hogan Lovells team was led by New York-based Partners Seth Cohen and Michael Hefter, Senior Associate Andrew Harris, and Law Clerk Danielle Flanagan.

Taylor Wessing has advised the Passerinvest Group on its acquisition of the building housing the general headquarters of the Directorate of Roads and Motorways, in the Prague 4 district, from investor Simona Otavova.

Financial details were not disclosed.

The Passerinvest Group, founded in 1991 by Radim Passer, is a Czech development and investment firm experienced in the construction of administrative and commercial buildings as well as residential projects. According to the firm, “with this acquisition, Passerinvest has expanded its portfolio of commercial properties in the Prague 4 and Prague 11 area of interest, in which it has been active as an investor long-term. In Prague 4 alone, the company has invested almost CZK 16 billion, of which CZK 1.6 billion has been invested in non-profit projects that are used by the general public (education, public green spaces, sports and urban infrastructure, security, ecology).

“This transaction confirms that the interest in quality office properties persists despite current economic and other challenges,” Taylor Wessing Partner Jakub Adam said. 

“In these times of volatile inflation and interest rates, we have accelerated our strategy of expanding investment in key properties in and around the Brumlovka area. I would like to acknowledge the professional and at the same time very pleasant cooperation with Jakub Adam’s team at TW,” Passerinvest Group Development Director Eduard Forejt commented.

Taylor Wessing’s team included Partner Jakub Adam and Associates Marek Stradal, Radim Dolezal, and Martin Serak.

Taylor Wessing could not provide additional information on the deal.

Cytowski & Partners has advised Spaceflow on a EUR 8 million Series A round with Hydda.

According to Cytowski & Partners, Hydda joined as an investor in the company following a seed round by Credo Ventures and UP21 from Prague, and Day One Capital from Budapest.

Spaceflow is a Czech real estate startup that connects users to their buildings with features focused on reservations, payments, community, events, and services. The startup is present in 18 markets, including the UK, the US, and DACH, Benelux, and Scandinavia regions.

Hydda is a Swedish investment fund.

The Cytowski & Partners team included Partner Tytus Cytowski and Associates Eresi Tracy Uche, Kunal Kolhe, and Tomiwa Ogundipe.

While recent legal updates are causing delays and others are potentially removing positive developments, Allen & Overy Partner Prokop Verner points out that there are reasons to be optimistic, especially if one is to follow the energy and online retail sectors. 

“Looking at the macroeconomic picture in the Czech Republic, as elsewhere in the CEE region, we feel a significant effect of the war in Ukraine,” Verner begins. “The situation is compounded by high inflation – one of the highest in Europe, with the official inflation rate of around 14%. This, in addition to increasing energy prices, creates challenges for the business sector. Many players, in particular, energy-intensive companies already feel it, but the second half of the year will likely be the most difficult, with a few insolvencies already on the horizon.” 

Verner remains optimistic, that despite the challenges in the second half of the year, the Czech economy will start to recover afterward. “Since the end of the last year, we have a new government, with less populist policies and more responsible public spending and rational economic policies,” he explains. According to Verner, “it will likely contribute to a better economic environment in the following years.” 

From a legal point of view, Verner highlights two recent major developments. “First of all, last year a new act on FDI control was adopted, subjecting a few infrastructure deals to the supervision of the Ministry of Industry and Trade,” he points out. “This has significantly prolonged the procedure and has an impact on investors coming from outside of the EU,” Verner says, noting that the ministry is still on the learning path on how to do it efficiently. 

“Second, we have a new construction act, creating a new landscape for the development sector,” he adds. “The new law shortens the time for building new projects.” According to Verner, it is a positive step, as currently, developing a new project usually takes from 5 to 10 years, and something was needed to be done. “The current government did not support the amendment, as they oppose centralized decision-making in general and are rather in favor of such decisions being made by the local authorities,” he says.

“Surprisingly,” Verner notes, “the overall challenges faced by the country do not translate negatively to the law firms’ work. We remain still very busy, with no real slowdown.” However, Verner notes, that “there is a trend of fewer international players active on the market, while local and regional players still have an appetite for transactions.”

