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New lease termination options for office buyers?

Issues

Apparently, the Ministry of Justice has recognized market needs to some extent and intends to implement certain amendments of the Civil Code also affecting property development financing and real estate acquisitions. The amendments in the pipeline may strengthen the positive trends on the property market and boost real estate financing.  

Tamás Balogh, Attorney at Law, Schoenherr Hetényi Attorneys at Law 

The initiative on the amendment of the secured transaction scheme is the subject of heated debates among legal professionals, as it puts forward some fundamental changes in the currently applicable civil law provisions. Not only would the formerly used non-accessory mortgages be reintroduced, but security interests would not be terminated in the case of transfer of contractual positions.  

These amendments would certainly have considerable impact on real estate financing and acquisitions, while some other planned changes could also have an impact on real estate lease relations. It is also the subject of ongoing discussions whether termination rights shall be granted to investors acquiring buildings with existing lease agreements.

With regards to the potential amendment of lease termination rights, pursuant to the current civil law provisions, lease relations shall remain in effect even if the object of the lease is sold to a third party. This concept means that the tenant may continue to use the leased property under the same conditions and for the same rental fee as agreed with the original landlord. The only amendment of the lease is that the original landlord is replaced by the purchaser entity by force of law.

Having recognized the significance of ensuring and maintaining the new owner’s right to utilize and control the property after the completion of an asset purchase transaction, the above general concept may be amended mainly in favor of investors of real estate acquisitions.

It is suggested that termination rights of the parties in real estate lease agreements shall be amended in a way that in the case of an asset sale, the new owner would be entitled to terminate definite term leases following the acquisition. Nevertheless, the right of the new landlord on termination would only exist for a limited period after having been informed about the registration of its ownership rights with the Land Registry. In the latter case, however, the previous landlord (i.e., the seller of the real estate) would be obliged to pay adequate compensation to the tenant. It is also subject to further clarification what the adequate compensation of the tenant shall mean and how it will be calculated.

As an exemption, the new landlord would not be allowed to terminate the definite term lease if the tenant’s right to lease is registered with the Land Registry. (Given that under the current regulatory system the registration of lease rights is not appropriately regulated, the amendment of the Land Registry regulations would also be required.)

It needs to be emphasized that the new regulation on termination rights shall only be applicable to those agreements which will have been concluded after the relevant act enters into force, which is expected only at the beginning of next year.

Investors and future tenants need to pay special attention to the contractual regulation of termination rights of new investors especially in the case of pre-leases and build-to-suit projects.

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