Doing (real estate) business in Hungary – an (unusual) legal overview

More than 20 years have passed since the political transition in Hungary and the country’s economy (including the Hungarian property market) became an integral part of the European economy. The yield of property investment, initially characterised by high investment risk, has seen a gradual decrease and today these yields are suffering from the results of the economic downturn.

Until the middle of the first decade of the 21th century, the Hungarian property market has been consolidated, and the consolidation procedure has been strengthened by the global recession. A major factor in the process of consolidation was the slowly improving legal environment, which has had a high impact on the investors conduct.

Back in the early 90s investors were interested in such fundamental issues as a) whether or not a cadastral register existed in Hungary, b) how the ownership of a property could be acquired, c) what the main types of companies there were in Hungarian law, and finally d) what the major collaterals for credits existed. However, these issues have now been largely resolved and investors are well informed. This is clearly apparent in property related conferences at which the only way to arouse the interest of well-trained professional investors is by presenting them with specialised topics exploring issues in depth.

This is now the case because investors familiarised themselves with the main features of the legal environment: they know that the usual solutions offered by their legal institutions at home are also available in Hungary, the cadastre system offers extensive legal security, and under the aegis of contractual freedom they can enter into contracts of their choice and their agreements will be adhered to.

Investors can expect to find a colourful, modern, legal environment in Hungary fully up to European standards.

Nevertheless, it still cannot be claimed that every issue has been resolved in regard to the legal environment of property investment and that investors are able to achieve their objectives without recourse to professional consultancy. The legal system is in a constant state of flux thus posing ever new challenges for investors.

Doing business in a foreign legal system is basically a cultural challenge: only by understanding local legal culture is it possible to implement our well-tested business strategy. And if you want to feel at home in a foreign cultural environment it is not a translator that you need but rather someone who understands and localizes “your” way of thinking and implements your goals with the appropriate means. If you are willing to familiarise yourself with Hungarian legal thinking and gain a better understanding of Hungarian legal culture, please read the “tips” below.

History, tradition

Generally speaking, issues of legal history are of no interest to property investors. Although we do not contest this point, it is nevertheless necessary to emphasise that the way in which numerous institutions within the current Hungarian legal system function cannot be properly understood without an analysis of their historical roots. The legal material an investor is faced with can be traced to several distinctive sources.

a) If a modern lawyer – lacking guidance from literature or respective court decrees – has his/her doubts in regard to a particular question related to a certain legal institution, he/she will usually find the answer in Hungarian legal literature, which although of a high standard nevertheless dates back to the period between the two world wars. And the reason for the necessity to acquire guidance from pre World War II legal institutions is the lack of commercial law in the current Hungarian legal system. In 1875, a very thorough commercial legal act was implemented in Hungary – following a precedent in Germany – and the modern system of institutions offered by this act thus became a catalyst to Hungarian business transactions. The idea of commercial law being made distinct from general private law was alien to socialist thinking thus all transactions were regulated by the Civil Code in a unified manner, regardless of whether such transactions were made commercially or within the framework of a private deal. If investors are interested in debentures, commercial transactions, and silent partners then their only recourse is to consult legal literature dating to before 1945.

b) However, the so-called socialist legal material that was in force prior to the political transition could not simply be discarded in a single day. And here we not only mean the norms governing the typical socialist institutions, but also those seemingly neutral institutions that survived the political transition which are considered a kind of socialist heritage due to their roots, ideology and content. It was only in 1959 that – based on case law with several hundred years of tradition – that civil law was codified within a single act in Hungary for the first time. Today, the most general legal conditions of property transactions are regulated by the same Civil Code that was hailed as the great achievement of socialist private law in 1959. Naturally, legislation has endeavoured to weed out the more typical socialist institutions over the past twenty years. Irrespective of this, countless institutions, notions and categories became organically interwoven into Hungarian legal thinking, in such a way that not even their socialist origin is remembered. Thus, for example, a foreign investor will find it hard to understand why in issues of liability the extent of diligence is “the conduct that can be generally expected in the given situation” or why liability for wilful or gross negligence cannot be excluded or why a purchase option cannot be validly established for more than five years.

c) Thirdly, it needs to be borne in mind that special circumstances existed after the political transition when successive governments tried to incorporate numerous foreign models into the legal system. Thus from this time on, the solutions from other legal cultures in the leading position in a given institution started to be borrowed unsystematically by Hungarian legislation, which in other respects had traditional German-Austrian roots. Thus, legal elements borrowed from the United States, the other English-speaking countries and even France are now part of the regulations, particularly in respect to the financial and capital markets. However, the symbiosis of the solutions from various legal cultures has not yet been fully achieved. Though it is beyond doubt that the best and most up-to-date elements should indeed be borrowed, it should nevertheless also be monitored how this set of rules becomes one unified whole – a process that will obviously take a lot of time.

