The (5) most common types of security rights in the Czech Republic
If you lend money to someone, you want them to pay it back. You also want them to do so if they go bankrupt or are unable to pay for other reasons. The chance that the loaned amount will actually be repaid increases considerably if you stipulate security in advance. The five most common forms of security are discussed below.
- Pledge/Mortgage;
- Security transfer of title;
- Joint and several liability;
- Guarantee;
- Reservation of title.
Which security is most appropriate in your situation obviously depends on the situation and the circumstances of the case.
Pledge/Mortgage
Accordance with the law, the collateral remains the property of the original owner (mortgagor/pledgor). However, the mortgagee/pledgee may initiate a sale of the mortgaged/pledged collateral (or, under certain conditions, may acquire the mortgaged/pledged collateral) if its secured claims are not fulfilled in a due and timely manner.
The following two quasi-securities over real estate are also widely used in secured transactions:
- A negative pledge (that is, a ban on creating a mortgage over the real estate).
- A ban on transferring or encumbering real estate.
Security transfer of title
Under a security transfer of title, the collateral is transferred to the creditor as security.
Joint and several liability
With joint and several liability, several parties are liable for repayment of the same amount.
As a creditor you can choose who you want to address. The person who is addressed must pay the full amount to you. The person who pays may try to get (part of) the amount back from one of the other joint and several debtors, but you have nothing to do with that as a creditor.
Stipulating joint and several liability can be an important advantage if one of the debtors is unable to pay or goes bankrupt. After all, you can then still appeal to the other debtors.
The most common example in practice is the joint and several liability agreement that a bank often concludes with various group companies. However, you can also use this for other agreements.
Guarantee
In the case of a guarantee, a third party – often a bank or holding company – undertakes to pay you a sum of money if you claim it as the beneficiary. This is generally the case if the debtor fails to pay his debt to you.
The most common example in practice is the bank guarantee on demand.
Reservation of title
Sellers can sell goods to a purchaser subject to the condition that the ownership title to the goods passes to the buyer once the purchase price has been paid in full. If the buyer fails to pay the price on the due date, the seller can repossess the sold goods, provided that the goods can be sufficiently identified and are distinguishable from other goods. The reservation title must be negotiated in the relevant purchase agreement.