Hungary

A. Mortgages

1. Can security be granted to a foreign lender?

Yes.

2. Can lenders take a mortgage over land and buildings on the land?

Land and the buildings erected on it are generally treated as one real estate interest (registered in the land registry under the same topographical lot number). Consequently, a mortgage established over the real estate extends to both the land and the buildings on the land.

Exceptionally, if a developer is granted a “land use right”, it is possible to register the building constructed on the basis of that right as a legally separate real estate from the land with its own topographical lot number. In such a case it is also possible to take a mortgage over that building only, or the land only or both the building and the land.

2.1 The distinction between mortgages on land and buildings on the land?

There are no distinctions with respect to either the nature, effectiveness, enforceability or the registration procedure regarding a mortgage over land or a mortgage over buildings. In case these are registered under different topographical lot numbers, the owner of the building has a right of use of the land at all times.

2.2 Are mortgage certificates for a certain value issued? What is the cost? Are they transferable?

The concept of mortgage certificates does not exist in Hungary.

2.3 Can second ranking security be taken? If so, how is it registered? Is a priority deed also registered?

Yes. The registration process of a second (or subsequent) ranking mortgage is basically the same process as that for the registration of a first ranking mortgage. Security ranking depends on the date the application for registration of the mortgage in the actual Land Register (ALR) is filed with the relevant Land Registry (LR).

The concept of a priority deed does not exist under Hungarian law. Mortgages rank – by operation of law – based on the time of filing the application. However, the parties can “reserve” in advance a ranking for a mortgage that is yet to be established.

However, it is possible for the ranking of mortgages to be changed with the consent of all affected parties registered in the ALR (e.g. owner, other mortgagees etc) by filing appropriate written declarations / consents with the LR.

2.4 Can the real estate be transferred to a third party (being still subject to the mortgage) without the lender’s consent?

Yes, unless a negative pledge (i.e. prohibition of alienation or encumbrance) was registered simultaneously with registering the mortgage in the land registry. Such a negative pledge registration can only be effected if the real estate is purchased at the same time the mortgage is created. If such registration is in place, the LR should refuse to register the title of the new owner without the consent of the mortgagee. In practice the LR often requires the consent / confirmation of the mortgagee, even if no negative pledge restriction is registered.

2.5 Are there any preferred creditors (other than prior ranking mortgage holders)?

Yes. In a liquidation, preferred creditors in relation to the real estate are: 

  • (i) any person who has started court enforcement procedure against the real estate (if the enforcement was registered by the LR before the commencement of the liquidation); and
  • (ii) any person who requested the police seize the real estate (that person is deemed to have the same rights as a mortgagee of the real estate).

The order of priority of payment of these creditors and an existing mortgagee is the order in which the following occurred (first in time being paid first) being (i) the date of registration of the enforcement right by the LR (ii) the seizure of the real estate (seizure may not be recorded by the LR in the ALR) and (iii) the registration date of the existing mortgage in the ALR.

2.6 Can “all monies” mortgages be taken?

No. The nearest Hungarian equivalent is a “framework mortgage” which secures all liabilities of the borrower arising from specified loan / facility / security arrangements made between the lender and the borrower (listed in the mortgage agreement) up to a maximum amount set out in the framework mortgage agreement.

2.7 Can a landlord’s right to receive rent be charged, assigned or transferred to a lender by way of security? If so, how?

Yes. The landlord’s right to receive rent and other receivables can be (i) pledged or (ii) assigned in a security assignment. The assignment needs to be notified to the tenant(s).

2.8 Is it customary / possible for a lender to take a charge / security over bank accounts of the borrower? Is it usual for lenders to contractually restrict rights to withdraw funds in accounts until the scheduled interest and capital repayments are made?

Yes, a borrower can grant a pledge over the balance of its existing and future bank accounts (which accounts are usually held by the lender). The rental account is almost invariably pledged and it is usually contractually agreed that (i) withdrawal of funds from the rental account needs the prior consent of the lender and (ii) in a default situation, the lender can (a) prevent the borrower having access to funds to the borrower’s accounts and (b) exercise a collection right over the balance of such accounts.

