Real Estate 2021

Last Updated April 13, 2021


Law and Practice


Lakatos, Köves & Partners is a nine-partner firm with more than 50 lawyers (including tax advisers) based in Budapest, with a predominantly international client base. It was Clifford Chance’s office in Budapest for many years, but has been independent since 2009. Lakatos, Köves & Partners has a somewhat unique position as an independent one-country firm focused on working for international clients, and often working with international law firms. Work ranges from development projects, ongoing portfolio management activity and new acquisitions and disposals by foreign investors, to real estate activity linked to the activity of industrials. The firm's finance and tax practices co-operate closely on real estate project financing, and work with the corporate and M&A team in regard to real estate-related asset and share deals. Clients include Accenture, Aeroflot, Allianz, China Investment Cooperation, Horizon Development, Marriott Hotels, Morgan Stanley, Thermo Fisher Scientific and Vodafone.

The foundations of the general protection of real estate rights are provided by the Fundamental Law of Hungary, according to which every person has the right to property.

The main source of Hungarian real estate law is the Civil Code (Acv V of 2013 on the Civil Code).

Real properties are registered in the centrally organised land registry system of Hungary, the rules of which are prescribed by Act CXLI of 1997 on Real Estate Registration and FVM Decree 109/1999 (XII. 29) on the Implementation of Act CXLI of 1997 on Real Estate Registration.

Other legislation relating to real properties also applies – eg, regarding agricultural land, leases of residential properties and premises, the construction of buildings, monument protection, condominiums and taxation.

The property market always reacts to an economic crisis with a certain delay. The unique characteristic of the COVID-19 pandemic is that it hit different property sectors at a different level. There has been no sign of any dramatic price fall in the past 12 months, but the different asset classes have been affected in different ways.

  • Logistics assets and industrial property proved to be highly resistant to the COVID-19 crisis in Hungary, with the growth of e-commerce and the shortening of supply chains making this asset class highly lucrative. Existing logistics market players are expanding and new players are coming to the market. Similarly, industrial properties have not been affected, and greenfield investments are continuing (especially from Far East countries). The market, like the country in general, is focused on Budapest – suitable development land in the areas surrounding Budapest is a scarce resource, and reclassification thereof (from agricultural to commercial/industrial) is a time-consuming and complex process.
  • Assets exposed to foreign tourism (such as capital city high-class hotels) are the most vulnerable and the most seriously hit by the effects of COVID-19. Meanwhile, internal tourism is keeping countryside hospitality alive. Hotel properties in Budapest (not in the countryside, which have been mostly maintained by internal tourism) are becoming targets for investors with a higher risk appetite.
  • Due to their open space nature, strip malls have become more attractive compared to traditional shopping centres.
  • The office market is awaiting to see how the home office/office work balance will end up. The redesigning of office space to comply with new health standards (social distancing) is expected to compensate for the reduced need for office space resulting from home office solutions. Vacancy rates are steadily increasing, as owners and occupiers remain uncertain regarding the home office/physical office balance. The general expectation is that the home office trend will not drastically alter the office occupation ratios, so offices are still considered a stable asset class in which to invest.
  • Downtown residential prices started to fall to a small extent (approximately 4% to 6%) due to a lack of tourism, Airbnb regulations and the increasing willingness of families to move into suburban areas during lockdowns. Institutional housing properties might become a new asset class in Hungary (the ratio of home ownership in Hungary is traditionally one of the highest in the world, being over 90%), as housing property prices in general have been intensely increasing in the past three years but the buying power of local inhabitants has not, so the wider spread of renting is expected, raising the opportunity for investors to invest into larger residential projects.
  • Banks have not stopped financing, but they are generally more cautious and face the risk of the devaluation of their financed real estate portfolios. There is liquidity on the market and investors are looking for opportunities, but most owners are not willing to meet distressed asset price expectations. Hungarian participation in the commercial property market continues to increase.
  • Private health service properties might also become a new asset class, as the businesses of private health service providers is gradually increasing due to the continuous deterioration of public healthcare. The property market is realising this, and trade has started in the ownership of properties occupied by stable private health service providers.

Blockchain and decentralised finance (DeFi) have not yet become established or widely recognised instruments on the Hungarian property market.

However, new trends in “pandemic-proof” office space are emerging, with the following becoming realistic option:

  • thermal cameras to measure the temperature of office workers at the entrance and segregate those who may be infected;
  • washroom sensors to track whether workers are washing their hands sufficiently;
  • touchless solutions and voice-mobile device control (instead of touching elevator buttons and door handles) are becoming higher priority in day-to-day functions;
  • the programmed control of proper humidity levels to prevent the spreading of airborne germs; and
  • smart cleaning, where technology warns that an office area requires cleaning.

Smart buildings can be a tool for implementing social distancing, as constant space monitoring can help to ensure the maintenance of the required density levels and the even usage of space.

The most concerning issue with such smart solutions is that, in order to function, they inevitably collect a large amount of personal data, which poses a significant exposure from a privacy law point of view. Temperature checks necessarily involve a person’s health data, which is sensitive, highly protected personal data, the handling of which is permitted only if there is a higher/justifiable interest and if such data processing is proportionate. Contact tracing applications also involve the collection, processing and transmission of personal data (such as data on geographical location and health data) by the relevant software developing companies and authorities. Video and other surveillance solutions that monitor office activities during working hours might also involve personal data. Currently, these applications can only be installed voluntarily with the individuals’ expressed consent. On the other hand, employers must provide a working environment that does not threaten life and health.

