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Why do banks require land as collateral?

Banks only accept building plots as collateral, which are designated in the municipal zoning plan as building parcels intended for construction. A meadow, field, or other land not designated for development will not be accepted by the bank as collateral. The lien on the land must be registered in the Land Registry and must not be encumbered by any other third-party lien that would take precedence over the bank's lien.

The value of the land determines the maximum loan amount the bank will provide. The key indicator is LTV (Loan to Value), which is the ratio between the loan amount and the collateral value of the property. For land, banks typically finance 70–80% of its appraised value. This means that if a plot of land has a collateral value of 2 million CZK, the bank will lend you a maximum of 1.4 to 1.6 million CZK.

The ARROWS law firm will help you with the preparation and review of the lien agreement to ensure that all conditions are set correctly and in accordance with Czech legislation.

What conditions must the land meet to be used as collateral?

A bank will not accept just any piece of land as collateral. You must meet several basic requirements, which are based on both the internal regulations of individual banks and legal regulations. Above all, the land must be registered in the Land Registry as a building plot with clearly defined boundaries.

The basic requirements include:

Purpose of the land: It must be a building plot intended for construction according to the municipal zoning plan. The bank requires submission of an extract from the zoning plan or a statement from the building authority confirming that the land is designated for construction.

Access to the land: The land must have guaranteed legal access, preferably in the form of a direct connection to a public road or via one's own land. If access is across another person's land, you must have an established easement for a right of way, which is registered in the Land Registry.

Utility networks: Although it is not a condition that the land must be fully serviced with utilities, the bank will require information about the availability of utility networks and the possibility of connecting to electricity, water, sewage, and gas.

Absence of legal defects: The land must not be encumbered by a lien in favor of another creditor, easements preventing its use, enforcement proceedings, insolvency, or other restrictions that would prevent the bank from exercising its lien.

Ownership relations: The collateral property does not have to be owned by the mortgage applicant – you can also use a property that you co-own with another person, or a property owned by a third party, as collateral. The person concerned must always agree to the lien and sign the lien agreement.

Insurance: The bank requires insurance for the collateral land with an assignment of insurance proceeds in favor of the bank, which means that in the event of an insured loss, the insurance payment will be paid directly to the bank.

ARROWS lawyers have extensive experience in verifying the legal status of properties and identifying hidden legal defects that could prevent a bank from accepting the land as collateral.

How do banks appraise land?

The appraisal of land for collateral purposes is a key process that determines the amount of the loan the bank will provide you. The bank commissions a property appraisal, which is carried out by a certified appraiser or an internal bank appraiser. This appraisal is usually valid for 6 to 12 months.

The collateral value of the land is determined as the market yield value, taking into account the permanent and long-term sustainable characteristics of the property and the income achievable by a third party under proper management. When appraising, banks primarily consider:

Position and location: Land in attractive locations with good accessibility has a higher value. The distance from the city center, civic amenities, and transport infrastructure significantly affects the price.

Readiness of the land: Whether the land is designated for construction in the zoning plan, whether a zoning decision or building permit has been issued, and whether it is connected to utility networks. Land with utility connections has a higher value than land without them.

Size and shape of the parcel: A regular shape of the plot suitable for construction increases its value. Banks also take into account the maximum possible building density according to the regulatory plan.

Legal status: The existence of easements, pre-emption rights, or other restrictions reduces the collateral value of the land.

It is not true that banks appraise building plots at only a fraction of their market value. If the land is designated for construction in the municipal zoning plan and is connected to utility networks, its appraisal is carried out in a completely standard manner.

The purchase price of the land may not be equal to the appraised value determined by the bank. If the bank appraises the land at a lower value than the purchase price, you will have to pay the difference from your own funds.

What documents will you need?

Preparing a complete set of documents for the land is a time-consuming process that requires visiting several authorities and obtaining a number of documents. For the bank, you will need to provide:

Extract from the Land Registry: A current extract from the title deed showing that you own the property and that it is not encumbered by liens, easements, or other restrictions. The extract must not be older than 3 months.