3. What are the mechanisms for registering land and for registering and perfecting security?

(a) Land and buildings 
To transfer ownership title either (i) an order of an authority or (ii) an agreement (being a notarial deed or being countersigned by a lawyer / legal counsel) needs to be produced to the LR. The new owner must be registered by the LR into the ALR. The transfer is perfected upon the registration of the new owner as registered owner in the ALR.

(b) Registering and perfecting security 
Mortgages must be established by an agreement creating a mortgage (being a notarial deed or being countersigned by a lawyer / legal counsel). The mortgage must be registered by the LR into the ALR. The mortgage is perfected upon its registration in the ALR. 

3.1 Consequences of failure to register? 

If a change of ownership is not registered in the ALR, the title to the property is not transferred.

If a mortgage is not registered in the ALR, that mortgage does not create valid security.

3.2 Formalities for execution of security and costs?

The mortgage must state the maximum secured amount. Such amount is usually around one hundred and thirty per cent. (130%) of the total secured obligations.

The costs for the creation of a mortgage are:

Notary fees 
A fee on a sliding scale depending on the amount of the secured obligations ranging form HUF 20,000 to HUF 200,000,000 (approx. EUR 73 to EUR 730,000) plus hourly rates of the notary public.

LR fees 
HUF 12,600 (approx. EUR 46) for each lot affected and each mortgage.

4. Can the lender use a Security Trustee to hold security on trust for creditors?

A security agent may be appointed by syndicate banks to administer the mortgage and other security.

The concepts of trust and parallel debt are unknown under Hungarian law. The (less robust and less protective) alternative is each lender being named as a “joint and several beneficiary” under the transaction documents. Each lender gives the security agent power of attorney to, amongst other things, sign for the lender in relation to the transaction documents and to enforce the security. An alternative would be “consignment”: broadly an agency arrangement where the security agent concludes the security agreements in its own name but for the benefit of the lenders. Enforcement of lenders’ claims by the security agent as a consignee might be problematic.

4.1 What happens if the lenders change later on e.g. on a transfer? Does new security have to be signed?

Most Hungarian security interests are ancillary to the underlying debt owed to the lender. If a lender’s rights under a bi-lateral facility agreement are being transferred to a new lender, it is not necessary to enter into a new security agreement. However, the new lender must be registered in the relevant registers (where registration is a perfection requirement of that security).

If, in a syndicate of lenders (who have appointed a security agent), one lender wants to transfer its lending commitment to another person, new security does not need to be taken. The security agent continues to hold the security for the syndicate (whose composition can change over time).

It is important to note that if an amendment is made to a facility agreement, which is more onerous to the borrower (e.g. increase of margin, increase of facility amount, the final maturity date is pushed out), new security must be created (covering all (i.e. original and increased) claims) and, where applicable, registered in the relevant registers. Such security interest is usually created as a second priority security, with the first priority security being released 90 days following the registration of the second priority security (to put that new security beyond challenge by any liquidator / third party creditors). After such release(s) the second ranking security interests should automatically become first ranking.

5. Does the landlord / borrower have control over changes in tenants if the tenant wants to transfer the lease to a new tenant and is the original tenant still bound by the lease?

Transfer of the lease

As a general rule:

the tenant is not entitled to transfer its interest in the lease but this can be varied by agreement in the lease e.g. the tenant may transfer if it obtains the prior approval of the landlord for the transfer; 
real estate can only be sublet or otherwise leased to third parties with the prior consent of the landlord.

6. How can the lender enforce its security?

6.1 Can a foreign jurisdiction (either a court or arbitral tribunal) be chosen to settle disputes and under what circumstances may such a choice not be recognised?

Hungarian law is the only competent governing law of the mortgage. Hungarian courts have exclusive jurisdiction in case of disputes relating to real estate located in Hungary. Otherwise parties are generally free (except to the extent they are “forum shopping”) to choose which laws apply to contracts and which courts have jurisdiction.