In order to avoid a breach of data protection regulations, the smart solutions should be used strictly in line with the relevant privacy rules, and all of the data shall be collected and processed only to the extent necessary to achieve the purpose of processing. Individuals shall be notified of the data collection and, if possible, the collected data shall be anonymised to reduce unnecessary personal data processing. Furthermore, proper storage, documentation and protection against unauthorised use have never been more important. It is going to be a task for legislators to draw the line between the protection of privacy and public health – the consequences of the epidemic could prioritise the latter.

The most significant reform for real estate is the ongoing renewal of the Land Registry system and procedure, expected to be introduced in Q3 2022. The introduction of the new “E-Land Registry System” would create a safer, more transparent and faster system, which would also allow automatic decision-making processes in certain cases.

In addition, there is a housing development programme in place, aimed at promoting the renewal of unused and neglected urban rust areas by encouraging construction and development in these areas. Rust projects will be so-called “priority investments in the public interest”, which will speed up and simplify the process of obtaining the necessary permits. The rust zones in Budapest and certain other locations should have been determined in September 2020, but this has not yet been done.

Property rights range from full ownership to contractual usage rights.

Most property rights can be registered in the land registry, such as ownership title, land use right, usufruct, right of use, easement rights, public interest usage rights, right of first refusal and right of repurchase, option to buy and the right to sell, right of support and life annuity, mortgage, independent lien, including converted independent liens, enforcement right, asset management right and permanent right of use for members of housing co-operatives.

Some rights, such as ownership, are established by registration with the land registry while others, such as pre-emption rights or options, are valid irrespective of their registration.

The rules for the transfer of title are contained in the Hungarian Civil Code, the Act on Real Estate Registration (Act CXLI of 1997) and the law on the implementation of the Act on Real Estate Registration (Act 109 of 1999). Specific rules exist for the transfer of agricultural and forestry lands (Act CXXII of 2013 and Act CCXII of 2013).

Title of real estate may be transferred by virtue of law (eg, inheritance), by an agreement (eg, sale and purchase agreement) or by court judgment (eg, litigation by adverse possession). Generally, the ownership title to a property is effected by its entry into the land registry.

Due to the stability of the Hungarian land registry system and the limited possibilities of challenging registered ownership, title insurance products were not widely used on the Hungarian market for a long time. This situation changed around 2014, after the end of the economic crisis (starting in 2008), when commercial properties started to trade again and real estate funds exiting from the market were about to close down, so were unwilling to undertake representations and warranties for the market standard periods (which could be several years, depending on the type of warranty). Such undertakings started to be replaced by title and W&I insurance products, and such instruments became more and more recognised on the Hungarian property market.

Real estate due diligence is comprised of inspecting publicly available data (such as the land registry) and requesting additional documents available only to the seller (eg, lease agreements).

Due diligence in an asset deal usually covers the following main areas:

  • title (including encumbrances and easements);
  • permits (ie, that the respective buildings have all the necessary building and occupancy permits);
  • zoning;
  • leasing and operating agreements; and
  • environmental and real estate-related litigation.

If the transaction is performed through a share deal or financing is involved, the areas to be reviewed are more extensive (including but not limited to corporate, employment, financing and tax matters).

The legal due diligence is usually performed parallel to technical, environmental and financial due diligence.

The methods of carrying out due diligence did not materially change due to COVID-19, as the vast majority of the investigation can be carried out using distance electronic tools (basically everything except technical inspection). "Video visits" became a tool in the property introductory phase for investors, but this does not ultimately replace physical visits at a certain stage.

Representations and warranties depend on the business practice and strength of the respective parties, but certain warranties are generally found in any contract relating to real estate, such as:

  • that the performance of the agreement is not legally or otherwise restricted;
  • that the seller is the owner of the property;
  • that the property is free of any encumbrance or litigation;
  • that there are no environmental issues regarding the property;
  • that the building is in good condition; and
  • that there are no hidden defects.

In the case of misrepresentation, the buyer may allege the breach of the contract and the general rules of the Civil Code and claim damages.

The most important areas of law for investors in general are property law, construction law, local zoning laws, tax laws and environmental laws. For restrictions on foreign investors, please see 2.11 Legal Restrictions on Foreign Investors.

In accordance with the “polluter pays” principle, the person causing the environmental damage is liable for such damage. However, in Hungary, not only the person who actually causes the pollution is responsible for the environmental damage, but also the current owner of the property.

The owner may excuse itself by naming the person (eg, previous owner, tenant) who actually caused the pollution but, in practice, this is difficult to prove.

In order to avoid these difficulties of proof, it is necessary to set out appropriate warranties in the sale and purchase agreements, in which the seller declares that, to its knowledge, there are no toxic materials or environmentally hazardous substances, explosives or similar materials on and under the surface of the property. The buyer of the real property typically seeks to exclude its liability for pollution that occurred prior to the sale and purchase.

Local building regulations, including zoning plans, as well as land registry data for real properties are publicly available from the ordinances of local municipalities. Potential purchasers are expected to check such databases to ensure compatibility with their development plans.

There is an established practice and legal background for investors concluding agreements with local municipalities for the purpose of implementing a specific project. In such agreements, municipalities can even undertake to change the local building regulation or initiate changing the land registry status of the properties concerned to fit the needs of such project. Such agreements are considered private law/commercial matters and cannot predetermine public law matters such as the approval of building permits, which must comply with construction norms in all cases.       

Ownership of real estate may be acquired by the state or the local municipality under exceptional circumstances for public use against immediate, full and unconditional compensation. Expropriation may be initiated by the state, the local municipality or a third party, if it acts in the public interest for the purposes specified by law.

The proceedings are conducted by the expropriation authority, with an administrative deadline of 75 days. The costs of expropriation are borne by the person requesting the expropriation. Usually, the parties try to treat expropriation as a last resort and rather prefer to ensure the state’s rights in other ways (eg, by establishing easements).