Cadastral map extract: A graphic representation of the location and boundaries of the land, including the parcel numbers of neighboring plots.

Surveyor's plan: For land designated for construction or for newly surveyed parcels, the bank may require a current surveyor's plan.

Extract from the zoning plan: A document confirming that the land is listed in the municipal zoning plan as a building plot intended for construction.

Statement from the building authority: A statement that the land is intended for construction and that it meets the conditions for issuing a building permit.

Documents regarding utility networks: Statements from utility administrators about the possibility of connecting to electricity, water, sewage, and gas, including information on the distance of connection points and estimated connection costs.

Documents regarding the access road: If access to the land is across another person's property, a document on the established easement for a right of way or a right-of-way agreement.

Insurance policy: A concluded insurance policy for the land with an assignment of proceeds in favor of the bank.

Market value appraisal: An expert opinion or appraisal carried out by the bank's appraiser.

Obtaining some documents can take several weeks. The process of preparing the documentation is legally and administratively demanding, and a single mistake in the documents can significantly complicate or delay the entire process. Thorough preparation of the documentation and its review by an expert is therefore crucial.

The ARROWS law firm will ensure the complete preparation of your documentation, including obtaining all necessary documents from the authorities, checking their accuracy, and submitting them to the bank in a timely manner. We will save you time and minimize the risk of errors.

What is LTV and how does it affect the loan amount?

LTV (Loan to Value) is one of the most important indicators that determines the amount of the loan a bank will provide you for a piece of land. It is the ratio between the loan amount and the collateral value of the property, expressed as a percentage.

According to a regulation of the Czech National Bank, as of April 1, 2022, the maximum LTV is 90% for applicants up to 36 years of age and 80% for applicants over 36 years of age. However, for land intended for construction, banks usually provide loans with a lower LTV, typically 70–80% of the collateral value.

A practical example: If your land has a collateral value of 3 million CZK and you are over 36 years old, the bank can provide you with a maximum of 2.4 million CZK (80% LTV). You must provide the remaining 600,000 CZK from your own funds.

The lower the LTV, the more favorable the interest rate the bank will offer you. If you manage to push the LTV below the 70% threshold, you can get significantly better loan terms.

How to lower LTV and get better terms?

There are several ways to achieve a lower LTV and thus a more favorable offer from the bank:

Increase your own funds: The more money you contribute from your savings, the lower the LTV will be.

Use another property as additional collateral: If you own another property (for example, your parents' apartment), you can offer it as collateral along with the land. The total value of the collateral will increase, thereby lowering the LTV.

Financial gift or loan from family: Money from parents or grandparents can cover part of the purchase price and reduce the required loan amount.

Use a building under construction as collateral: If a house under construction "under the roof" with completed exterior walls already stands on the land, you can include it in the collateral, which will increase the total collateral value.

Procedure for establishing a lien on land

Establishing a lien on a piece of land is a multi-step process that requires coordination between you, the bank, and the Land Registry Office. A lien on a property is created only upon its registration in the Land Registry, not merely by signing the lien agreement.

Step 1: Loan approval by the bank
First, you must go through the approval process at the bank. You submit a loan application, provide proof of your income, and the bank performs a credit scoring and assesses your ability to repay.

Step 2: Appraisal of the land's value
The bank will have the collateral value of the land appraised. The appraisal is carried out by the bank's internal appraiser or a contracted expert. This step usually takes 1–2 weeks.

Step 3: Preparation of contractual documentation
After the loan is approved, the bank prepares the loan agreement and the lien agreement. The lien agreement is signed by you (and any other co-owners of the land) and by the bank as the lien creditor.

The lien agreement must contain: identification of the contracting parties, a precise specification of the collateral land according to the data in the Land Registry, identification of the secured claim, the amount of the secured claim, and the rights and obligations of the parties.

Step 4: Official verification of signatures
The signatures on the lien agreement must be officially verified so that the agreement can be used as a registration document for the Land Registry Office.