As for the future, Verner says that major developments are expected in the energy and online retail sectors. “The tender to extend the construction of a new nuclear power plant in Dukovany has finally been initiated,” he explains. “It is a long-term project, expected to be finalized in fifteen years, yet it is a huge step forward, dramatically shaping our energy market.” In addition, Verner says that online retail is another very active market, with many players. “We see their activities and appetite to expand to other markets. In that regard, a lot is going on both in transactional and TMT sectors,” he notes.

Former Wilsons Attorney-at-Law Monika Kajankova has joined Dentons’ Prague office as a Partner on May 15, 2022.

Specializing in real estate, Kajankova spent 9 and a half years with her previous team at Wilsons, between 2013 and 2022.

“Dentons is the top Real Estate practice in the Czech Republic, and I am thrilled to be part of this forward-thinking team as a Partner,” Kajankova commented. “The firm gives a great opportunity to join an international practice and to utilize its global platform to support the needs of my clients.”

“Monika is a great addition to our team,” Dentons Czech Republic Co-Head of Real Estate Jiri Strzinek added. “She brings considerable experience which will complement and further strengthen our existing Real Estate practice.”

Glatzova & Co has advised Germany’s Handolfo Invest on its acquisition of Czech food supplements manufacturer Algamo. BNT Attorneys in CEE reportedly advised the seller. 

Handolfo Invest is a German investment group. Algamo is a food supplements manufacturer in the Czech Republic with products used in the cosmetic industry, pharmaceutical industry, and dietary supplements production.

The Glatzova & Co team included Partner Vladimira Glatzova, Associate Jindrich Pastrnak, and Law Clerk Tomas Farnik.

Clifford Chance has advised a club of lenders including Komercni Banka, Ceska Sporitelna, and Raiffeisenbank on a EUR 137.5 million loan to the Accolade group for the construction of an Amazon automated distribution center. Allen & Overy advised Accolade.

According to Allen & Overy, the financing for the development of an innovative distribution center in Kojetin, the Czech Republic, represents “the largest-ever loan for a single industrial rental property” in CEE.

“Accolade will be using the money to finance the construction and long-term ownership of an automated distribution center, that is being built in Kojetin, near the D1 highway. The total surface area of the three-story premise will be more than 187,000 square meters,” Clifford Chance informed. “The area of the warehouse will include natural elements, such as dedicated areas for insects and lizards and there is a plan to plant around 500 trees in the area. The heating of the premises will be powered by heat pumps and there will be photovoltaic panels installed on the roof.”

Clifford Chance’s team included Partner Milos Felgr, Counsel Milan Rakosnik, Associates Tereza Rehorova and Josef Lysonek, and Junior Lawyers Adam Simice and Tomas Kubala.

Allen & Overy’s team included Counsel Petra Mysakova, Senior Associate Lucie Siva, and Trainee David Bujgl.

JSK has advised Sudop CIT on its acquisition of Czech information technology company Profiq. The Marek Hoskovec law office reportedly advised the sellers.

The Sudop Group is a Czech-based engineering and consulting services company. Sudop Consulting and IT invests in the IT ecosystem.

Profiq is a Czech company building complete software products and technologies, including platforms, frameworks, server-side applications, and developer tools for identity and access management, finance, mobile, and desktop virtualization.

According to JSK, “by adding another specialized IT company to its portfolio, Sudop CIT strengthens its position in the Czech IT market. Sudop’s goal is to build one of the largest IT groups in Central Europe. It has already acquired several other IT companies, helping to consolidate the Czech and Central European IT market. Behind Sudop CIT is the Sudop group, which originally focused only on design and engineering in the field of construction.”

The JSK team was led by Partner Tomas Dolezil and included Senior Lawyers Jana Pospisilova, Lucia Regecova, and Hana Cislerova, and Trainees Klara Smidova, Jan Koprnicky, Marek Pume, and Filip Kvapil.