After more than 15 years of drafting, the New Hungarian Civil Code enters into force next year. Having regard to the significantly changed business and trade relations, the New Civil Code replaces several obsolete regulations of the real estate law and, more importantly, fills numerous gaps in the current civil law provisions.
New opportunities for investors: introduction of the put option and amendments to the option right
Among other changes, the New Civil Code introduces the well-known and commonly used legal instrument of business in the legal world: the put option. The put option provides the owner the right, but not the obligation, to sell the underlying asset at a specific purchase price to the other contracting party. The put option is the exact opposite of the option right, which gives the holder the right to acquire the asset at the previously agreed purchase price.
Although the concept was well known in the commercial practice and commonly used by investors, the exact terms of the put option were so far determined by agreement between the parties. As the establishment of the put option highly restricts the right of the owner on disposal and creates a long-term contractual relationship between the parties, the new regulation fills an important gap in the current civil law provisions. A written form has become mandatory to secure the rights of the contracting parties. Moreover, for real property, the right must be registered in the land registry.
The new law also significantly modifies the rules of option rights. The key changes affect the maximum term of the option right: from 15 March 2014, investors may also establish option rights for an indefinite term. The five-year term limitation of the option right was not reasonable for real estate transactions, where option rights were mainly established as securities for the financial obligations of the real estate developers. It has been always a challenging – often unsuccessful – task for the financing entities to prolong the five-year definite term of their option rights. The New Civil Code establishes a more advantageous position for them, as the parties are also allowed to agree on indefinite term option rights.
Amendments to the pre-emption right and repurchase right
The New Civil Code also modifies the general rules of pre-emption right. Pursuant to the new regulations, pre-emption right may also be established in favour of more than one obligee. The amended regulations of the pre-emption right may provide more favourable business conditions for real estate owners and investors as future real estate transactions can be secured even when numerous bidders show interest in acquiring the same property. In the latter case, the owner of real property may grant pre-emption rights to each of the bidders, and they may exercise their pre-emption rights in the order they agreed or in the order of establishment.
Another important amendment from the New Civil Code is that repurchase rights may also be established for an indefinite term; the current five-year restriction will no longer apply. Contrary to the current rules, where the repurchase price must be equal to the original purchase price adjusted by the useful expenditures of the buyer or the depreciation of the asset, the parties may also determine different, market standard calculation methods of the repurchase price.
Quote: Repurchase rights may also be established for an indefinite term; the current five-year restriction will no longer apply.
This article was originally published in the schoenherr roadmap`14 - if you would like to receive a complimentary copy of this publication, please visit: pr.schoenherr.eu/roadmap.
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