Step 5: Filing an application for registration of the lien
Together with the seller (if you are buying the land) or alone (if you are using your own land as collateral), you file an application for the registration of the lien with the relevant Land Registry Office. You attach one original of the lien agreement with officially verified signatures to the application.

The administrative fee for registering a lien is 2,000 CZK.

Step 6: Registration of the lien in the Land Registry
The Land Registry Office will review the application and the attached documents. If everything is in order, it will register the lien in the Land Registry. This process usually takes up to 30 days from the filing of the application.

The lien comes into effect as of the moment the application for registration was received by the relevant Land Registry Office. This is particularly important for determining the priority of liens if there were multiple liens on the same piece of land.

Step 7: Drawing down the loan
Many banks today allow the loan to be drawn down based on the filing of the application for registration of the lien, without having to wait for the registration process to be completed. This is called "drawing down on the basis of the application for registration."

The entire process is administratively and time-consuming. Any error in the documentation, incomplete data, or an incorrectly filled-out application can lead to the rejection or suspension of the registration proceedings, which means unnecessary delays and additional costs.

The ARROWS law firm will provide you with complete legal services for establishing a lien – from preparing the lien agreement, through official verification of signatures, to filing the application for registration and communicating with the Land Registry Office. Thanks to our experience, we can significantly shorten the process and minimize the risk of errors.

What to expect when using land as collateral

Why is the lien agreement so important?

The lien agreement is a key document that defines the rights and obligations between you as the pledgor and the bank as the lien creditor. A poorly drafted or incomplete lien agreement can be a reason for the Land Registry Office to reject the registration application.

The lien agreement must be concluded in writing with officially verified signatures of all contracting parties. Banks use their own template agreements, which, however, often contain provisions that are unilaterally disadvantageous to the debtor.

Typical restrictions in a lien agreement:

Prohibition of alienation: You cannot sell or donate the land without the prior consent of the bank. Violation of this prohibition is usually associated with high contractual penalties.

Prohibition of encumbrance: You may not establish another lien or easement on the land without the bank's consent.

Obligation of maintenance and insurance: You must maintain the land in good condition and have insurance with an assignment of proceeds in favor of the bank for the entire duration of the loan repayment.

Notification duty: You must report all changes concerning the land to the bank – for example, the start of construction, a change in the type of land, or the emergence of legal defects.

The bank's right to inspect: The bank has the right to inspect the condition of the land and the way you handle it.

Violation of these obligations can lead to the imposition of contractual penalties in the hundreds of thousands of crowns or even to the termination of the loan agreement and the immediate maturity of the entire debt.

In practice, the legal issues surrounding lien agreements are much more complex than they may seem at first glance. The individual points of the agreement have hidden exceptions, procedural details, and connections to other regulations in the real world. Without a thorough legal analysis, you can easily overlook a provision that could cost you dearly in the future.

The ARROWS law firm provides a review of lien agreements prepared by the bank and will alert you to unilaterally disadvantageous or risky provisions. We propose amendments to the agreement that protect your interests. We also commonly partner with corporate lawyers to resolve special issues. Connect with us and get a tailor-made legal solution.

International transactions and cross-border collateral

If you are planning to finance land abroad or use a property in another country as collateral, you face a significantly more complex legal situation. The lien is governed by the law of the state where the property is located (lex rei sitae). This means that if you want to use a plot of land in Germany as collateral, the lien will be governed by German law, even if the loan is provided by a Czech bank.

Cross-border transactions require:

Knowledge of foreign legal systems: The German Grundschuld or the Austrian Pfandrecht have different legal regulations than the Czech lien law.

Coordination with foreign authorities: The registration of a lien in the German Grundbuch or the Austrian Grundbuch has different rules and deadlines.

Tax implications: Cross-border transactions can have implications for real estate transfer tax, inheritance tax, or gift tax in both countries.

Recognition of judgments: In the event of the enforcement of a lien, it is necessary to ensure that a judgment issued in one country is recognized and enforced in the other.

The ARROWS law firm has a decade of experience with international transactions thanks to the ARROWS International network. We handle cases with an international element on a daily basis and can provide you with comprehensive legal services abroad.