Transfer Tax

Generally, the sale and purchase of real estate is subject to transfer tax, payable by the purchaser. The general tax rate is 4% up to HUF1 billion (approximately EUR2.8 million) of the market value of the real estate and 2% on the excess; however, the total payable transfer tax is capped at HUF200 million (approximately EUR555,000) per piece of real estate.

Similarly, transfer tax should be payable by the purchaser of shares in a real estate holding company if said purchaser’s ownership ratio reaches 75% of the company’s total shares. This threshold includes the shares of related parties and close relatives. The amount of transfer tax should be calculated separately in relation to each real estate asset held by the company, in line with the rules detailed above. A "real estate holding company" is a company whose total assets in the balance sheet are made up 75% or more of Hungarian real estate, or that owns more than 75% participation, directly or indirectly, in a company fulfilling the condition under (i).

The cost related to transfer tax is typically not shared between the purchaser and the seller in a transaction. However, it is always considered by the parties when the acquisition structure is being set up.

In addition, the transfer of real estate that has been rezoned as incorporated land and the transfer of the shares of a real estate holding company holding such land are subject to transfer tax, payable by the seller. The rate of transfer tax is 90%, which is levied on the following:

  • the difference between the market value of the real estate being sold, at the time of acquisition by the seller, and the market value established for the time of transfer; or
  • in the sale of shares of a real estate holding company, on the difference established according to the above in proportion to the ratio in which the shares are sold compared to all shares.

The transfer tax is applicable if the rezoning took place within ten years of the sale (taking into account the predecessor's period of tenure of ownership in certain cases). However, no transfer tax is payable if the real estate was rezoned in the sixth year after the seller’s acquisition, nor if it was acquired by inheritance.

A preferential transfer tax rate can be applicable (flat 2%) for acquisitions by real estate funds, credit institutions, real estate traders or REITs; however, the HUF200 million cap cannot be applied in these cases.

Various exemptions are also available; for example, subject to further conditions, no transfer tax is payable if the transfer takes place between related parties and in the case of a preferred transformation or exchange of shares or transfer of business.       

The acquisition of real estate by foreigners (ie, natural or legal persons outside the EU or the EEA) is subject to the approval of the competent government office, which is granted if the acquisition of the real property does not constitute harm to local government or other public interests.

For the approval, the application must be submitted in writing by completing the appropriate form. The administrative deadline is 45 days and the procedure is subject to a fee.

The acquisition of agricultural land is only possible by natural persons; the acquisition thereof by foreigners (who are not citizens of the EU or the EEA) is expressly excluded under Hungarian law.

Citizens of EU and EEA Member States are subject to the same conditions as Hungarian citizens.

In general, the acquisition of commercial real estate in Hungary is financed with both debt and equity.

Typical debt financing instruments are bank loans. Portfolios are often financed with syndicated loans or bond issues.

Intercompany loans are often provided for equity financing purposes. Usually, intercompany loans are expected to be subordinated to external creditors.

The typical security package for commercial real estate consists of:

  • a registered charge over the property itself; a prohibition on alienation and encumbrance is also usually registered against the property. Depending on their approach to enforcement, lenders often also request a call option right in respect of the real estate;
  • a charge over ownership rights in the property holding company;
  • a charge or security assignment of significant receivables (eg, claims under acquisition agreements, lease agreements, insurance, etc);
  • full security over bank accounts (usually a bank account charge combined with a security deposit);
  • a charge over assets (this can be over specific assets or over all unregistered assets of the property holding company); and
  • guarantees are often provided by sponsors.

Securities and encumbrances should be registered with the appropriate Hungarian registers (eg, the land register, the company register or the security interest register maintained by the Chamber of Hungarian Public Notaries) in order to be effective against third parties.

Lending (and taking security for loans) is a regulated activity in Hungary if it is conducted in a “businesslike manner”. Lenders holding a licence elsewhere in the EEA can passport such licence into Hungary. As the financial regulatory authority in Hungary, the Hungarian National Bank holds a public register of financial institutions licensed in, or passported into, Hungary.

No general restrictions apply for granting security over real estate to a foreign entity, nor are there any specific restrictions on debt repayment to a foreign lender. However, limitations and restrictions can apply in the case of charges over certain types of land (eg, agricultural land and forests) or charges over shares of entities that are considered to be strategically important by the Hungarian government.

Notarial fees and registration charges are payable in connection with the notarisation and registration of security documents. Fees and taxes are also payable in connection with enforcement procedures in Hungary.

Notarial fees can be significant, depending on the transaction value and the complexity of the documentation to be notarised.

The legal requirements of providing valid security must be reviewed and considered on a case-by-case basis.

As a general rule, managers of an obligor must act with the diligence of a prudent business person and in the obligor’s best interests. The obligor’s articles of incorporation may specifically require the prior approval of the shareholders and/or directors of the obligor for taking a loan and granting valid security. Hungarian law, however, gives a significant degree of protection to lenders contracting in good faith with an obligor's legitimate representatives.

Financial assistance restrictions in Hungary are limited mainly to public companies.

Cross-collateralisation is generally permitted where there is an indirect benefit to the guarantor and the beneficiary of the collateral has provided good consideration.

Additional restrictions can apply to obligations undertaken by or security interests granted by specific types of obligors – eg, individuals, public entities, regulated entities, real estate funds or their subsidiaries.

Sophisticated loan and security documents contain detailed procedures that apply in an event of default.

Hungarian security can typically be enforced in the following ways:

  • out-of-court enforcement – security over real estate can be enforced by an out-of-court sale of the secured assets by the security holder in accordance with the security agreement and the provisions of the Hungarian Civil Code – this method of enforcement is available regardless of whether or not the security document is notarised;
  • judicial enforcement – security can be enforced by a judicial officer or bailiff on the basis of an enforcement order issued by a court – this method of enforcement is available regardless of whether or not the security document is notarised; and
  • summary or “direct” enforcement – security can be enforced by a judicial officer or bailiff on the basis of an enforcement order issued by a notary public following a summary enforcement procedure – this method of enforcement is only available if the documentation being relied upon has been notarised.

