An overview of key Hungarian cadastre and Land Registry issues

In Hungary, the cadastre and legal registry was integrated in 1971 at a legal and institutional level. Despite the fact that the cadastre developed at a time when modern technology made title documentation easier to update, the system faced challenges due to the vast increase in the number of new parcels created by the Land Compensation program.

The Hungarian inheritance procedure created additional challenges, when rules applied during previous centuries led to the systematic fragmentation of property into very small parcels - usually each sibling had to receive a portion of inherited land. Another source of fragmentation of property was due to land reforms after the First and Second World Wars. These reforms distributed land to small and medium-sized agricultural farmers. Such fragmentation has meant that ownership rights to concrete land are often not clear. In 2006, the European Union Committee on Land Registration identified the following primary faults of the Hungarian land registry: 

  • a high number of co-owner shares
  • incomplete land register
  • physical inaccessibility of some plots
  • inaccessibility of the Land Registry using the internet  

The average lag time between taking possession of land and the issuance of titles was about 18 months at one point. Now, the Land Registry office should register a change in title within 30 days from the date the application is filed; but in practice, it can still take up to three months.

The incompleteness of the public records means that title defects, such as instruments executed under an expired or fabricated power of attorney, a lack of competency, the capacity or legal authority of a party, a forged signature on title deeds, or other defects, are risks that could result in the sale purchase agreement or the transfer of ownership being declared null and void.

Hungary does not have an adequate State indemnity policy for foreign investors. For example, if there has been an administrative error on the part of the Land Registry, the state can reimburse the loss but there is no guarantee that the documents, which are authenticated/ certified by the Land Registry, will be corrected. It is possible, in some cases, to ensure that title documents are correct by applying to the Hungarian court to get confirmation that the documents are valid. However, this is a time-consuming and costly procedure which is not always suitable or practical in the fast-paced real estate investment and development environment.

In a recent First Title case, a 50-year usage right was granted over land owned by a Hungarian public authority, enabling the investor/ developer to construct a building and then use a stipulated part of the building during the 50 year period of the usage right. In the due diligence review, First Title identified several risks:

  • The Hungarian civil code required that there should be an exact term of years for the usage right to run. Although a term of 50 years was granted by the public authority, the Land Registry entry of the usage right on the title to the land does not specify a
  • term of years, and therefore could be challenged and the usage right removed from the public register.
  • The Fiscal Administration Act required that a public tender procedure should be completed before the transfer of the usage right by the public authority. When the usage right was granted, no public tender procedure was undertaken.
  • A public procurement procedure was required so that the building could be legally constructed. A further analysis of the title documentation revealed that the procurement procedure was not followed.
  • The usage right is terminable by the public authority with 180 days notice for a material breach of its terms by the company - one important type of material breach specified in the Usage Right Agreement is if the 'public use' nature of the premises are altered, and is not operated for its intended public purpose or is only partially operated 'without reason.
  • The usage right agreement should have been vested in the investor as a successor in title to the company that was originally granted the usage right. The investor risked being deemed, not the legal successor in title because of the way his company was created.

Fortunately investors, as well as developers and lenders, have the option of purchasing a First Title insurance policy which did and can cover these and other known and unknown title defects in the public record.