Specific problems in international transactions

Assignment of insurance proceeds: Why is it necessary?

The assignment of insurance proceeds is another key condition that banks require when establishing a lien on land. Through this assignment, the bank secures the transfer of the insurance payment in its favor in the event of an insured loss.

Without this assignment, the insurance payment in the event of damage to the land (for example, from a natural disaster) would be paid to you as the owner, even if you did not subsequently use the money to repair or restore the property. The bank would thus lose the value of the collateral without having the funds to repay the loan.

How the assignment works in practice:

After concluding the insurance policy, you fill out an assignment form, which is confirmed by the insurance company. You then submit this form to the bank. In newer loan agreements, consent to the assignment is already given as part of the loan agreement, and the bank handles the assignment directly with the insurance company.

In the event of an insured loss (for example, floods, landslides, or other damage to the land), the insurance company pays the insurance proceeds directly to the bank. The bank uses it to repair the land or to repay part of the loan.

The assignment automatically terminates upon full repayment of the mortgage. The bank notifies the insurance company of the loan repayment, and the insurance then pertains only to you as the owner.

It is important to realize that the land must be insured for the entire duration of the loan repayment. If you cancel the insurance or let it lapse, you are violating the terms of both the loan and the lien agreement, which can lead to contractual penalties or even the immediate maturity of the entire loan.

Deletion of the lien after loan repayment

Upon full repayment of the loan, the lien automatically terminates by law. However, the record of the lien remains in the Land Registry until you file an application for its deletion.

Procedure for deleting a lien:

Step 1: Confirmation of lien termination
After paying the final installment of the loan, the bank will issue a confirmation of lien termination (also called a "deed of release"). This confirmation contains details of the lien to be deleted and the verified signature of the lien creditor (the bank).

Step 2: Filing an application for deletion
With the confirmation of lien termination, you file an application for the deletion of the lien with the Land Registry Office. The application can be filed by either the property owner or the bank.

Step 3: Registration of the deletion in the Land Registry
The Land Registry Office will review the application and the attached documents. If everything is in order, it will delete the lien from the Land Registry. The entire process usually takes 20–30 days.

The administrative fee for deleting a lien is 2,000 CZK.

Important notice: The lien will not be deleted from the Land Registry on its own. If you do not arrange for the deletion, the lien will remain registered in Part C of the title deed, which can complicate the future sale or encumbrance of the property.

Hidden pitfalls when using land as collateral

According to an instruction from the Czech Office for Surveying, Mapping and Cadastre from February 2018, for the deletion of a lien based on its waiver by the lien creditor, it is necessary to prove that this waiver was delivered to the lien debtor. This can be proven either by the lien debtor's signature on the confirmation of lien termination or by the lien debtor being the applicant in the registration proceedings.

The ARROWS law firm will handle the complete deletion of the lien after the loan is repaid, including communication with the bank, preparation of the deletion application, and filing it with the Land Registry Office. Contact us for an immediate solution to your situation.

The most common mistakes and how to avoid them

When securing a loan with land as collateral, people make several typical mistakes that can lead to the rejection of the loan application, a prolonged process, or financial losses.

Mistake 1: Insufficient financial reserves
Many applicants only account for the purchase price of the land and forget about other costs – property appraisal (4,000–6,000 CZK), registration of contracts at the Land Registry (2,000 CZK for the lien + 2,000 CZK for the ownership right), legal services (10,000–20,000 CZK), and official verification of signatures.

Mistake 2: Signing a reservation agreement before determining financing options
If you sign a reservation agreement for a piece of land without having a confirmed mortgage approval, you risk losing the reservation fee (usually 50,000–100,000 CZK) if the bank does not approve the loan.

Mistake 3: Poor credit history
Banks share information about loans and payment discipline through credit registries. If you have negative records (late payments, insolvency), this can lead to the rejection of your loan application.

Mistake 4: Believing the purchase price equals the appraised value
The appraised value determined by the bank may be lower than the purchase price. If the bank appraises the land at 2 million CZK, but the purchase price is 2.3 million CZK, you will have to pay the 300,000 CZK difference from your own funds.