Traditionally, lenders have requested that security documents be notarised in order to benefit from the direct enforcement mechanism, thereby avoiding the necessity to go to court but benefiting from the involvement of a judicial enforcement officer. In theory, the notary should issue the direct enforcement order on the basis of a statement by the secured creditor that an amount has fallen due and that the obligor has been requested to pay such amount and has not done so. The enforcement order can then be enforced by a judicial enforcement officer on the same basis as a court order. In practice, however, notaries can be wary of granting, and judicial enforcement officers can be wary of acting on the basis of a direct enforcement order.

The ranking of mortgages over real estate depends on the time of registration (principle of priority); additional steps to give priority to a lender’s mortgage are not required.

The sale of certain property (eg, listed buildings) may be subject to pre-emption rights, including on enforcement.

In general, existing debt can be subordinated to newly created debt by way of an agreement between the relevant creditors and the obligor.

In the case of secured debts, the relevant security register must reflect the subordination, which usually requires the co-operation of the lenders and the obligors.

As a general rule, the polluter is liable for contamination. If the polluter cannot be identified, there is a residual liability for the owner of the real estate.

Secured creditors holding or enforcing security over real estate cannot be held liable under environmental laws solely due to their position as beneficiary of the security. In the unlikely event that the secured creditor caused the pollution or acquires the real estate itself in the course of enforcement proceedings, said creditor may incur liability.

The creditor and liquidator of an insolvent company can challenge transactions concluded during “suspect periods” leading up to the insolvency on the basis that they are:

  • fraudulent transactions concluded fewer than five years before the start of insolvency proceedings;
  • transactions at an undervalue concluded fewer than three years before the start of insolvency proceedings;
  • transactions preferential to a specific creditor (or group of creditors) concluded fewer than 90 days before the start of insolvency proceedings; or
  • transactions benefitting a creditor concluded fewer than three years before the start of insolvency proceedings where that creditor has failed to adequately account for any surplus of proceeds received from collateral provided to that creditor.

The liquidator is entitled to terminate contracts concluded by the insolvent company. If this is done, the counterparty has 40 days from the date of such termination to register with the liquidator any claim it has against the insolvent company arising out of the termination.

Obligors can seek time-limited protection from enforcement of security under Hungarian corporate bankruptcy laws.

With limited exceptions, secured assets remain part of the estate of the Hungarian obligor. Upon the insolvency of the Hungarian obligor, such assets will be liquidated by the liquidator as part of the liquidation proceedings (not by the secured creditor pursuant to the security) and the proceeds of such liquidation (minus the liquidator’s costs) will be distributed to the secured creditors by the liquidator. Any surplus proceeds will then be distributed to the unsecured creditors of the insolvent company in accordance with statutory rules.

Most real estate finance transactions in Hungary are denominated in euros or Hungarian forints. Interest rates are set by reference to EURIBOR or BUBOR. The reformed methods of calculating EURIBOR and BUBOR are expected to continue to be used for transactions.

In Hungary, strategic planning and zoning are generally regulated by acts of Parliament and government decrees, as well as ordinances of the local municipalities. Acts of parliament and government decrees provide a general framework and apply on a nationwide level, whereas local ordinances provide more specific rules that apply only to the administrative areas of such municipalities. The most important pieces of legislation in this regard are Act LXXVIII on the Formation and Protection of the Built Environment and Government Decree 253/1997 (XII.20) on Nationwide Planning and Building Requirements.

The design, appearance and method of construction of buildings and the refurbishment of existing buildings are governed by legislation, specifically the laws referenced in 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning. The construction process itself is also regulated by several laws, including Government Decree 191/2009 (IX.15), which is commonly known as the "Construction Code".

The competent building authority of a territory is generally responsible for controlling the development process through the issuance of building permits and occupancy permits; however, the consent of several other authorities may be required in this process. National or special agencies deal with projects that require special permitting, such as those that involve mining or certain infrastructure.

The competent land registry office of a territory is generally responsible for the qualification of individual parcels of real estate (such as the qualification of a real property as agricultural or exempt from agricultural cultivation).

Finally, the local municipality is generally responsible for determining the zoning requirements and the designated use of the various zones within its administrative area, within the statutory framework established by nationwide laws.

Restrictions on construction and use are regulated by nationwide and local planning and zoning regulations, laws regarding the construction process, rules relating to the land registry status of the concerned real property, and the rights of owners of neighbouring properties and other interested parties.

In general, a building permit is required to start development on a new project, although not all construction activities are subject to obtaining a building permit. The building permit is issued by the locally competent building authority. The development of special facilities may require additional or separate permits and consents from other authorities.

When a project is finished, an occupancy permit is required for the commercial use of the building or structure. The occupancy permit is also issued by the building authority, and can be granted permanently, conditionally or temporarily (corresponding to the building permit application) and may include certain conditions.

Third parties affected by the project, including owners of neighbouring real properties, will typically be involved by the authority in the permitting process, and may submit their comments and complaints to the authority. Such parties will usually have the right to appeal to the court against the decision issuing the building permit or the occupancy permit; such appeal may prevent the developer from starting the construction or commercial use of the structure.

The permitting rules and rights of affected parties are vastly simplified in the construction of smaller (below 300 sq m) residential buildings.

Decisions of the building authority may be appealed before the competent court, as a general rule.

