Hungary: The Underground Parking Lot Case In Sopron (Hungary)

In this article, we briefly address the Supreme Court's decision in the so-called Sopron underground parking lot case which has been one of the hottest topics in the legal playing field in the past few months. Below, we discuss the case, the decision itself, and our proposals for solving the problems brought about by the decision.

1. The "Sopron Underground Parking Lot" Case

The litigating parties concluded an agreement pursuant to which the defendant undertook to build a public underground parking lot underneath the real property owned by the Municipality of Sopron. The parking lot was to be operated by the defendant on business terms. The affected real property qualified as a public square and belonged to the so-called "primary assets" of the municipality. The defendant also undertook to reconstruct the surface of the public square. Based on the agreement of the parties, the underground parking lot would be registered under a separate topographical lot number and then transferred to the defendant's ownership upon registration.

The parties acted in accordance with the terms laid down in the agreement: the real property was divided and the building permit was duly issued for the construction of the parking lot. The construction was due for completion during the litigation.

The plaintiff (the municipality) requested the court to establish that the agreement was null and void.

2. Supreme Court Decision

The Supreme Court established that the agreement was null and void due to the fact that "the ownership title to a structure built on, beneath or above the surface of a real property that may not be subject to sale may only be acquired by the owner of the land; as a consequence, ownership of a real property that may not be subject to sale may not be divided."

The Supreme Court argues that "the fact that a real property may not be subject to sale means on the one hand that there may not be a change in the owner of such real property, not even by way of a so-called "original method of acquisition" and also implies a considerable restriction of the owner's rights. Said restriction means that the real property may not be sold and may not even be encumbered."

An "original method of acquisition" is a type of acquisition that does not presume that there was a previous owner of the real property. Acquiring ownership on the basis of an authority resolution qualifies as an original method of acquisition.

3. Problems Triggered By The Supreme Court Decision

In the past few years, several agreements similar to the one in the Sopron case have been concluded. Numerous investments were commenced, mainly by foreign investors, on the basis of the "in rem" encumbrance of a real property which, qualifying as a municipality's primary asset, may not be subject to sale. Quite a few bigger municipalities concluded agreements similar to the Sopron case, where an underground parking lot was to be built underneath a real property owned by the respective municipality and where the real property qualified as a primary asset. Based on these agreements, the investor generally undertook to fully reconstruct the surface above the underground parking lot in exchange for the ownership of the parking lot. These investments have typically been funded by bank loans where the underground parking lot owned by the investor serves as one of the collaterals for the loan. It is yet to be analyzed under what conditions these investments could be continued or indeed whether continuing such investments would be in the interest of the investors.

It is still uncertain whether the municipalities will challenge the legality of agreements similar to that addressed in the Sopron case. One issue of concern for investors is whether there is any specific date after which they or any third party acquiring ownership from the investor can feel safe that their ownership will not be challenged in any way.

If the investor, as the registered owner of the underground parking lot, does not sell the parking lot to a third party, the municipality may assert their ownership right against the investor at any time, with no any time limit. This is because ownership claims do not lapse under the Hungarian Civil Code.

If the investor has sold his parking lot to a third party, "legal proceedings for cancellation may be initiated against a bona fide person acquiring a right by subsequent registration, by confiding in the validity of the previous registration, within sixty days of delivery if the original resolution on invalid registration was delivered to the aggrieved party. Legal proceeding for cancellation may be initiated within three years from the date of registration if no such delivery has taken place." Consequentially, a municipality can assert its ownership claim against a bona fide third party within 3 years from the date of registration. Taking this into consideration, an investor registered as the owner of a parking lot will probably be unable to sell it, as third parties are unlikely to want to take the risk of a potential ownership claim by the municipality for three years from the date of registration of its ownership.

If the investor does not sell the underground parking lot, it is questionable how municipalities would be able to provide proper compensation if they asserted their ownership claim, particularly with high-value investments. In most cases, presumably it would not be in the municipalities' interest to initiate legal proceedings for cancellation. Nevertheless, investors will still be in a very precarious situation with an underground parking lot that is practically impossible to sell.

4. Proposal For Solution

In light of the Supreme Court decision, (i) the ownership title to real property legally qualifying as primary assets may not be transferred, (ii) real property like this may not be encumbered with "in rem" rights (e.g. usufruct, usage right etc.). In addition, "asset management right" may not be established on such real properties (this is not permitted by the Municipality Act).

Large-scale investments cannot be implemented without "in rem" collaterals. This therefore raises the question of how municipalities will be able, taking the current legal background into account, to find investors for investments to be made under or on the surface of public squares. If investors cannot acquire in rem rights on the real property they wish to construct (and which may be worth several billions of Hungarian forints), the financing of investments through the establishment of "in rem" collaterals on the respective real property would basically be unfeasible.

The solution could lie in a decision delivered by the Supreme Court a few months ago (Decision KGD2008.107), wherein the Supreme Court ruled that "municipalities may alter the classification of only those real properties that have previously been qualified by the municipalities themselves as real properties that may not be subject to sale. Real properties that qualify by law as real properties that may not be subject to sale may not be re-qualified by the municipality as real properties that may be sold." At the same time, the Supreme Court also established that "the municipality is authorized to alter the characteristics of a real property through a so-called "re-zoning" procedure." This is where "the council of representatives at the municipality initiates authority proceedings with a view to separating assets which do not serve any municipal duties and jurisdiction and are therefore not to be regarded as assets qualifying as primary assets from those that may not be subject to sale...Such assets subject to separation may not be sold or encumbered and may not serve as collateral as long as said authority proceedings are not completed and the affected real properties are registered with the land registry as a public square, public road or public park."

Based on court decision KGD 2008.107, a real property may be sold and encumbered after completion of the said authority proceedings. However, it remains to be addressed exactly what kind of real property does not serve any municipal purpose or jurisdiction and is therefore not to be regarded as assets qualifying as primary assets and may, consequentially, be separated from primary assets by way of re-zoning.

It is questionable whether, without re-zoning, a primary asset that may not be subject to sale can be subject to any contractual obligations. For example, can an asset that may not be sold be subject to a lease agreement, or can only legal concepts such as the so-called operation right or PPP be considered viable solutions? Even if the relevant real property can be subject to a lease, the lease itself does not make the establishment of "in rem" collaterals on the respective real property feasible when it comes to bank financing. In terms of a lease, the rules laid down by the relevant municipality on the lease of municipality-owned premises would be subject to prior review and any and all unfavourable terms would have to be eliminated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.