6.2 Does the local law allow for the enforcement of arbitral awards or foreign judgements without review?

Yes, as a general rule, foreign arbitral awards and foreign judgments are recognised and enforceable in Hungary (by virtue of applicable EC Regulations and other international conventions) without any scrutiny in the merits, unless a constitutional right of one of the parties is violated.

However, if the dispute relates to real estate located in Hungary, the Hungarian courts have exclusive jurisdiction (i.e. foreign judgments on that subject will not be recognised).

6.3 How can that security be enforced? Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

Security can be enforced by (i) out-of-court enforcement procedure (direct enforcement by the lender or its appointee) if criteria are met or (ii) court enforcement procedure. Under both procedures the real estate can be sold to a third party.

If a mortgage is a notarial deed, the mortgage becomes “directly enforceable” (i.e. the lender does not need to obtain a court judgment first) and there is no avenue for parties to dispute the amount of the secured liabilities, the method of the enforcement and / or any other matters set out in the mortgage).

At any time before an event of default has been declared, it is open to the borrower to agree in writing that the lender is permitted to use an out-of-court enforcement procedure. If this applies a minimum sale price, the method of the sale to a third party and deadline for the sale have to be agreed. In the mortgage the borrower and the lender can agree that after an event of default has been declared (i) they together will sell the real estate (ii) the lender will instruct an institution commercially engaged in granting mortgage-backed loans or arranging auctions (“relevant institution”) to sell the real estate or (iii) if the lender is a relevant institution as its main business, it will sell the real estate itself. There is a statutory 30-day notice requirement for the lender to notify the borrower on the proposed sale.

Where out-of-court enforcement is not available or the real estate sale failed to take place before the agreed deadline, the mortgage may be enforced only by court enforcement procedure (managed by a court appointed bailiff) by selling the real estate at public auction (conducted by the bailiff).

It is not possible to appoint a receiver / liquidator to sell the real estate. Any liquidator / bailiff is appointed by the relevant court, not by the lender. The court generally selects the liquidator using a random computerised selection method but is entitled to appoint a specific liquidator if the circumstances of the borrower need to be taken into account (e.g. complexity, geographical location).

6.4 Is the lender responsible for the maintenance and insurance of the real estate after default until sale?

No.

6.5 Is there any method of foreclosure (lender obtaining good title to the real estate in satisfaction of all or part of its debt)? If so, does this require a court order and is it only automatically used when the real estate is not sold at public auction?

Any agreement for foreclosure made before an event of default is declared invalid. After such an event is declared, a lender and mortgagor may agree that the lender acquires ownership title over the real estate, but this is not common, as it requires the co-operation of the mortgagor an enforcement scenario. As such a transaction is a consensual sale and purchase of the encumbered real estate, it does not require the involvement of the court.

7. Is there anything else that you would specifically point out to a foreign lender as being unusual or particularly difficult?

It is arguable that, legally speaking, a relevant institution might need to be regulated / supervised by the Hungarian Financial Supervisory Authority. As foreign lenders might not have appropriate personnel / administrative know-how in Hungary to sell a real estate in an out-of-court enforcement scenario appointing a Hungarian relevant institution to do so might make commercial sense in practice.

B. Security Over Shares

Assuming real estate is held in a locally incorporated single purpose vehicle to provide an alternative to enforcement of the mortgage over real estate:

1. Can security be granted to a foreign lender?

Yes.

2. Can second ranking security be taken? If so, how is it registered?

The following security can be taken:

(a) pledge over business quotas (similar to shares) of a Kft (limited liability company) and

(b) share deposit and / or pledge over shares in a Zrt (private company limited by shares).

Pledges over shares are rarely used as the share deposit is preferable. Options to acquire business quotas and shares are also taken.

SPVs tend to be Kft companies as financial assistance restrictions do not apply to Kft companies.

