Exchanging flats by exchange agreement: linking two transfers, a mortgage and a balancing payment

A young family needs a larger flat; an older couple would prefer a smaller one without stairs. Instead of each of them selling and buying separately, they exchange their flats and settle the difference in value with a balancing payment. An exchange agreement is built for that situation: both transfers sit in a single document, they go to the cadastre together, and nobody is left without a flat while the other side already has its new one. For it to work that way, the agreement must deal with matters that an ordinary purchase raises on one side only.

Each party is both seller and buyer

Exchange is governed by a single provision of the Civil Code: the rules on purchase agreements apply as appropriate, and each party is treated as the seller of the asset it gives and as the buyer of the asset it receives (Section 611). With flats this means that each party is liable for defects in the flat it hands over. If a defect the other party did not point out later comes to light, the party that received the flat is entitled to a reasonable reduction in price, and where the defect renders the asset unusable, also to withdraw from the agreement (Section 597). The defect must be notified to the other party without undue delay, and at the latest within 24 months of taking the flat over (Section 599). In an exchange it is therefore useful for both parties to describe the condition of their flat and its known defects in the agreement, and for a handover protocol to be drawn up for both flats.

Precise identification and annexes

For a flat, the cadastre requires the flat number, the floor, the entrance, the building’s registration number and the co-ownership share in the common parts, the common facilities of the building and the land (Section 42(2)(c) of the Cadastral Act). In an exchange these details must be given for both flats and for both title sheets. Each flat also requires a certificate from the building manager or the owners’ association about arrears; what to do if the manager will not issue one is dealt with in the building manager’s certificate when selling a flat. The title sheet often also records the statutory security right of the other flat owners, which does not block the exchange; the explanation is in the statutory security right over a flat.

A mortgage over one of the flats

If one of the flats is encumbered by a mortgage, the exchange will not extinguish it. A security right takes effect against the acquirer (Section 151h(1)) and ends only when the secured claim ends (Section 151md(1)(a)). There are essentially three options: the loan is repaid before the exchange or out of the balancing payment; the bank agrees to an assumption of the debt or to moving the security to the other flat; or the acquirer takes out a new loan from which the original one is repaid. Each of them requires the bank’s cooperation, and the agreement must determine who will secure it and what happens if the bank refuses. Look at the security agreement as well, to see what it says about a transfer of the flat. The detailed procedure for repaying a loan out of the price is described in the article buying a flat with the seller’s mortgage.

The balancing payment and handover of the flats

The difference in value is dealt with by a balancing payment in the exchange agreement. It is worth tying its due date to approval of registration and, where the sum is larger, placing it in escrow to be released once both transfers are registered. Agreeing the handover date matters just as much. If one family is moving into the flat of another that has not yet moved out, a chain arises which needs to be set out in dates and backed by a penalty for delay.

One agreement, one application, two transferors

An exchange agreement goes to the cadastre in a single registration application, which must cover all the legal acts and all the properties under the agreement (Section 30(5)). The cadastre therefore decides on both transfers at once, which is the main advantage over two separate purchase agreements. Both parties are transferors, however, and the rule on signatures therefore applies to both:

The transferor’s signature on the agreement, the signature of the party bound by a pre-emption right, the signature of the burdened party where an easement is created or of the beneficiary where an easement ends, and the signatures of co-owners on an agreement dissolving and settling co-ownership or on the settlement of undivided co-ownership of spouses must be officially certified under special legislation; […] where those persons are represented, their signature on the power of attorney must also be certified. This does not apply where a party to the agreement is a state authority, the Slovak Land Fund, a municipality or a self-governing region, or the Railways of the Slovak Republic, or where the property transfer agreement is executed in the form of a notarial deed or authorised by a lawyer.

— Section 42(3) of Act No. 162/1995 Coll. (unofficial English translation)

If two married couples exchange flats and each couple holds its flat in undivided co-ownership of spouses, that means four certified signatures. Authorisation by a lawyer replaces them. The lawyer draws up the agreement, establishes the identity of the parties and assesses the agreement’s compliance with the law as well as the risk of damage arising (Section 1a(1) of the Act on Advocacy); the cadastre then reviews the agreement only for compliance with the cadastral records and for procedural conditions (Section 31(2)), and is to decide within 20 days instead of 30 days (Section 32).

Checklist

• both flats exactly as recorded on the title sheets, with the shares in the common parts and the land,
• the values of the flats, the amount and due date of the balancing payment, and escrow where appropriate,
• the arrangement for the mortgage and the bank’s consent,
• declarations about the condition and known defects of both flats,
• building managers’ certificates of no arrears,
• handover dates and penalties for delay,
• who files the registration application and what happens if the cadastre suspends the proceedings.

The general rules on exchange, including tax, are dealt with in exchange agreements for property. We prepare an exchange of flats from due diligence on both title sheets through to registration in the cadastre as part of our exchange agreement service. If you want to save on certification of signatures and are signing in Košice, we will authorise the agreement as part of our authorisation of a property transfer agreement service.