diff --git a/rhodecode/tests/functional/test_settings.py b/rhodecode/tests/functional/test_settings.py
--- a/rhodecode/tests/functional/test_settings.py
+++ b/rhodecode/tests/functional/test_settings.py
@@ -1,5 +1,16 @@
-from rhodecode.model.db import Repository
 from rhodecode.tests import *
+from rhodecode.model.db import UserRepoToPerm, Repository, User, Permission
+from rhodecode.model.meta import Session
+
+
+def _get_permission_for_user(user, repo):
+    perm = UserRepoToPerm.query()\
+                .filter(UserRepoToPerm.repository ==
+                        Repository.get_by_repo_name(repo))\
+                .filter(UserRepoToPerm.user == User.get_by_username(user))\
+                .all()
+    return perm
+
 
 class TestSettingsController(TestController):
 
@@ -8,3 +19,43 @@ class TestSettingsController(TestControl
         response = self.app.get(url(controller='settings', action='index',
                                     repo_name=HG_REPO))
         # Test response...
+
+    def test_set_private_flag_sets_default_to_none(self):
+        self.log_user()
+        #initially repository perm should be read
+        perm = _get_permission_for_user(user='default', repo=HG_REPO)
+        self.assertTrue(len(perm), 1)
+        self.assertEqual(perm[0].permission.permission_name, 'repository.read')
+        self.assertEqual(Repository.get_by_repo_name(HG_REPO).private, False)
+
+        response = self.app.put(url('repo', repo_name=HG_REPO),
+                        _get_repo_create_params(repo_private=1,
+                                                repo_name=HG_REPO,
+                                                user=TEST_USER_ADMIN_LOGIN))
+        self.checkSessionFlash(response,
+                               msg='Repository %s updated successfully' % (HG_REPO))
+        self.assertEqual(Repository.get_by_repo_name(HG_REPO).private, True)
+
+        #now the repo default permission should be None
+        perm = _get_permission_for_user(user='default', repo=HG_REPO)
+        self.assertTrue(len(perm), 1)
+        self.assertEqual(perm[0].permission.permission_name, 'repository.none')
+
+        response = self.app.put(url('repo', repo_name=HG_REPO),
+                        _get_repo_create_params(repo_private=False,
+                                                repo_name=HG_REPO,
+                                                user=TEST_USER_ADMIN_LOGIN))
+        self.checkSessionFlash(response,
+                               msg='Repository %s updated successfully' % (HG_REPO))
+        self.assertEqual(Repository.get_by_repo_name(HG_REPO).private, False)
+
+        #we turn off private now the repo default permission should stay None
+        perm = _get_permission_for_user(user='default', repo=HG_REPO)
+        self.assertTrue(len(perm), 1)
+        self.assertEqual(perm[0].permission.permission_name, 'repository.none')
+
+        #update this permission back
+        perm[0].permission = Permission.get_by_key('repository.read')
+        Session().add(perm[0])
+        Session().commit()
+        
\ No newline at end of file