Second priority security can only be established in respect of a pledge. Quota pledges over business quotas are registered in the company register but the pledges are registered (and have priority) in the order of the date of their registration. The concept of agreeing their respective priorities does not exist. 
Security deposit is perfected by the handover of the shares (or, in case of dematerialised shares, upon their transfer to a blocked securities account), so no second priority security is available.

If multiple option rights are granted in respect of the same asset the parties may contractually agree the order of “priority” by agreeing the order in which option beneficiaries can exercise their option rights.

3. What are the mechanisms for registering and perfecting security?

Quota pledge. Registration in the company register by filing the extract of the pledge agreement with the relevant court of registration.

Share deposit

  • shares evidenced by certificates-to be handed over to the lender
  • dematerialised shares-transferred to a blocked securities account in lender’s name

Quota / share option rights. No perfection requirements.

3.1 Consequences of failure to register?

If the relevant perfection requirements are not met, the security is not validly created and cannot be enforced.

3.2 Formalities for execution of security and costs?

Generally none but it is advisable that an agreement creating pledges / deposits / options is made by notarial deed to enable it to be directly enforceable.

Notary fees 
See A3.2 above.

Quota pledge registration fee 
HUF 3,000 (approx. EUR 11).

4. Do the shares need to be transferred into the name of the lender or its nominee?

In the case of enforcement of a quota / share pledges, the lender / its nominee would be entitled to sell the pledged quotas / shares to a third party purchaser.

The terms of a share deposit can grant the lender the right, on certain conditions, to acquire / appropriate the shares itself.

5. How can the lender enforce its security?

5.1 Can it be sold to a third party? Is it possible for a secured party to appoint receivers / liquidators and if so how and what are their powers? Can security be enforced directly without recourse to the courts and are private sales of security possible? Does it have to be sold by auction?

Quota pledge: the rules in A 6.3 above for mortgages apply to such a pledge.

Option rights: rights may be exercised by the option beneficiary (if it chooses to do so) upon the occurrence of an event of default.

Share deposits: when the security becomes enforceable, the lender may (where entitled to do so by the deposit terms) either directly acquire the shares itself or sell them.

5.2 Are loans from shareholders subordinated? If so, how is this done? Is it customary for such loans to be waived or written off contractually as part of an enforcement of a share pledge, should a default occur?

Majority shareholders’ claims (including loans) rank as unsecured creditors’ claims in an insolvency situation.

Loans from shareholders can be contractually subordinated.

Shareholders can agree that repayment of their loans are waived / written off should default occur, but this is not yet customary in Hungary.

C. Leases

Legal issues that would be likely to impact upon the valuation and the security of income from an investment perspective.

1. Lease Structure

1.1 Typical lease length?

The typical lease length for office buildings is 3 to 8 years, with additional extension options for the tenant. It is typical that institutional / commercial leases are concluded for a definite term.

In our experience, typical lease lengths for other normal commercial leases generally range between 3 to 10 years, with longer leases for anchor tenants and special-purpose premises.

1.2 Maximum / minimum lease length if any?

Not applicable.

1.3 Statutory controls and obligations regarding renewal / termination of leases (does tenant have automatic right to renew or can they apply to the courts for a new lease); also does some form of notice have to be served to terminate a lease to avoid renewal?

There are no statutory controls and / or obligations with respect to the renewal of the lease. The tenant does not have an automatic right to renew the lease. The parties may agree to grant the tenant a right to extend the lease before the expiry date of the fixed term. The additional term is usually either the same or shorter than the original term. Indefinite lease terms are uncommon. If the lease term is not extended, the lease terminates on the expiry of the fixed term.

If after the expiry of the fixed term, the tenant remains in the leased premises and the landlord does not object thereto within 15 days, the lease is by law automatically extended and becomes a lease for an indefinite term. This statutory extension is often excluded in institutional / commercial lease agreements.

1.4 Any overriding statutes concerning the ability of the tenant to break a fixed term lease (whether or not included as a term of the lease)?

