An old-new in rem legal institution in the Hungarian Civil Code: the right of construction

A new draft legislative act, which is still under discussion, aiming to amend certain laws “in order to increase the competitiveness of the economy”, has recently been published for public consultation; the backbone thereof are proposals to amend the Civil Code in force. The main points of this draft concerning the Civil Code include inter alia, the introduction of more detailed rules on subordinated lien in order to clarify the legal position of the assignee, the introduction of a new, special case of separation, known as “detachment”, as well as the intention to introduce or reintroduce the law on the right of construction into the Hungarian legal system. In this article, we would like to highlight the latter legal institution, which has already been part of the Hungarian legal system once, and to present its planned regulation as well as its possible practical effects on economic life.

The concept and characteristics of the right of construction

The right to construct, as defined in the draft legislation, entitles the holder to construct or exploit a building on or under the surface of immovable property, whereby it is entitled to construct a building, to use the immovable property for this purpose, to occupy, use or collect the proceeds of the constructed or existing building. The right to construct shall extend to the building erected or exploited thereunder and to its components too.

The right to construct is a marketable and transferable right, it may be subject to succession, and held simultaneously and jointly by several holders, subject to the rules governing common ownership. The right to construct may be encumbered by a lien registering it in the Land Registry, nevertheless, it is important to stress that it is not equivalent to a mortgage on the property.

According to the proposal, the right to construct can be created by a written contract for a fixed term and requires, in addition to the contract, the registration of this right in the Land Registry in favour of the holder. The proposal provides the possibility for the owner of the immovable property to establish the right to construct in his own name as holder of the right and to pledge it independently.

It is important to highlight that the right to construct will cease to exist if it has not been exercised by the holder for fifteen years or if it has been established for more than fifty years, after fifty years have elapsed from the date of its establishment.

As mentioned above, the right to construct is a transferable right of pecuniary value, whereby it should be stressed that the transfer or encumbrance of the immovable property subject to the right to construct does not affect the existence of the right to construct, nor does the transfer or encumbrance of the right to construct affect the ownership of the immovable property. Likewise, it can be stated that the lien on the right to construct does not restrict the transfer of the property concerned or the encumbrance thereof by security rights.

Unless otherwise agreed by the parties, which is provided for by the draft legislation under the rules on the separate ownership of buildings and land, a building constructed under the right to construct remains the component of the concerned immovable property even if the owner thereof and the holder of the right to construct are different persons, therefore the construction does not automatically create an independent ownership right in respect of the building.

The detailed content and scope of the right to construct can be freely determined by the parties concerned within the framework of the legislation (including in particular the provisions of building law and land registration, such as local building regulations and building capacity), but it should be stressed that, under the proposed law, the creation and registration of this right does not in itself presuppose the existence of a building permit.

This legal instrument may be established free of charge, or for a consideration, as freely agreed by the parties. In the latter case, the holder of the right to construct is obliged to pay a one-off and/or periodic fee, the so-called construction fee, the amount and due date of which must be specified by the parties in the contract establishing this right.

Naturally, the above rules also give rise to the relevant amendment of several laws, including the Law on the Land Registry, which, if adopted, will add the right to construct to the list of rights that can be registered in the Land Registry.

This legal instrument is mainly comparable to the usufruct right, but it provides the holder of right with a stronger basis and right, because, in addition to the right of free use and exploitation granted by the usufruct right too, it also provides the right of free disposal of the buildings and their components that are created under this right. As mentioned above, the right to construct is a transferable, encumberable right, which is an additional right compared to the possibilities provided by law in relation to the usufruct right.

The practical and economic importance of the right to construct

After reviewing the rules of the draft legislation, it is worth examining the potential impact of this old-new legal instrument on economic life.

According to the explanatory memorandum attached to the proposal, the problems emerging in connection with the financing of investments related to the construction of some buildings and technical installations are an obstacle to economic growth and competitiveness. The difficulty arises from the fact that the building, structure, work, or superstructure to be constructed in the future cannot be mortgaged or accepted as collateral for a loan that could be encumbered by such a right and cannot, therefore, serve as adequate collateral for the financing needed to carry out the project.

The proposing ministry cites solar power plant investments as a typical example, since, in these cases, not only the asset to be installed and built on, but also the power plant license and the long-term take-over guarantee, that are linked to the land, are included in the value of the investment.

The reintroduction of the right to construct into Hungarian law would provide a much simpler basis for financing such investments than the systems currently in use. As in the case of renewable energy investments, the right of construction could play an essential role in facilitating the financing of construction works on, under, or even over public land (e.g. underpasses, bridges, underground car parks, tunnels), which could also stimulate economic activity. The timeliness of the introduction of this legal institution is further justified by the fact that, at the same time, a complete renewal of the land registration law is underway, which provides an appropriate basis and opportunity for the reintegration of the right to construct into our legal system.