The planned new Hungarian Civil Code is expected to bring significant changes to the Hungarian collateral system. The changes will hopefully eliminate certain deficiencies in the current legislation pertaining to the maximum sum mortgage, one of the more popular collateral forms used in financing transactions.

The “maximum sum” mortgage

A “maximum sum” mortgage (keretbiztosítéki jelzálog) is a special form of mortgage particularly used in financing practice as collateral to revolving facilities. A maximum sum mortgage may not only secure a specific claim (as a regular mortgage) but also any and all claims arising from a specific legal relationship between the parties, up to a maximum amount. Consequently, the maximum sum mortgage is a particularly flexible security, but this flexibility may also result in serious risks in certain banking transactions.

Mortgages in general are accessory (with the exception of the “independent” mortgage), ie, closely attached to the secured claim, and transferred by law if the underlying claim is transferred. This is an extremely beneficial feature enhancing the marketability of secured claims, as the transferees automatically receive a secured claim.

Mixed signals from the courts

But long-standing Hungarian court practice is of the firm view that the maximum sum mortgage is connected to the legal relationship, and not the individual claims arising therefrom. Multiple recent precedents continue to confirm that the connection between the maximum sum mortgage and the individual claims is only indirect.

As a result of this approach, the automatic transfer of the mortgage described above will not apply in all cases: maximum sum mortgages can only transfer with the secured legal relationship, but not with an individual claim. If only an individual claim is transferred without the transfer of the entire secured legal relationship, the maximum sum mortgage will remain with the original beneficiary, and will continue to secure the original legal relationship. As the transferee may not be in the position to get new security from the obligor, the market value of such unsecured claims will be severely diminished.

Court practice is less unanimous in cases where the transfer of the individual claim takes place after the termination of the underlying legal relationship. The Hungarian Supreme Court held in an individual case that, if the underlying legal relationship terminates, the maximum sum mortgage will not terminate, but will directly secure the residual individual claim(s). With the termination of the underlying legal relationship the maximum sum mortgage will lose its original function and will transform into a regular mortgage securing the individual claim in the amount of such claim. The regular mortgage will thus also transfer automatically with the transfer of the individual claim.

Still, the Supreme Court in another decision held that since the Hungarian Civil Code does not regulate the automatic transformation of a maximum sum mortgage into a regular mortgage, such transformation requires the specific agreement of the parties.

Conclusion

The current uncertainty in the statutory background and the court practice has created a situation that is clearly unsatisfactory for both lenders and borrowers. Just like in a number of similar cases (eg, security trustee), practitioners expect the planned new Civil Code to provide the statutory background for a uniform, consistent, and market-friendly court practice.

Long-standing Hungarian court practice is of the view that the maximum sum mortgage is connected to the legal relationship, and not the individual claims arising therefrom. If only an individual claim is transferred without the transfer of the entire secured legal relationship, the maximum sum mortgage will remain with the original beneficiary, and will continue to secure the original legal relationship.