A fixed term lease cannot be terminated by the parties by notice until the fixed term of the lease has lapsed, unless there are contractual break options in the lease. There are no statutory break-options for tenants in the case of fixed-term leases, other than the case where the leased premises cannot be used for the intended purposes, due to the fault of the landlord. Institutional, investment type lease agreements usually do not contain any contractual break-options for the tenant.

1.5 Any other security of tenure provisions available to a tenant that would frustrate possession or prevent receipt of market rents?

None.

2. Rent / Rent Reviews

2.1 Rental income receivable quarterly / monthly in-advance / in-arrears?

Rent is usually payable either quarterly or monthly in advance, without deduction. Rents are now commonly expressed either in the local currency (HUF) or in EUR.

2.2 Periodicity of reviews?

The rent review usually takes place annually, with retrospective effect from the agreed rent review date.

2.3 Basis of review (upwards-only or variable, indexation or market rent)?

It is customary for the basis of review to be indexation only. The index to be applied depends on the currency in which the rent is set:

(a) in HUF, the official Hungarian consumer price index is applied; and

(b) in EUR, the harmonised index of consumer prices (HICP) is applied.

The indexation is usually upwards-only and the rent cannot fall below the initial base rent.

2.4 Are rents / reviews subject to statutory control in regard to quantum or increase (i.e. rent control)?

None.

3. Lease Obligations: Who has responsibility for:

3.1 Internal maintenance, decoration and repair?

Usually the tenant’s responsibility.

3.2 External maintenance, decoration and repair?

Landlord’s responsibility.

3.3 Structural repairs?

Landlord’s responsibility.

3.4 Insurance?

In case of institutional “triple net” leases, the insurance of the leased premises is usually paid by the landlord, but recharged to the tenant as part of the service charge.

3.5 VAT?

A landlord has two options: (i) letting is VAT-exempt, in which case the right of deduction of VAT may not be exercised by the landlord; or (ii) VAT is payable on the rental fee, but VAT is deductible.

The current Hungarian VAT rate is twenty five per cent. (25%)

3.6 Rates?

The rate of property taxes are established by the local municipalities on a square metres basis (the average annual property tax is HUF 900 / m2 (approx. EUR 3.3 / m2)).

3.7 Other typical outgoings?

Property tax is usually paid by the landlord, but recharged to the tenant as part of the service charge.

3.8 The ability to recoup any landlord outgoings (including management costs) by way of service charges?

In case of institutional “triple net” leases, the landlord outgoings are part of the service charge.

4. Enforceability

4.1 Are terms of leases / contracts recognised and supported by case law in the jurisdiction?

Hungarian law recognises lease obligations. Although the Hungarian judicial system is not based on case law, the Hungarian courts may refer to published court judgments, especially in connection with disputes over the termination of leases.

5. Valuation and Environmental

5.1 To be recognised in the courts, does an appraisal have to be prepared by some domestically regulated / qualified party or is an RICS (Royal Institution of Chartered Surveyors)-qualified appraisal report accepted and recognised in each jurisdiction?

The appraisal is only recognised in Hungarian courts if it was prepared by a judicial expert recognised and registered by the Hungarian Ministry of Justice.

5.2 Is it possible / customary to obtain environmental reports from a local government agency or a qualified, insured environmental professional?

Qualified / insured environmental professionals can prepare environmental reports but such reports are not binding on the environmental agency or the courts.

In Hungary, the environmental agency (which is independent from local / central government) can declare real estate contaminated.

Local government does not prepare environmental reports for the lenders / real estate owners.

5.3 Is it possible for liability in respect of past or present breaches of environmental laws to attach to a lender by it holding or enforcing a mortgage over real estate?

Generally, no. However, if the lender were a shareholder of the mortgagor or directly acquired title to the real estate via enforcement (e.g. by exercising an option right), liability could attach to the lender. Environmental liability would not attach to the lender solely by holding and enforcing any of the Hungarian security referred to above, unless the lender takes title to the assets.