Hungary: end to building contractor's statutory mortgage right

The statutory mortgage right given to building contractors over their client’s real estate under the Civil Code is unconstitutional, the Constitutional Court has ruled.

In its decision, made on 29 March 2010, the court ruled that the right was unreasonable restriction on the right of private ownership, one of the most important principles of the Hungarian constitution.

This was due to the lack of properly defined limits for the type of the projects to which the right applied and the lack of any need for justified overdue claims. This unlimited aspect of the right also breached the requirement for legal clarity, another important constitutional principle.

The right was inserted into the Civil Code in 2007 to ease serious circular debt problems in the construction industry. It gave contractors the right to register a mortgage over their client’s (or its affiliated companies’) real estate for the whole amount of their fee payable under the construction agreement whether or not it was already due.

These provisions were heavily criticised by developers as they allowed contractors to encumber the client’s real estate with only minor or no legitimate claims. Registration of a mortgage often resulted in the client defaulting on its covenants in facility agreements relating to the development.

Law: Constitutional Court decision no. 145/B/2009; Civil Code section 402(2)-(3)