Politics

Hungarian legislation is deeply linked to politics, just as in many other countries of the world. It is particularly true in the case of an EU member state that needs to make a major effort to comply with the “Maastricht Criteria”. And the strong links to politics are manifested in the appearance of fiscal aspects in the particular legal regulations. Creating laws in Hungary – similarly to other countries of Europe or the rest of the world – is not simply the responsibility of the Minister of Justice. The Minister of Finance has the decisive role in the process of legislation, and it is he/she who has the greatest say on decisions regarding draft bills on the basis of the fiscal effects the given legal regulation would have. Therefore it is not surprising that we are occasionally faced with such rules that overturn long-standing traditional structures and re-map the system of private law in order to meet a certain budgetary demand (such as collecting value added tax).

It is to be hoped that the new Civil Code, the draft of which has been completed by the preparatory boards, will be an exception to this. By passing this new Civil Code, it is anticipated that one of the most modern statutes in Europe will be created and this will also have an indirect influence on the activities of companies involved in property investment.

Judicial Decisions

The Hungarian judicial system has undergone a major transition during the last twenty-five years. Increasing the salaries of judges has substantially contributed to reducing corruption in the area of the judicature, and the efficiency of passing court judgments has gained significant impetus by extending the court system and increasing the personal and technical portfolios of courts. Ever since the Supreme Court of Hungary began to focus on the uniformity of the practice of passing judgments according to merit, such decisions have been made in regard to important issues that greatly facilitate the work of those using the law. Despite all of this, the Hungarian legal system is still rather like an iceberg, the top of which represents the resolved and clearly predictable legal issues, whereas the greater part hidden under the water symbolizes those possible legal problems for which the legal opinion of a given court can scarcely be predicted. Irrespective of this, we are of the opinion that our primary task is to draft such contracts (i.e. to model and resolve the predictable conflicts within the contract) which will ensure that the involvement of the courts to settle the dispute between the parties is avoided.

Lawyers

The primary cause of the situation outlined above can be traced to the kind of university education that lawyers in Hungary receive. Whereas in Western European universities the primary aim is to train students to enable them to solve problems, and to master both theoretical and practical aspects of law, in Hungary education is concentrated on legal history and only provides some kind of schematic, descriptive knowledge. This means that while the students of Western European law schools graduate after solving numerous legal cases, for their Hungarian fellows memorizing descriptive law represents the greatest challenge in their path to graduation. Only a radical reform of educational methods would be able to bring about a change in this situation, however, that would also require a generational shift of university teachers.

Language

We can best express ourselves in our mother tongue. Therefore it is understandable that foreign investors wish to communicate with their partners in their own native language or in a second language they have mastered. This is especially true, when for example a German buyer and a French seller meet in connection with a property project in Hungary. It is totally natural that they will hold their negotiations in English and that they have their contract drawn up in English as well. Nevertheless, in certain cases we recommend that they do not do this. Choice of language for the contract might fundamentally affect the outcome of any possible legal dispute between the parties. If for example a legal dispute is brought before a Hungarian state court then the language of the procedure will be Hungarian. In accordance with this all documents in the legal process will have to be filed to the court in Hungarian as well. All this means that any contract concluded in English will have to be filed to the court as a certified translation, and presently only one institution is entitled to make such certified translations in Hungary. Holding such a monopoly greatly affects the institution’s work and the quality of the translations produced. The investor will not be able to influence the content of the translation thus produced, therefore there is no guarantee whatsoever either that the terms and definitions used in the contract will be translated into Hungarian in a way that best corresponds to the wishes of the given parties. Considering this important factor we strongly recommend the choice of Hungarian as the governing language upon signature of the contract, after which it would be the legal consultant’s responsibility to ensure that the translation of the contract accurately renders the original Hungarian text.

László Szécsényi

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