The new Civil Code (Act No. 89/2012 Coll.) contains rules on the transfer of rights as security that significantly extend the previous regulation under the old Civil Code (Act No. 40/1964 Coll., Civil Code). Despite lawmakers’ apparent efforts to make the concept of transfer of rights for security clearer and more certain, the new regulation raises a number of questions that still need to be settled through case law or possibly a technical update to the statute.
The basis of a rights transfer for security is that the debtor or a third party temporarily transfers its rights (e.g. ownership rights to movable or immovable property) in order to secure a creditor´s claim. Unless the parties agree otherwise, a transfer of rights for security is assumed to be a transfer with a condition subsequent, i.e. a condition whose fulfilment will mean that already occurred consequences cease to apply. If the debt is paid, this condition subsequent is applied, and the transferred right is returned to the original transferring party. Conversely, if the secured debt is not paid, the transfer of rights becomes unconditional and permanent, and the creditor becomes the owner of the transferred item without limitation.
For property that is publicly registered, the transfer of rights as security only takes effect when it is recorded in the relevant registry. In contrast, if an object is not listed in the public domain, the transfer of rights as security becomes effective when the agreement between the creditor and the security provider is concluded.
The new law does not require agreements on the transfer of rights as security to be in writing.
Although the law assumes that the transfer of rights as security has the simple condition subsequent that the debt is paid, the parties are also free to agree on a so-called contingent transfer of rights (in Czech: fiduciární převod práva), i.e. where the end of the transfer depends on the creditor’s performance of other specific legal acts. In that case, the restoration of the right to the transferor does not occur based on mere satisfaction of the debt, but requires additional active steps by the creditor (e.g. the filing of a registration application in the real estate Cadastral register).The administrator of the property subject to the transfer of rights as security is only required to perform basic maintenance (i.e. preserving the nature and purpose of that property), unless the parties agree otherwise. The creditor is not allowed to transfer or encumber the item. To protect potential purchasers acting in good faith, however, such transfers remains valid even if this duty is breached so long as the property concerned is not registered in a public registry.
If the debt is not paid, the creditor becomes the permanent and unlimited owner of the item, and the security provider has a duty to hand over to the creditor any objects that it has not yet provided which are required for the full exercise of the transferred right.
A transfer of rights as security is one of the strongest security instruments which a creditor can request. From the time of the security’s creation (or, as the case may be, its recording in the relevant public registry), rights pass to the creditor. That creditor need not take any additional steps if the debt is unpaid, i.e. in such case, the creditor fully and unconditionally takes over the original owner’s rights to the property.