On March 15, 2014, the new Civil Code enters into force as the most important legislation, governing the financial and personal relations of companies and persons. The new code with an increased commercial emphasis incorporates the results of legal developments of the past decades by adapting to the economic needs of our times. The new code takes into account the rules crystallized in the Hungarian trade of property and has regard to European legislation as well. The new act comes with several new and completely or substantially reformed legal institutions. The changes will concern the activity of enterprises widely, thus familiarization and appropriate preparation by business participants will be fundamental. With our newsletters, we would like to provide support for your preparation.

With this newsletter we would like to outline the rules of the new Civil Code, i.e. Act V of 2013 (hereinafter: “new Civil Code”) regarding property law, which affect, among others, the regulations on ownership.

  1. Changes to property law in general

1.1 Superstructures

Compared to the rules currently in effect, the more flexible regulation of the new Civil Code allows more often for the separation of the ownership of buildings or the land, based on either the resolution of the owner or an agreement between the land owner and the owner of the building. The current regulations have been causing difficulties, particularly in the course of real estate developments, by not allowing in every case for separate owners of the land and the buildings erected thereon. The new regulation is expected to provide a solution to the problems of several developments; it may for example simplify the utilization of complexes consisting of several buildings.

1.2 Rules of transferring possession

The Code defines the rules on transfer of possession of things more specifically, if compared to the law in effect. In case of all transactions, where transfer of possession is made necessary by the law (e.g. transfer of ownership, or the creation of a lien), the parties have to proceed in compliance with these rules in order to achieve the intended legal effect. The transfer of possession, in addition to the conclusion of a contract, also requires the actual transfer of the right of control over the thing (in certain cases, however, the agreement between the parties about the transfer of possession may eventually suffice, e.g. the seller continues to use the property as a tenant). The transfer of possession requires that both the delivering and the receiving party have the legal capacity to act, the transactional will and the appropriate right of representation.

1.3 Adverse possession

The new Civil Code introduces the institution of adverse possession with title, by which some contracts—aimed at transfer of ownership but which have formal defects—may be mended. Accordingly, the acquisition of ownership through adverse possession takes effect as early as after five years (as opposed to 15 years as otherwise applicable), if the possessor obtained the possession of the real property from the owner by way of a written contract, based on which he could have claimed the registration of his title in the land register, had the contract complied with the requisite formal requirements, provided the possessor paid the consideration.

1.4 Protection of rights in the land register

The legislator further clarified the statutory limitation deadlines, after which rights over real properties may not be challenged or disputed, even if the preceding registrations would prove to be invalid. The protective effect of the land register, according to the new Civil Code, may take effect, depending on the circumstances, as early as six months after the delivery of the resolution concerning the registration, but in no case later than three years after such registration becomes effective, provided the respective right (e.g. ownership) was acquired, in good faith, for consideration, and in trust of the completeness and accuracy of the prior land register entry that later proved to be void.

1.5 Acquisition of ownership by way of an administrative resolution or auction

The new Civil Code, from now on, unambiguously stipulates in connection with the acquisition of ownership of real estate by way of an administrative decision or an auction by an authority (e.g. auction in an enforcement procedure), as a prevailing principle, that the rights of third parties concerning the acquired thing shall cease to exist. However, when applying this rule, the regulations on the court enforcement procedure will have to be considered as well, since they determine, inter alia, the rights that continue to exist on the real estate sold in an auction in an enforcement procedure.

1.6 Protection of possession

Regarding the protection of possession, according to the rules of the new Civil Code, it is not obligatory to apply for protection of possession at the government clerk in the first year after the injury of the right of possession; the party whose possession has been disturbed may decide to turn directly to the court. With these rules, the legislator presumably wanted to foster the prompt settlement of cases concerning the protection of possession. This may help in particular the parties in landlord-tenant and contractor-subcontractor relationships. The three presently regulated instruments concerning the protection of possession (rightful force, administrative procedure before the clerk, and the lawsuit on the protection of possession) remain upheld by the new Civil Code.

  1. Encumbrances and easements

2.1 Prohibition of sale and encumbrance

The provisions of the new Civil Code provide the way for more flexible solutions especially in case of financing transactions with regard to the prohibition of alienation and encumbrance established in order to secure the rights on the valuables serving as coverage. On the one hand such prohibitions may be established not only upon transfer of ownership in the future, but they may be created without restriction. On the other hand, the new regulation makes it explicitly possible, instead of a prohibition of alienation and encumbrance, to establish only a prohibition of alienation (without prohibition of encumbrance).

2.2 Usufruct, right of use

The new Civil Code further specifies the rules on usufruct and the right of use. It is evident, that these rights can also be established in favor of legal persons (e.g. business associations). Based on the new rules, usufruct and the right of use may be established in favor of a legal person for a limited period of time but in no case longer than 50 years. This in particular happens frequently in case of real estates, e.g. it happens in case of investments in connection with state property or estates belonging to the local government that the parties establish a right to use on the individual estates.

2.3 Easements

The new Civil Code, unlike the present regulation, enables the owner to establish an easement on his own property by way of a unilateral declaration. This may ease the utilization and subsequent selling of complexes consisting of multiple premises. Based on an easement the possessor of a real property may, in a predefined scope, use the real property of someone else for an advantageous purpose of his own, or may claim that the possessor of the other real property shall refrain from certain conduct.