Czechia: Housing shortage could be resolved by urban residential development done in collaboration with commercial property development companies

Cities both big and small have been feeling the crunch from insufficient public housing capacity. Residential development in collaboration with professional developers could be the answer. However, care must be taken to ensure that the commercial-law parameters of such projects conform to the rules set out in the Public Procurement Act.

Cities both big and small are making the painful realization that there are not enough public apartments; the insufficient supply is due to privatization in the past, followed by the complete absence of municipal residential development in the form of new projects. If cities haven’t shown any activity in this regard, it is because they lack know-how in property development and have no experience in the exceedingly complex endeavor of preparing public housing development projects and seeing them through. A commendable exception is Prague: the capital city in 2020 founded a public-benefit organization, Pražská developerská společnost, to act as the city’s developer. This move has already produced tangible results. Other cities are taking the cue and are looking into the possibilities of having professional developers build public apartments on suitable land owned by them. The cities are prepared to sign over the land, and expect ownership of (a portion of) the apartments built by the developer on them. This type of collaboration may benefit both sides. Commercial property development companies frequently complain about the lack of suitable plots and, for certain locations, about the entangled situation regarding title of ownership.

Cities and developers may engage in collaboration in a variety of ways. For instance, a joint venture could be established to which the city contributes its land plots, and these would then be developed by the JV partner. The city would receive the newly-built apartments as a part of the settlement when the joint venture is being dissolved. A factually similar construction envisions that ownership of the land plots is transferred to the developer, for consideration (counter-performance) in the form of the apartments that will be made available in the future; the most significant difference of this arrangement is that the city holds no financial interest in the SPV that is tasked with building the apartments. Finally, one cannot rule out an arrangement under which the developer builds directly on municipal land, based on a leasehold, then rents out the apartments for an agreed period in order to generate return on its investment, and finally transfers them to the city (whereupon the leasehold expires). In this spirit, Prague has already launched a project, “Affordable Co-op Housing”, where apartments will be built on the capital city’s land based on a co-operative established jointly by the city and by a selected property developer.

It is at this point that we must caution, however, that such a collaboration may come within the purview of the Public Procurement Act, depending on what kind of counter-performance toward the city is expected from the developer. When the parties carve out the commercial-law aspects of their cooperation, they need to take this aspect into account, lest the developer and the city come to workable understanding only to see it hampered by the law.

The ultimate shape of the set of contracts between the partners will be influenced not only by the Public Procurement Act but also, and substantially so, by the demands imposed by cities unto the contractors – i.e., specifically demands for security and for incorporating sanctions and penalties in the contracts. To some extent, these are legitimate requirements, considering that the collaboration between cities and developers will often entail that the city entrusts the developer with its land even though the counter-performance (in the form of newly-built apartments) does not yet exist. The city must be able to rely on the developer actually building the promised apartments. On the other hand, if security for the city’s comfort is created over the to-be-developed land in the form of rights in rem (e.g. a pledge or negative pledge), then the developer may have difficulties raising (bank) financing for the construction. It is therefore advisable to include the lender from the very beginning in the discussion on the scope and terms of security for the city.

But the cities are not alone in making demands to ensure the successful completion of the project. The timely construction of housing by the real estate developer requires not only a well-designed project but also relies on settled and uncontentious ownership relations, free from title issues, at the given location. If this is the case, the permitting process may be sped up, facilitating a smooth progression of the construction work proper. With this in mind, the developer ought to insist in the contracts that the city’s assistance on the level of local self-government within the context of permitting procedures is guaranteed.

Again, one needs to be very careful. According to the decision-making practice of the Supreme Administrative Court, a “non-aggression pact” of this kind between a real estate developer and a municipal government may in the extreme case give rise to systemic bias on the part of the competent building office – which will ultimately greatly protract the permitting process. According to the original draft for a new Building Act, legal institutions were planned to expedite the building permitting process, one of which would have resolved systemic bias by referring permitting procedures from the individual municipality to special state building offices. However, the current national government has decided to walk away from the implementation of this principle. The sad consequence is that one of the most pressing issues of Czech building law is likely to remain unresolved.

The above should be understood as a brief overview of only some of the most important aspects and potential issues with respect to the cooperation between cities and property developers – a cooperation which is meant to shore up the number of public apartments, but also to increase residential development overall so that there will be more housing in the market. After all, Prague alone is rumored to lack up to 120,000 apartments – a state of affairs which calls for urgent action. One solution, with potentially huge advantages for both sides, might indeed be the collaboration between cities and commercial development companies.

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