It is specifically permitted by law for developers or investors to enter into development and support agreements with the competent local municipality for the purpose of implementing the settlement development and settlement planning tasks of the municipality, and to facilitate a development project. Such agreement will typically provide the framework of co-operation of the parties to make the necessary changes to local town planning instruments.

The relevant law provides examples for the subject matter of the development and support agreement; however, the subject matter may be anything that supports the achievement of the settlement development goals of the municipality, and the parties are free to negotiate the terms and conditions of the agreement. The agreement shall ultimately be approved by the representative body of the municipality, so the municipality decides in advance whether it agrees with the investor’s development goal.

Similar agreements may also be concluded with the utility suppliers, especially for development of the utility to reach a certain capacity.

There is a separate supervisory authority that monitors all construction activities and enforces rules pertaining to the construction. Several other authorities may also be involved in this process, including the heritage protection authority and the environmental authority. Authorities may apply a wide range of measures against unlawful construction activities, including issuing a notice to comply and, if the notice is ignored, imposing a fine, or even suspending the construction until the breach is remedied. Restrictions on designated use may also be enforced by the locally competent land registry office, which may apply similar measures.

There are no specific rules on what types of entities are available to hold real estate assets: all types of entities are available to investors. The most commonly used entities are limited liability companies (in Hungarian: Kft.), private limited companies (in Hungarian: Zrt.), regulated real estate investment companies (in Hungarian: SZIT) and real estate investment funds. Limited liability companies are founded with an initial capital consisting of capital contributions of a predetermined amount, and the liability of members of the company extends only to the provision of their initial contributions, and to other contributions set out in the deed of foundation. As a general rule, members shall not bear liability for the company’s obligations.

Limited Liability Company

The liability of members of the company extends only to the provision of their initial contributions (the amount of each contribution may not be less than HUF100,000), and members shall not bear liability for the company’s obligations. The initial capital of a limited liability company may not be less than HUF3 million, and it is possible for a sole member to establish such company.

Public and Private Limited Company

The shareholders of a public limited company shall not be held liable for the company’s obligations: their obligation to the limited company extends to the provision of funds covering the nominal value or the accounting par value of shares. A limited company whose shares are listed on a stock exchange shall be recognised as a public limited company; one whose shares are not listed on any stock exchange shall be recognised as a private limited company. The share capital of a public limited company may not be less than HUF5 million, and the share capital of the public limited company may not be less than HUF20 million.

Investment Funds

An investment fund is either an AIF (in Hungarian: ABA) or UCITS (in Hungarian: ÁÉKBV), in accordance with Act XVI of 2014 on Collective Investment Trusts and Their Managers and on the Amendment of Financial Regulations and in accordance with the relevant EU directives. An investment fund manager must have an initial capital of at least EUR125,000, or at least EUR300,000 for real estate funds.

The initial capital of limited liability companies (Kft.) may not be less than HUF3 million.

The share capital of private limited companies (Zrt.) may not be less than HUF5 million.

The share capital of public limited companies (Nyrt.) may not be less than HUF20 million.

An investment fund manager must have an initial capital of at least EUR300,000 for real estate funds.

Limited Liability Company

The supreme body of a limited liability company is the members’ meeting. The law defines situations where it is mandatory to convene a members' meeting without delay. The management of a company is provided for by one or more managing directors. If a company has more than one managing director, they shall be entitled to handle management issues independently, with the provision that they are entitled to raise an objection against the planned or executed actions of any other managing director. Managing directors are responsible for the business management of the company and are entitled to convene the members' meeting. Members or founders may provide in the instrument of constitution for the establishment of a supervisory board comprised of three persons, tasked with supervising management in order to protect the interests of the company. In certain cases, a statutory auditor must also be appointed, who is responsible for carrying out the audits of accounting documents.

Public and Private Limited Company

The supreme body of a limited company is the general meeting. The law defines situations where it is mandatory to convene the general meeting without delay, with simultaneous notification to the supervisory board of the company. Different rules apply to public and private limited companies regarding the convening of and participation at the general meeting. Public limited companies are managed by the board of directors, which comprise at least three natural persons. The board of directors shall exercise its rights and perform its duties as an independent body, and shall prepare a report on the management, the financial situation and the business policy of the company at least once every year for the general meeting, and at least once every three months for the supervisory board, if any. Public limited companies are required to set up audit committees, and all limited companies shall employ an auditor.

Investment Funds

The collective portfolio management activity of investment fund managers is subject to obtaining prior official authorisation from the National Bank of Hungary. Investment fund managers shall have a head office in Hungary from which they direct their operations, and shall be managed by at least two natural persons under a contract of employment.

The annual entity maintenance and accounting compliance costs are different for each company. Companies are obliged to prepare financial statements for every accounting period, and these must be approved by the general meeting and then filed with the Register of Companies.

In this register, the reports and balance sheets for the given business years are publicly available to everyone.

Public limited companies are always obliged to elect an auditor; in private limited companies, the shareholders shall elect an auditor if the private limited company keeps double-entry bookkeeping, the average annual net sales of the company exceed HUF300 million and the number of employees is more than 50 on average in the two business years preceding the business year.

The most common form of use of real estate for a limited period of time is a lease or a leasehold. In a lease, the tenant is entitled to use the leased premises, while in a leasehold the tenant is also entitled to collect the benefits of the property. Under Hungarian law, there are various further arrangements allowing the use of real estate for a limited period of time, such as the right of use, the right of use of a land, the right of use for public purposes and usufruct.

The Hungarian Civil Code contains the general rules for lease agreements. There are specific rules for the leasing and disposal of residential buildings and premises (with specific rules on the lease of properties owned by municipalities), but in general the same legislation applies to the lease of different types of premises – eg, office spaces, commercial premises, residential buildings or logistics parks.

