Legal terms still need taking care of, even in a landlord’s market

Analysis

In an improving Budapest real estate market, landlords of quality commercial assets are in a favorable position. Nevertheless, the legal terms of commercial leases still require scrutiny, especially when it comes to a post-acquisition clearance or upgrade of inherited tenant portfolios.

Sándor HABÓCZKY, Partner, SCHOENHERR HETÉNYI ATTORNEYS AT LAW

This is mainly because Hungary’s current leasing regulations (most of the Civil Code and outdated Act on the Leases of Commercial and Residential Premises) still generally reflect a tenant friendly approach, with some mandatory terms, and although they are often disputed, it is still difficult to deviate from them.

There are particular issues to be handled by landlords, such as when a tenant whose lease has been terminated with payment arrears does not evacuate the leased property, and thus delays the conclusion of a new rental agreement. These days, well located commercial premises in a good condition are relatively easily let to a new tenant. However, our laws still protect those in actual possession of the property. As – 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, 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 that the tenant move out and return the premises once the lease relationship has been terminated, or a separate undertaking from 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, popular clauses included in leases are the contractual right to change locks to restrict the tenant’s entry into the premises or prevent the further use and possession of the premises, or the landlord’s ability 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 perspective, it may not be useless as long as it serves as a consequence of non-payment of utility costs by the tenant, and is not a mere sanction for 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, said sanctions, as well as the respective waiver of protection/objection by the tenant, could be held to be unlawful by a court.

Commercial risks are also faced by landlords, but they can be well 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 well function when a tenant is in arrears or if the tenant wants to vacate the premises early in violation of the contract term. 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. These improvements are often borne by the landlord – at least partially – and the risk is that a unique property equipped for a special business (e.g. a spa or a salon) may remain unrented as a result of its specificity. To cover these risks, landlords may also consider concluding a purchase option (available again as fiduciary collateral since 1 July 2016), 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 from the same business field as the previous tenant. Such fiduciary collateral may also provide useful alternatives to secure potential pecuniary claims (i.e. claims for compensating arrears or damages) against non-performing tenants.

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