Payment terms in a sale agreement for property: when and how to pay so that no one loses the money or the flat

A sale agreement gives rise to the seller’s obligation to hand over the object of the sale and the buyer’s obligation to take it over and pay the agreed price (Section 588 of the Civil Code). With real property a third element is added which the parties do not control: ownership passes only upon registration in the Land Register (Section 133(2)). Between signature and entry there is therefore always a period in which one party has already given something and the other has not. The payment terms determine who bears that risk. If the agreement deals with them in a single sentence stating that “the purchase price shall be paid on signature”, the risk as a rule remains with the buyer.

What to tie the due dates to

The due date of the purchase price should not be tied to a date in the calendar but to an event you can evidence. Most often these are:

• signature of the agreement and filing of the registration application — suitable only for a small part of the price, or where escrow is used, because the buyer is not yet the owner,
• the allowance of registration — the buyer pays only once recorded as owner; the risk shifts to the seller, who transfers without any certainty of receiving the money,
• deletion of an encumbrance — if the property is subject to a lien of the seller’s bank, part of the price goes directly towards their loan and the balance only after deletion,
• handover of the property — for example a retention until the handover report is signed and the keys are handed over.

The compromise between the first and second options is escrow. The buyer deposits the price with a lawyer or a notary on signature, and they release it to the seller once the agreed conditions have been met, typically after registration has been allowed. How escrow works and what to ask about it is explained in the article lawyer escrow when buying property. Cash payments are restricted by law; the limits are examined in the question how much can be paid in cash.

When part of the price is paid by a bank

On a purchase with a mortgage, the price is split into own funds and the loan. Own funds are usually paid earlier, so it is sensible to protect them with escrow. The loan part comes from the bank according to its drawdown conditions, which may require, for example, security by way of a lien, a particular account of the seller and declarations in the sale agreement. The agreement must match those conditions precisely, otherwise the bank will not release the funds and payment will stall. It must also determine what happens if the bank does not release the funds in time: a time limit, a right to withdraw, or a condition precedent (Section 36(2)). What to do if the loan is ultimately not approved is examined in the question the bank did not approve the mortgage after the agreement was signed; why a bank sometimes wants a lien agreement from the seller, in the question the bank’s lien agreement and the seller.

What happens if something goes wrong

Well-drafted payment terms also allow for the deal not going to plan:

• The buyer’s default. A debtor who fails to discharge a debt in time is in default; if they do not pay even within an additional reasonable period, the seller may withdraw from the agreement and, in the case of a monetary debt, also claim default interest (Section 517(1) and (2)). An agreed contractual penalty must be paid even if no loss arose from the breach of duty (Section 544(1)); it may be agreed only in writing (subsection 2). The sanctions should be symmetrical for the seller’s delay in handing over as well.
• A stay of the registration. The Land Register stays the proceedings where defects in the application or its annexes must be remedied, and if they are not remedied within the period set, it discontinues the proceedings (Section 31a(c) and Section 31b(1)(f) of the Cadastral Act). The agreement should oblige both parties to cooperate on the correction and provide that the money meanwhile remains in escrow.
• Refusal of registration or withdrawal. A refusal of registration does not in itself cancel the agreement, so the agreement should determine whether and when withdrawal is then possible. Withdrawal cancels the agreement from the outset and the parties return what they have received (Section 48(2), Section 457). While the money is in escrow, its return is straightforward; if it has already been released to the seller, what remains is a claim that has to be enforced.

What the lawyer does on authorisation

With an authorised agreement the law imposes a specific duty on the lawyer precisely in relation to payments:

In the case of an agreement on the transfer of real property for consideration, the lawyer shall draw the attention of the parties to the agreement to the payment terms for the purchase price agreed in the agreement, and shall state in the agreement a declaration by the parties to the agreement that they have acquainted themselves with those terms.

— Section 1aa of Act No. 586/2003 Coll. (unofficial English translation)

The declaration in the agreement is meaningful only if you genuinely understand the terms. Before signing, therefore, have it explained to you exactly when each part of the price leaves and what happens to it in each of the scenarios described.

Checklist before signing

• Is the due date of each part of the price tied to a demonstrable event rather than to a date?
• Does the agreement require payment directly to the seller before the buyer is registered or the money is protected by escrow?
• Does the agreement deal with repayment of the seller’s mortgage and deletion of the lien?
• Does the text match the bank’s drawdown conditions, including the account number and the purpose of the payment?
• Is it clear who files the registration application and when, and what happens on a stay or a refusal?
• Does the agreement contain a declaration that the price has already been paid when that is not so?

We will check a draft agreement drawn up by someone else and rewrite the payment terms so that they protect you, as part of our review of a sale agreement service. On a purchase with a loan we will align them with the bank as part of our buying property with a mortgage service. If we draw up and authorise the agreement ourselves, we go through the payment terms with both parties at signature as part of our authorisation of an agreement on the transfer of property service.