The main source of regulation for leases is the Hungarian Civil Code, which contains the general rules for lease agreements. However, these are not mandatory rules and the principle of freedom of contract is generally applicable to leases, and therefore also to the rent and the term of the lease.

With regard to the COVID-19 situation, a number of restrictions have been enacted into law by governmental authorities, which affect lease agreements.

According to Government Decree 52/2021 (II.9), there is currently a rent-free period for certain business premises owned by the Hungarian State, a local municipality or a company under the majority influence of the Hungarian State or a local municipality, from 10 February 2021 until June 2021, during which time the tenants of these leased premises are exempt from the rent payment obligation.

There was a moratorium until 30 June 2020, during which time it was prohibited to terminate lease agreements concluded with respect to non-residential premises in certain sectors and the landlord was not entitled to increase the rent, even if the given lease agreement would have otherwise allowed such. The affected sectors were tourism, catering, entertainment, film, performance artists, event organisation and sports events.

On 24 March 2020, the government suspended evictions of real estate for the duration of the state of emergency declared due to the COVID-19 epidemic, until the end of the state of emergency, the date of which is currently uncertain. Currently, therefore, if a tenant does not voluntarily leave the leased premises, the bailiff cannot force it to leave. However, in this case, the landlord is still entitled to a usage fee by virtue of law, in the same amount as the monthly rent. In commercial lease agreements, the parties usually stipulate two to three times the amount of the rent as usage fee.

In view of the credit moratorium (which is valid until 30 June 2021), those who are listed in the National Asset Management Programme as tenants will also receive a deferral until 30 June 2021 for rent payment obligations arising from their lease agreement.

A lease agreement may be concluded for a definite or an indefinite period, according to the Civil Code. Commercial lease agreements are typically concluded for a definite period, with the general lease period usually being between five and 15 years. It is also common to provide the tenant with an extension right, according to which the term of the lease may be extended, usually for an additional five years.

Throughout the term of commercial lease agreements, the landlord is usually obliged to maintain and repair the building, its structure and the common areas, while the tenant shall maintain and repair the facilities within the leased premises. Rent is usually paid monthly or quarterly in advance.

Hungarian law does not regulate “force majeure”, but epidemics are known in Hungarian jurisprudence and are generally considered as force majeure events. A force majeure event may have the effect of a so-called “frustration” under the Hungarian Civil Code, provided that it renders the performance of an agreement impossible.

Before the COVID-19 situation, lease agreements contained general force majeure rules (but not explicitly detailed). Since the COVID-19 pandemic, the parties to lease agreements now usually acknowledge that COVID-19 cannot be considered as force majeure, as the parties were already aware of its existence during the negotiations and conclusion of the lease agreement.

Generally, the rent will remain the same through the term of the lease (unless so-called step rent is agreed); however, the use of indexation in lease agreements is a common practice in Hungary, which allows the landlord to increase the rent annually. The most commonly used indices are the Harmonised Indexes of Consumer Prices (HICP) published by Eurostat and the Monetary Union Index of Consumer Prices (MUICP). If the rent is determined in HUF, the parties generally use the index published by the Central Statistics Office (in Hungarian: KSH). Usually, a decrease of the rent based on the indexation is excluded.

The landlords often give a three- to six-month rent discount, which in practice means that during the discount period the tenant is only required to pay 50% of the monthly rent.

Unless there is an indexation clause in the lease agreement, the amount of the rent can only be changed by the agreement of the parties and the amendment of the lease agreement.

As the main rule, rent for real estate is VAT exempt, although the lessor can opt to apply VAT taxation to the renting of real estate or non-residential real estate generally. The general VAT rate is 27%.

VAT exemption cannot be applied for the renting of places for accommodation purposes and premises for parking purposes, among others.

At the start of the lease, the tenant is often obliged to pay a security (in the form of cash deposit, bank guarantee or corporate guarantee) to the landlord to secure its obligations arising from the lease agreement. If the parties agree that the costs of the fit-out works shall be borne by the tenant, the tenant shall pay this amount to the landlord in advance.

The costs related to the repair and maintenance of the common areas of the leased premises are usually paid by the landlord, but are borne by the tenants in the form of service charges.

In general, the tenant shall be responsible for the payment of the costs of the utilities in respect of the leased premises.

These costs are either paid by tenants directly to the utility providers (on the basis of separate utility agreements between each tenant and the utility providers), or directly to the landlord. In the latter case, the landlord pays the cost of utilities to the service providers and re-invoices such costs to the respective tenant.

In general, during the term of the lease agreement, the tenant shall take out an all-risk property insurance policy against any and all damages and loss in relation to items brought into the leased premises by the tenant, in an amount equivalent to the replacement value of such items. In addition, the tenant shall take out liability insurance for personal injury, property damage and economic loss in the amount that is standard for its business. The landlord shall carry and maintain an all-risk property insurance policy covering the building and landlord's property therein during the entire term of the lease, and shall also maintain liability insurance.

The purpose for which leased premises may be used is usually agreed between the parties in the lease agreement (permitted use) and is also subject to the respective zoning in which the building is located, as well as the construction and occupancy permit of the building in which the leased premises are located. Any change to the permitted use is usually subject to the landlord’s prior written consent. If the tenant uses the leased premises in a manner contrary to the permitted use, the landlord is usually entitled to terminate the contract by extraordinary notice.

Hungarian law protects neighbours against disturbances caused by, for example, activities with excessive noise, smell, sound effects or air pollution. Therefore, if a tenant carries out such activities, other tenants may request possession protection proceedings from the notary.

The tenant’s right to make modifications and alterations to the leased premises will depend on the parties’ agreement. Usually, such requests of the tenants (whether affecting the structure or the installation of additional fittings within the leased premises or not) must be submitted to the landlord for prior approval.

