Land dispute: Hungary restores abolished usufruct rights of EU citizens

English2022. jan. 6.Növekedé

Usufruct rights to Hungarian farmland from which foreign citizens and legal entities were stripped years ago will be re-entered in the real estate register. The state will also pay compensation to the injured parties. The cancellations were part of a crackdown on pocket contracts, but the European Court of Justice ruled in a high profile international lawsuit that the measures were contrary to EU law.

A legislative amendment proposal recently submitted to the National Assembly by the government in order to adjust domestic land acquisition regulations marks the end of almost eight years of international legal debate.

With the proposed changes, Hungary undertakes a legal obligation to reinstate in the Hungarian real estate register the usufruct rights that were abolished by the Parliament in 2014 as part of a comprehensive land regulation package.

The provisions that entered into force in 2014 stated that usufruct rights established by a contract between parties other than next of kin will cease to exist as of the force of law.

In doing so, they annulled rights that the beneficiaries of usufruct rights had legally registered in the real estate register under the previous legislation.

The provisions also applied to private individuals and legal entities in the EU, who had been legally entitled to acquire usufruct rights in Hungary until 2002. Only from that time onwards were domestic regulations prohibiting the establishment of usufruct rights on agricultural land by natural persons who did not have Hungarian citizenship and legal entities.

The whole legal debate originated from the fact that, in Hungary’s judgement, foreigners used usufruct rights to circumvent the legal provisions that had prohibited them from acquiring property in the Hungarian agricultural land market since 1994.

This meant that they had signed back-up agreements – so called pocket contracts – with Hungarian landowners for the purchase of the land, and in practice they had secured themselves with legally registrable usufruct rights.

The speculative intention behind these transactions was that Hungary, as an EU member state, would eventually have to authorise the purchase of land by foreigners, and that these background purchase agreements would then be readily available  and could be submitted to the land registry offices.

However, the abolition of valid usufruct rights caused a strong international backlash and fierce outcry in Austria and Germany in particular.

The measure mainly affected Austrian and German citizens and their companies who had registered usufruct rights on land in Western Hungary near the border, mainly in Vas, Győr-Moson-Sopron, Zala and Veszprém counties, and who had lost these rights without compensation as of 1 May 2014.

The injured parties brought several lawsuits in Hungarian courts, which referred the case to the European Court of Justice for a preliminary ruling.

One of these was the case of Segro Kft., a company owned by German nationals, and the legal dispute initiated by Günther Horváth, an Austrian citizen.

The Austrian government then turned to the European Commission, which first initiated infringement proceedings against Hungary and then took the case to the European Court of Justice. The most important argument was that the Hungarian measures violated the rules on free settlement and movement of capital, which are fundamental EU rights.

The European Court of Justice finally delivered its verdicts in 2018 and 2019 condemning Hungary.

This led to the current amendments to the legislation, including the provisions on re-registration and compensation.

Thus, more than seven years have passed since the cancellations, and three to four years since the court rulings, meaning that it will have been quite a while before the obligation to restore the rights and compensate the injured parties will be fulfilled.

Under the proposed legislation, those concerned will be able to submit applications for re-registration between 1 July and 31 December 2022.

The official procedure will be carried out by the National Land Centre of the Ministry of Agriculture, which will notify all right-holders or their successors by 7 May next year.

If no problem arises with the requested re-registration, the original situation will be restored. If this is not possible - for example because the land has since been purchased in good faith by someone else -, the application will be rejected and compensation will be awarded.

Compensation may also be granted if right-holders do not request the return of the usufruct right but opt ​​for the financial compensation option.

The amount of compensation can be based on the one-year value of the cancelled usufruct right. The one-year value is determined on the basis of 1/20th, i.e. five percent of the market value of the land concerned at the time of cancellation.

If the cancelled usufruct right is re-registered, the compensation will be determined by multiplying the annual value by the number of years between cancellation and re-registration.

If the re-registration does not take place, a maximum of 5-15 times the annual value will be paid to individuals and a maximum of 15 times to legal entities, depending on the duration of the cancelled usufruct and the age of the usufruct right-holder.

Data from the Central Statistical Office show that the average price of arable land per hectare was 930 thousand forints at the time of cancellation in 2014, so the annual value of such land - calculated at a 5 percent rate – could be approximately 45 thousand forints.

If someone was younger than 25 years old at the time of cancellation in 2014, the proposed amendment would entitle them to 15-fold compensation for an indefinite usufruct right, i.e. - based on the average land price - they could receive roughly 670 thousand forints per hectare.

If, on the other hand, the right-holder was already over 65 years old in 2014, they would only be entitled to 5-fold compensation, i.e. around 220 thousand forints per hectare.

The compensation awarded would also be increased by interest for the period between the date of cancellation and the date of payment, at a rate equal to the current central bank base rate plus two percentage points per calendar half-year.

The Ministry of Agriculture does not have precise figures on how many people or plots of land could be affected by the re-registration and compensation, because in 2014 not only usufruct data were deleted from the land register, so those data will have to be retrieved afterwards.

In any case, age may be decisive as to what extent those eligible will be able to take advantage of the new opportunity.

If we assume that the right of usufruct is usually not registered at a very young age and those who exercised this right immediately before the ban in 2002 may have been 40-50 years old at the time, the majority of those concerned may now be over 65 or may have even passed away in recent years.

Therefore, the majority of those who are still alive are unlikely to apply for re-registration or will no longer want to farm on the land that may be reclaimed, so the whole procedure may in practice have less impact on the domestic land conditions that have developed since then.

In this case, compensation may be the preferred option, where the maximum 5-fold multiplier for older people could reduce the state's compensation obligations.