Case Studies of Recent Risks Found in Land Register

The strategic importance of Slovakia with its central location, good transport links, low taxes and relatively affordable development space has proved extremely popular with a broad range of international investors. Despite the rapid growth of the market, the land registry system has not yet fully responded to the increasing demand in a way that minimises title risks.

During the previous Communist regime in Slovakia, land ownership was considered unimportant. As a result, registration of ownership changes was not obligatory. For example, in 1995 only 3.3% of land parcels were registered with clear ownership because part of the Slovak cadastral documentation was destroyed or lost during the Second World War and was not updated in the intervening years. This meant that changes in the ownership of Slovak property were not registered.

Slovakia uses a cadastral registration system. However, the cadastre does not accurately identify all parcels of land. Many files are only auxiliary files (so-called simplified registers) enabling searching for parcels represented in maps of the historical land cadastre (under the old parcel numbers). This search through archival documents is difficult and time-consuming manual work demanding very skilled personnel.

These problems prompted a nation-wide process of land registration renewal that started in 1996. Local land registry renewal commissions were established according to local self-government units with members representing the state administration (including specialists), the local government and landowners. The overall aim of these commissions was complete renewal of land registration by the year 2000 in order to create certainty for landowners and investors. However, at present only 40% of land transactions have been registered. Moreover, only one tenth of agricultural land is registered which is a further hindrance to foreign investors looking for greenfield or undeveloped land.

Problems with the Slovak land registration system manifest in the title documents - many documents confirming transfers of ownership have not been properly authenticated, and some land transfers in Slovakia still remain informal.

Given the problems with the land registers and the lack of State guarantee in Slovakia, sellers' warranties are often of limited value and lawyers' due diligence reports can prove inconclusive because they are unable to review all the title documents. For this reason, title insurance can be a useful and vital tool for investors, developers and lenders.

First Title has encountered many issues relating to the incomplete cadastral record. Following are two recent cases.

Case 1

A leading Slovak development company purchased land from a Slovak public authority. A detailed investigation of the title history of the land plots revealed that the public authority acquired the land based on an act relating to property rights. This act detailed that from a certain date all plots of land that were (i) unregistered (ii) placed within a built up area of the city and (iii) not owned by the state would be owned by the public authority. In this case all the land plots were unregistered in the early 1990's.

Risks:

  • There was a risk that each of the requirements of the relevant act were not satisfied and that the former owners of the plots could try and reclaim ownership of the land.
  • The public authority acquired one of the larger plots of land in the early 1990's on the basis of an exchange agreement entered into with a local entity. The lawyers who were involved in the sale of the local entity to the public authority did not check the title documents relating to the local entity because only the owner of the property had access to the documents in the cadastre.

Case 2A property was partly owned by a company. The current owner of the company wanted to sell off part of the company which included the land in a quick transaction. After careful inspection of the chain of ownership over the previous 10 years, the following risks were apparent:

 

Risks:

  • The purchase agreement was made between two companies that were possibly related to each other. In such cases the purchase price needs to be evaluated by an expert and the purchase agreement needs to be delivered to a respected commercial register. These requirements were not observed possibly resulting in the ineffectiveness of the sale;
  • The title history going back a period of 10 years relating to four plots of land was missing
  • The purchase agreement in relation to two plots of land did not include documents proving that the purchase price corresponded to market value. If the two plots of land were not sold at their market value, a third party could try and invalidate the sale of the two land plots; and
  • The purchase agreement relating to nine plots of land - each plot of land was co-owned - was possibly not properly represented by the purchasing company because the person representing the purchaser was dismissed prior to the execution of the agreement. This put the purchase agreement at risk of being null and void. 

In both of these cases, First Title issued Known Risk and Good Title policies to protect the developer/owner against the identified problems. These are just two examples of the use of title insurance to protect against problems with the land register and the lack of state guarantee in Slovakia.