In some cases, the tenant is entitled to change decorative elements that do not affect the structure, but these changes shall also be in line with the image and quality of the leased premises.

The main source of regulation for leases is the Hungarian Civil Code, which contains the general rules for lease agreements. There are specific rules for the leasing and disposal of residential buildings and premises in Act 1993 of LXXVIII. In general, the same legislation applies to the lease of office spaces, commercial premises or logistics parks.

According to Government Decree 52/2021 (II.9), there is currently a rent-free period for certain business premises owned by the Hungarian State, a local municipality or a company under the majority influence of the Hungarian State or a local municipality, from 10 February 2021 until June 2021, during which time these leased premises are exempt from the rent payment obligation.

It is common to stipulate in lease agreements that the landlord may terminate the lease agreement if liquidation proceedings or involuntary deregistration proceedings are ordered with binding force against the tenant, or if the tenant filed a request for voluntary winding up at the Register of Companies, or even if such procedures are threatening.

Under Hungarian law, in a liquidation procedure the liquidator may terminate any contract concluded by the debtor (including its lease agreements), except for lease agreements of natural persons related to residential properties. In addition, if a tenant files for bankruptcy, the landlord is prohibited from terminating the lease agreement during the time of the bankruptcy due to the bankruptcy procedure.

Generally, a tenant to a lease agreement is required to provide the landlord with a cash deposit, a bank guarantee or a parent/group company guarantee, or to ensure a suretyship. The amount of this security is usually equal to three to 12 months of (gross) rent plus service charges.

If the amount of a cash deposit security exceeds the monthly rent three times over, such excessive security may be reduced by the court at the tenant’s request.

The landlord is also entitled to a statutory lien over the tenant’s assets located within the leased premises, from which the landlord may satisfy its claims of unpaid rent and additional costs.

It is also common to request a so-called eviction declaration from tenants issued in the form of a notarial deed, under which tenants may be forced to leave the leased premises without a court procedure if the lease agreement terminates for any reason.

In addition, tenants are usually required to have all-risk property insurance and liability insurance for personal injury, property damage and economic loss in the amount that is standard for their business.

According to the Hungarian Civil Code, if the tenant continues to use the leased premises after the expiration of the definite term and the landlord does not challenge such use, then the term of the lease becomes indefinite and may be terminated by ordinary termination. However, the possibility of this is usually excluded by the parties in commercial lease agreements.

Nevertheless, if the tenant does not leave the leased premises by the date of termination, the landlord may be entitled to a so-called usage fee in addition to the general compensation claims under the Civil Code. According to the law, the usage fee is the same amount as the monthly rent, but the parties usually stipulate two to three times the amount of the rent in commercial leases.

It is also common to request a so-called eviction declaration from tenants issued in the form of a notarial deed, under which tenants may be forced to leave the leased premises without a court procedure if the lease agreement terminates for any reason. However, measures to evacuate properties will only be possible again after the end of the COVID-19 emergency situation.

In general, the tenant shall be entitled to sub-lease or assign the use of the leased premises to a third party with the prior written consent of the landlord. A common exception in commercial leases is sub-letting to a company that belongs to the tenant’s company group. In this case, the prior written consent of the landlord is not required; notification is sufficient. It is also common in commercial leases to request eviction declarations not only from tenants, but also from sub-tenants.       

Both the tenant and the landlord are entitled to terminate the lease agreement in accordance with the general rules of the Civil Code, Act LXXVIII of 1993 or with reference to the reasons or events for termination contained in the agreement.

According to Act LXXVIII of 1993 on the lease and alienation of apartments and premises, the lease agreement ceases in the following circumstances:

  • if the agreement is terminated by mutual agreement of the parties;
  • if the apartment is destroyed;
  • if the lease is terminated by either party;
  • if the tenant dies;
  • if the tenant exchanges the apartment for another apartment;
  • if the tenant was expelled from Hungary;
  • if the tenant's tenancy is terminated by a court or other authority; or
  • by virtue of law.

In the case of non-residential premises, the lease agreement ceases if the legal person terminates without a legal successor or if the tenant's self-employed activity in the premises has ceased.

It is typical in commercial lease agreements to limit tenants’ termination rights. Generally, the tenant is entitled to terminate the lease if it is obstructed or significantly restricted in the proper use of the leased premises for a longer period of time (45-60 days) and the landlord fails to remedy the defect in due course (30-60 days from the tenant’s notification).

In contrast, the landlord’s termination rights are much broader – the breach of any material obligation of the tenant usually serves as termination cause (such as the tenant fails to pay the rent, the service charge or the cost of utilities; the tenant fails to provide the security; the use of the leased premises is contrary to the permitted use; or the tenant fails to obtain or maintain any licences or insurances, among other reasons).

Hungarian law requires leases to be in a written form. There is no registry for leases in Hungary – ie, lease agreements cannot be registered with the land registry (contrary to certain other rights of use).

If the tenant fails to comply with its obligations under the lease agreement and thereafter does not leave the leased premises, the tenant can be forced to leave without recourse to the court if an eviction declaration signed by the tenant is available. This eviction declaration is incorporated into a notarial deed, which includes the tenant’s unilateral commitment to leave the leased premises. In the event of default, the notary shall attach an enforcement clause to the eviction declaration, on the basis of which the bailiff will force the tenant to leave the property with the assistance of the authorities.

The government has suspended evictions for the duration of the state of emergency caused by the COVID-19 pandemic, so it will only be possible to take action to evacuate a property after the state of emergency has ended, the timing of which remains uncertain.

According to the Act on Bankruptcy Proceedings and Liquidation Proceedings (Act XLIX of 1991), the liquidator shall have powers to terminate contracts concluded by the debtor with immediate effect, except for lease agreements of natural persons for residential properties. Beyond that, there are no cases where a third party would be entitled to terminate a lease agreement.