Mistake 5: Using a poor-quality contract
Contracts downloaded from the internet or prepared unprofessionally often contain errors or do not meet legal requirements. This can lead to problems with the transfer of ownership or loss of money.

Mistake 6: Not verifying the legal status of the land
Many buyers do not look at the title deed and do not check whether the land is encumbered by liens, easements, enforcement proceedings, or other restrictions. Such defects can make it impossible to obtain a loan.

Mistake 7: Insufficient review of the zoning plan
The land may be designated in the zoning plan as agricultural land or green space, not as a building plot. The bank will not accept such land as collateral.

The ARROWS law firm has experience from providing long-term services to our clients. Our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions. We pride ourselves on speed and high quality. We are insured for damages up to 500,000,000 CZK, which means maximum security for you as a client.

When does it make sense to use legal assistance?

Given the complexity and risks associated with using land as collateral, using legal services is not just a recommendation, but often a necessity. A lien agreement is a legally binding document with long-term impacts on your property and financial situation. A single mistake could cost you hundreds of thousands of crowns or the entire piece of land.

The ARROWS law firm will provide you with:

• Legal consultation regarding the conditions of the collateral, loan amount, LTV, and negotiations with the bank.

• Preparation or review of the lien agreement, with a check of all provisions and a warning about unilaterally disadvantageous conditions.

• Verification of the legal status of the land (due diligence), including a review of the title deed, zoning plan, utility networks, and access road.

• Securing all documentation required by the bank – extracts from the Land Registry, statements from authorities, insurance policies with assignment of proceeds.

• Representation in negotiations with the bank regarding the terms of the loan and the security package.

• Representation in proceedings before the Land Registry Office for the registration of the lien and its subsequent deletion after the loan is repaid.

• Resolution of disputes in case of problems with the collateral, enforcement proceedings, or the realization of the lien.

Our lawyers deal with these issues on a regular basis and specialize in them. Thanks to our experience, we can significantly reduce the time required for processing and minimize the risk of errors. It is therefore safer and often faster for you to have the entire matter professionally handled by the ARROWS law firm.

Connecting with investment opportunities

If you are currently arranging financing by using land as collateral and are also looking for investment partners, business opportunities, or are considering selling or buying a project, we can help you not only with the legal security but also with connecting you with potential investors and partners.

The ARROWS law firm not only provides legal security for some projects but also implements them itself, including the possibility of their purchase or arranging their sale. In addition to legal services, we also offer consultations for investors and entrepreneurs who are looking for suitable partners or opportunities for acquisitions or exits.

We carry out some of these activities with our partners – the company SHARE DEAL Office, which focuses on supporting transactions and connecting investors.

Our lawyers have experience not only with the legal framework of these transactions but also with their practical implementation – thanks to this, they can also advise clients on issues of economic feasibility and negotiating terms.

Conclusion: Preparation is the key to success

Using land as collateral for a loan is a complex process that requires thorough preparation, knowledge of legal regulations, and coordination with the bank and the Land Registry Office. The success of the entire transaction depends on the quality of the document preparation, a correctly drafted lien agreement, and adherence to all procedural steps.

As is clear from this article, the legal issues of liens are much more complex in practice than they may seem. Individual steps that appear simple have hidden exceptions, procedural details, connections to other regulations, and risks that a layperson often does not see.

If you do not want to risk mistakes, damages, or penalties, you can safely entrust the entire matter to the ARROWS law firm. We have extensive experience from providing long-term services to our clients in the field of real estate law and bank financing. We also commonly partner with corporate lawyers to resolve special issues. Thanks to our ARROWS International network, we handle cases with an international element on a daily basis.

The ARROWS law firm is insured for damages up to 500,000,000 CZK, which means maximum security for you as a client. Our portfolio includes more than 150 joint-stock companies, 250 limited liability companies, and 50 municipalities and regions. We pride ourselves on the speed and high quality of our legal services.

Do not hesitate to contact our office – just get in touch and you will receive immediate help with your case.