Understanding the Right of First Refusal in Hungary

What is the Right of First Refusal?

The Right of First Refusal, or pre-emption right, is a legal concept in Hungary's Civil Code that impacts real estate purchases. It gives specific individuals or entities the priority to purchase a property, but only when it is put up for sale. Essentially, if a property is encumbered with a pre-emption right, it can only be sold if the person or party entitled to that right waives it or fails to respond to a written notification from the seller within the given timeframe.

The seller is obligated to notify the pre-emption right holder, providing them with all essential details of the offer, including 

• the purchase price, 
• name of the prospective buyer
• payment terms, and 
• deadlines. 

This notification serves as an invitation for the pre-emption right holder to decide if they want to purchase the property under the same terms. If they exercise this right, the contract must be honored, and the seller is required to complete the transaction with the pre-emption right holder instead of the original buyer.

How to Exercise Pre-emption Right in Case of a Real Estate Purchase

Exercising the pre-emption (or right of first refusal) in real estate transactions in Hungary involves careful steps and timing. If you are entitled to a pre-emption right, you have the priority to purchase a property when the owner decides to sell. However, this right can only be exercised if the seller follows specific procedures to inform you of the sale offer.

Notification of Sale Offer: The seller must notify you, the pre-emption right holder, in writing, detailing the terms of the offer received from the potential buyer. This includes important details like the buyer's name, purchase price, payment terms, and deadlines. In some cases, the notification might be a copy of the real estate purchase contract itself. If the seller fails to inform you properly, the transaction could be challenged.

Proof of Notification: The seller must provide credible proof that you, the entitled party, received the offer notification. For this purpose, registered mail or a legally verifiable delivery method is typically used. If the property is in undivided joint ownership and the entitled party is hard to reach, the seller may need to make additional efforts or submit a statement explaining the difficulty.

Accepting the Offer: Once notified, you have the option to accept the offer. If you choose to do so, you are stepping into the shoes of the initial buyer, and the property sale proceeds directly with you instead. Acceptance must be complete and unqualified; any change in terms may invalidate your claim to the property.

Waiver or Silence: You can also waive your pre-emption right explicitly or remain silent. If you opt to waive it, the seller is free to proceed with the original buyer. Silence or lack of response is also generally interpreted as a waiver after the deadline.

By following these procedures, the pre-emption right holder ensures they are fully informed of any potential property sale and are given the opportunity to purchase it if they so choose. Missteps in the notification or acceptance process can lead to legal complications, so it’s often wise to seek legal advice to navigate the steps properly.

Most Common Cases of Pre-emption Rights

In Hungary, pre-emption rights, or the right of first refusal, often arise in real estate transactions and can apply in various situations. Generally, this right allows a pre-emptive party to purchase a property on the same terms offered to a third-party buyer. However, the complexity and enforcement of pre-emption rights can vary depending on the source of the right—whether it is statutory, contractual, or falls under specific regulations. Below are some of the most typical cases where pre-emption rights come into play:

• Co-ownership Situations: According to the Civil Code, co-owners of a property hold a pre-emption right on each other's share when sold to an external party. This is especially common among neighboring property owners or inherited properties. In such cases, the property sale cannot proceed without first offering it to the other co-owners.
• Condominium Agreements: Sometimes, a condominium’s articles of association grant pre-emption rights to other unit owners. Although not mandatory by law, these rights are often outlined in condominium agreements, which can be verified through the land registry or the association's documents.
• Municipal or State-Owned Properties: Local government or the Hungarian State has a statutory pre-emption right when selling certain properties. For instance, under the Local Government Act, municipalities have a right of first refusal on properties of cultural heritage or other assets of public importance. This information is typically accessible via the land registry or specialized registers like the national cultural heritage list.
• Contractually Established Pre-emption Rights: A property owner may also grant pre-emption rights to a third party through a private agreement or contract. These agreements may specify terms, such as price and duration, under which the pre-emption right can be exercised, and they are usually recorded in the land registry for clarity.
• Special Cases under the Land Transaction Act: In transactions involving agricultural or land properties, pre-emption rights may be extended to specific groups, such as neighboring landowners or farmers. These rights are governed by specific legislation, which outlines procedures to ensure the pre-emptive party has a fair opportunity to exercise their rights.

Each scenario involves unique notification requirements, timelines, and documentation to ensure compliance. For instance, if the entitled party does not respond in a set time, it can be inferred that they waived their right, allowing the property sale to proceed. However, overlooking or incorrectly handling these rights can result in disputes or delays, emphasizing the importance of consulting legal guidance.

Circumventing the Right of Pre-emption

Circumventing the Right of Pre-emption in Hungary: Key Tactics and Legal Risks

In Hungary, property owners sometimes seek ways to circumvent the right of pre-emption, especially in cases where they’d prefer not to sell to a neighbor or co-owner with a pre-emption right. Whether due to personal conflicts or simply to avoid the complexity of obtaining waivers, some owners attempt to sidestep the pre-emption process altogether.

Common Tactics

Selling Multiple Properties as a Bundle (Dologösszesség): One of the more common methods is to sell the property together with another asset (such as a garage or parking space) as an inseparable bundle. This tactic may deter the pre-emption right holder from exercising their right, as it forces them to purchase the entire bundle rather than just the individual property. However, Hungarian case law, specifically the Supreme Court’s opinion (2/2009. PK), clarifies that this method can be legally challenged if it appears to be a bad-faith attempt to bypass pre-emption rights.

Using a Barter Agreement (Csereszerződés): Another approach is to transfer the property through a barter agreement, where two parties exchange properties instead of involving a direct sale. This can complicate matters for the pre-emption right holder, as they may not have the means to “exchange” an equivalent property. However, courts have invalidated such transactions when they are evidently designed to sidestep pre-emption rights.

Gifting the Property (Ajándékozás): Pre-emption rights apply only to sales and not to gifts. As a result, some owners choose to gift the property instead, thus circumventing the right of pre-emption. However, this can be costly due to the high gift tax rate, and it may be legally contested if it appears to mask a sale.

Legal Risks and Judicial Stance on Circumventing Pre-emption Rights

Attempting to circumvent the pre-emption right can lead to legal disputes and even the nullification of transactions. Under the Hungarian Civil Code, simulated contracts intended to bypass the pre-emption right are considered void. Courts in Hungary have consistently taken a stand against these circumvention tactics, viewing them as an abuse of contractual freedom. In disputed cases, courts often side with the pre-emption right holder, especially if the seller's actions are deemed to be in bad faith.

Conclusion

The Right of First Refusal (ROFR) in Hungary holds substantial importance in real estate transactions. This legal right allows designated individuals or entities, often co-owners or local government bodies, to purchase a property before other potential buyers. Its primary purpose is to give these parties priority, ensuring they have the first opportunity to acquire the property if they wish.

For property buyers, understanding the implications of ROFR is crucial, as it can significantly affect the transaction process. When a property is encumbered with a pre-emption right, it cannot be freely sold unless the holder of this right explicitly waives it or fails to respond within the stipulated time. Sellers, on the other hand, have a legal obligation to notify ROFR holders of any sale offers in a timely and verifiable manner.

In practice, ROFR is not always straightforward. For instance, recent cases have highlighted situations where buyers, after conducting a thorough land registry search, discovered that certain pre-emption rights were not explicitly recorded in the registry. Such surprises can disrupt the sale process, causing delays and unforeseen legal challenges.

Ensure compliance with Hungarian property laws, especially if you're a foreign buyer. Consulting with a legal professional experienced in Hungarian real estate transactions is advisable - and we are here for you!