Legal terms of commercial leases still require scrutiny in the current landlord’s market for commercial leases in Budapest, especially when it comes to a post-acquisition clearance or upgrade of inherited tenant portfolios.
In an improving Budapest real estate market, landlords of quality commercial assets are decreasing tenant incentives and are in a favourable position if they have quality lettable spaces. Even though landlords set the pace as regards the commercial terms, they cannot entirely change the landscape to their benefit when it comes to the legal terms, as the legal conditions of commercial leases are still quite tenant-friendly as a result of some old-fashioned pieces of legislation still being in place. This legal environment requires scrutiny, especially when it comes to a post-acquisition clearance or upgrade of inherited tenant portfolios.
Hungary’s current lease regulations (most of the Civil Code and the outdated Act on the Leases of Commercial and Residential Premises) still generally reflect a tenant-friendly approach, with some mandatory terms. They are often disputed, however, and are still difficult to deviate from.
There are certain issues to be handled by landlords, one being the case when a tenant whose lease has been terminated with payment arrears does not evacuate the leased property, thus delaying the conclusion of a new rental agreement. These days, well-located commercial premises in good condition are relatively easily let to a new tenant. However, Hungary’s laws still protect those in actual possession of the property. In the absence of a voluntary move by the old tenant, the lawful eviction of the property would require a court order and subsequent judicial execution process; therefore, landlords often require lease agreements to be signed in front of a notary public, putting the agreement in a directly executable form from inception. Either these lease agreements contain provisions prescribing the tenant to move out and return the premises once the lease relationship has been terminated, or a separate undertaking of the tenant is required (an eviction statement is included in the same notary deed form).
Given that eviction by way of judicial enforcement may take months even when tenant undertakings are included in executable deeds, landlords have become inventive in warning tenants in advance by including complete inventories of collaterals and sanctions in lease agreements. For example, a popular clause in leases is the contractual right to change locks to restrict the tenant’s entry into the premises or to prevent the further use and possession of the premises, or a clause allowing the landlord to remove items belonging to the tenant from the leased premises. These arbitrary acts are usually unlawful, and thus could establish tenant claims delaying the conclusion of a new lease.
A harsh, but similarly popular landlord measure is to suspend the tenant’s supply of public utilities. Although restricting access to public utilities could be tricky from a legal point of view, it may not be useless as long as it serves as a consequence of non-payment of utility costs by the tenant and not a mere sanction upon non-payment of rent.
No doubt, a threatening, extensive list of sanctions may have a strong preventive or psychological effect. However, even if tenants expressly waive their rights in terms of the above arbitrary measures, these sanctions, as well as the respective waiver of protection/objection by the tenant, could be held to be unlawful by a court.
Landlords also face commercial risks, but they can be avoided or mitigated through various legitimate channels (bank guarantee, deposit, parent company or shareholder suretyship, etc). One of the most important is the landlord’s statutory lien over the assets of the tenant, not only securing the rent, but also costs in relation to the lease. Assuming the tenant’s assets represent a greater value, this collateral may function when a tenant is in arrears or if the tenant wants to vacate the premises early in violation of the contract term.
Landlords should also be reasonably protected against an early, unlawful exit in case the premises were improved by the landlord in accordance with the special needs of the tenant. These improvements are often borne by the landlord (or at least partially) and the risk is that a unique property equipped for a special business, such as a spa or a salon, may remain unrented as a result of its specificity. To cover these risk and to protect initial investments, landlords may also consider concluding a purchase option over the tenant’s assets, which could make it easier for the landlord to keep the developed function of the property and find a new tenant to take over the premises in the same business field as the previous tenant carried on therein. The purchase option (that can function again as fiduciary collateral since July 2016 as a result of a relevant amendment of the Civil Code) gives unilateral control to the landlord over the tenant’s assets under specific circumstances and may also provide useful alternatives to secure potential pecuniary claims (ie claims for compensating arrears or damages) against non-performing tenants, too.
The landlord should also be reasonably protected against an early, unlawful exit in case the premises were improved by the landlord in accordance with the special needs of the tenant.