Construction contracts typically set out a fixed contract price for the scope of work covered. Unit prices are also commonly used to regulate the price of unforeseen or additional works.

EPC agreements under which the contractor is responsible for both design and construction are widespread in the market. If a separate architectural services firm is involved, such firm (designer) will usually be responsible for obtaining the building permit of the project, while the contractor will be responsible for the construction and obtaining the occupancy permit of the implemented structures.

Limitation of liability clauses, contractual warranties, various forms of insurances, liquidated damages and parent company or bank guarantees covering performance and maintenance periods are commonly used to manage construction risks. In addition to any contractual warranties/guarantees, statutory minimum warranty/guarantee periods apply to different types of built-in materials/superstructures.

Delay penalties (or liquidated damages) and withholding certain amounts (from the contract price based on achieving project milestones by the deadline) are the most commonly used tools to manage schedule-related risk.

Parent company guarantees and bank guarantees are commonly used to guarantee a contractor’s performance; it is also typical for the contractor to replace the withheld contract price with an equivalent amount of bank guarantee.

Additionally, there is a so-called construction trustee regime operating in Hungary, as established by mandatory law and applicable above certain construction value thresholds, which aims to ensure due payment within all levels of the construction chain (ie, the owner shall advance the contract price for the respective phases to the trustee, which shall be released upon certification of due performance).

The contractor has a statutory lien up to the amount of the outstanding contract price and costs over the assets of the owner that are possessed by the contractor within the scope of the construction agreement. The contractor is not entitled to encumber the property, only the tangible assets of the owner. The lien is removed automatically if the contractor’s claims are settled.

A structure may only be occupied if the competent authority has issued a final and binding occupancy permit verifying that such structure is suitable for safe and intended use, and has been built in line with the building permit.

VAT on Sale and Purchase

Generally, the sale and purchase of real estate is VAT exempt. The seller can opt to apply VAT to the sale and purchase of real estate in general or to non-residential real estate, in which case the sale and purchase would be subject to reverse charge – ie, the purchaser shall be obliged for the assessment and payment of VAT.

The VAT exemption does not apply to the transfer of new real estate (ie, real estate that has not been occupied or where fewer than two years have passed since its occupancy or development) or to building plots, so the sale and purchase of such real estate is subject to VAT at the general 27% rate, to be paid and assessed by the seller.

A preferential 5% VAT rate can be applied to the sale of residential units in a multi-unit residential building with a total net floor space not exceeding 150 sq m, and to single-unit residential units with a total net floor space not exceeding 300 sq m. The preferential VAT rate is applicable from 1 January 2021.

The sale and purchase of a company’s shares is VAT exempt.

Structuring techniques are available to mitigate transfer tax liability, the applicability of which has been confirmed by the tax authority under specific circumstances.

Local Real Estate Taxes

Local municipalities can introduce rules for local tax on buildings and building plots in a municipality decree within the limits imposed by the local taxes act.

The real estate tax shall be paid semi-annually by the person registered as the owner on the first day of the calendar year in which the transaction closes. In practice, the cost of the local business tax is usually divided between the parties on a time-proportioned basis for the year of the transaction.

The maximum rates of local real estate tax in 2021 are as follows:

  • approximately EUR5.5 per sq m for buildings and approximately EUR1 per sq m for building plots; or
  • 3.6% of the adjusted market value of the building or 3% of the adjusted market value of the building plot, if the local municipality opts to impose the tax in its decree on the value of the real estate instead of its base area.

Local Real Estate Tax Exemption

There are certain tax exemptions (eg, for temporary housing units, building structures used for the disposal of radioactive waste or incorporated land used for agricultural purposes), but business premises are generally subject to local real estate taxes. In all cases, the respective local municipality’s decree should be reviewed for tax exemption and tax rates.

Certain municipalities do not levy real estate taxes.

No withholding tax is currently applicable in Hungary on dividends, interest or royalties paid to foreign corporate entities. If tax exemption does not apply, 15% withholding tax shall be payable by foreign private individuals on their income from Hungarian real estate.

Foreign investors’ profit (adjusted in accordance with the provisions of the corporate income tax act) from the rental of domestic real estate is subject to 9% corporate income tax, and their revenue from the same activity is subject to 2% local business tax.

Foreign investors can also be subject to corporate income tax on the income from the transfer or withdrawal of participation in a Hungarian real estate holding company (unless the applicable double tax treaty prohibits the application of such tax by Hungary). A real estate holding company is a company whose total assets in its balance sheet are made up by more than 75% of real estate (including the real estate held by related companies and their Hungarian permanent establishments).

Depreciation of assets is generally available for corporate income tax purposes. However, no depreciation may be accounted for relating to the cost (original cost) of land, plots of land (other than those used for mining or the disposal of hazardous waste) or forests, or of the assets that were not activated.

Lakatos, Köves & Partners

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+36 1 429 1300

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Lakatos, Köves & Partners is a nine-partner firm with more than 50 lawyers (including tax advisers) based in Budapest, with a predominantly international client base. It was Clifford Chance’s office in Budapest for many years, but has been independent since 2009. Lakatos, Köves & Partners has a somewhat unique position as an independent one-country firm focused on working for international clients, and often working with international law firms. Work ranges from development projects, ongoing portfolio management activity and new acquisitions and disposals by foreign investors, to real estate activity linked to the activity of industrials. The firm's finance and tax practices co-operate closely on real estate project financing, and work with the corporate and M&A team in regard to real estate-related asset and share deals. Clients include Accenture, Aeroflot, Allianz, China Investment Cooperation, Horizon Development, Marriott Hotels, Morgan Stanley, Thermo Fisher Scientific and Vodafone.

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