Developer's Risk Limitation: Title Insurance

By Zdenek Valka and Emil Flegel
As published in
October 2007

Over recent years a developer’s boom, both residential and industrial, has been observed. Investment construction, its effectiveness, speed and legal surety are affected by a number of factors. The developer therefore faces pressures from many sides. For this purpose it is important for him to limit potential risks as much as possible.

An important factor that in the practice often causes complications to an investor is the title to the land or building where construction works are being implemented. According to valid construction law, the documentation of the property or other right to land is a necessary part of the application for planning decision or building permission. Many investors/developers rely on an ordinary extract from the land register, i.e. the deed of ownership. Most banks financing development apply the same procedure, whereby some of them don’t even wait until the lien is registered in their favour, but allow the credit drawing against the submission of the proposal for entry of the lien to the land register. Competition on the bank market is growing and the market forces the banks to assume a part of risk that until recently was borne by the developers/debtors.

The Government does not guarantee the correctness of data in the land register Unlike neighbouring countries such as Poland and to a certain degree Germany, the Government in the Slovak Republic does not guarantee at all that data kept in the land register correspond to reality. The Land Register Office only keeps records of ownership relations to real property, as they result from the submitted documents. Its power and particularly its obligation to examine the legal surety of documents are very limited. If a developer or authorized law office itself wishes to examine the history of the ownership relations, in Slovakia it is made more difficult – unlike neighbouring countries – by the limited access to the Collection of Documents.

For an investor the loss or legal challenge to its title or other right to the respective property by a court may have fatal consequences that often lead to the suspension of construction works and thwarting of the whole project. It is particularly unpleasant if the property is attacked by a title dispute, or when a preliminary ruling is rendered, prohibiting the owner (entered in the land register) from disposing of the property during the building permission proceedings or planning procedure. continue on page 10 Nové trhy v EU boom In this case the building authorities are obliged by law to stay the administrative proceedings and wait for the resolution of a so-called civil objection. In the case of a filed action the developer may wait several years for such a resolution. This situation will however not affect the obligation to repay the credit. In this case a real threat of bankruptcy exists, and the bank only has the pledged property as satisfaction of its claims. But it may not succeed because the property title dispute is an obstacle to its monetizing and the credit becomes unsecured and unenforceable.

The state of legal uncertainty does not benefit the property market The situation is affected by a set of negative aspects, particularly in cases where the principle SUPERFICIES SOLO CEDIT, i.e. the principle that the building is a part of land, has been suppressed for more than 50 years in our law. In practice, situations occur when the title of the investor or owner of the building to the land is successfully disputed. He may, for example due to the action for restitution or for recovery of title, lose his title to land, thus causing problematic relations between both parties. If the parties fail to agree on the regulation of their mutual relations, particularly easement in favour of the building owner, disputes often end up in court.

The problems also influence relations in construction, because the investor is obliged to document his right to the land on which he wishes to build. The certainty of the title or other right to land is of key importance to him. This uncertainty in the area of land registry reflects back into investment construction, and investors and builders look for a way how to protect their interests and investments. The basic condition for a successful investment or development project is thorough due diligence which, together with title insurance, is perhaps the only way how to effectively protect the transferee/purchaser (but also investor, bank or lien creditor) against potential risks. nehnuteľnosťami v Bukurešti vzrástlo o viac ako 100 %, a to tak, že Risks should not be underestimated. According to the principle contained in the valid civil code, ownership does not lapse and an action for recovery of title or for determination of the title to property may be filed at any time.

Examples are known from practice where courts have decided in favour of the initial (actual) owners 60 years after they unlawfully lost their ownership. There is a relatively strong perception that a thick line can be drawn behind the ownership history of real property using the positive prescription. The condition of the prescription of the property right is the expiration of a ten-year period as well as good faith, which however is nowhere clearly defined and is difficult to prove. If the expropriation is indicated in the land register it is very difficult to argue according to good faith.

Thorough familiarization includes not only the collection of information about the chain of acquisition titles over time, but also their deeper analysis. In practice it is alarming how many acquisition titles entered in the land register suffer from relative, or even absolute, invalidity. The most frequent problems are incorrect definitions of the transferred real property, the signature by unauthorized persons, incorrect or missing power of attorney, absence of the required permissions in cases of sale of state property, non-observance of legal procedure for the sale of municipal property, hidden liens, pre-emption or other rights corresponding to an easement, violation of the provisions of the Commercial Code, etc.

Each developer as well as financing banks should therefore consider how the potential risks in the area of the land register and property rights to real property could be minimized. One of the options is title insurance.

Zdenek Valka is Stewart’s Country Manager for the Czech Republic and Slovakia operations. Emil Flegel is Legal Counsel for Stewart’s Czech Republic and Slovakia operations. They can both be reached at: (+421) 2-4463 7004 or /