Landowners in Hungary who are parties to “pocket contracts” face up to five years’ imprisonment and expropriation. Is there a solution?

Until the end of April 2014, EU nationals were, as a rule, also prohibited from acquiring arable land in Hungary, owing to a temporary derogation under EU law. For this reason, foreign purchasers — most often from Austria — frequently entered into so-called “pocket contracts” with Hungarian sellers. In most cases, the parties signed an undated sale and purchase agreement and deposited it with a lawyer of their confidence, hoping that once the land moratorium expired, the lawyer would arrange for the new owner to be registered in the land register. At the same time, as a form of legal security, usufruct or use rights were usually agreed in the past, either for life or for a period of 20 years, and an often fictitious mortgage was registered over the arable land in favour of the foreign purchaser.

The new Land Act, which entered into force on 1 May 2014, was intended — according to the recitals of the Act itself — to ensure national treatment for EU nationals, so that all EU citizens could enjoy the same rights as Hungarian citizens. This was achieved only in part, however. Through a special implementation act on “certain related provisions and transitional rules” concerning the new Land Act, the Hungarian government not only created de facto discrimination against EU citizens, but also declared war on the parties to earlier contracts and on those who drafted them, usually lawyers and notaries. From 2014 onwards, they may face not only expropriation without compensation, but also imprisonment of up to five years.

Anyone who has had, or still has, an interest in arable land in Hungary should therefore be aware of the following risks:
1. Nationalisation without compensation
A law adopted in 2014 on the “disclosure and prevention” of circumvention of the Land Act requires all state authorities to inform the public prosecutor’s office ex officio if there is any suspicion of possible circumvention of the former Land Act. Former Hungarian owners may also notify the public prosecutor’s office, including where they are dissatisfied with the current situation or, for whatever reason, wish to cause harm to the foreign possessor.
In both cases, however, the public prosecutor’s office must bring an action seeking a declaration that the legal transactions are null and void and requesting the transfer of all affected plots of land to the State without compensation.

2. Earlier contractual arrangements annulled by law and access to the courts for foreigners excluded by law
The final provisions of the so-called Implementation Act contain a hidden clause declaring all earlier contractual provisions concerning Hungarian arable land that are conditional upon the termination of the land moratorium — even where they are not otherwise invalid — to be “unenforceable”. If the parties provided for the contract to enter into force at a later date, the law provides that this will never occur. The same applies to contractual security interests, such as mortgages, usufruct rights or rights of use, which must likewise be cancelled upon application by the public prosecutor’s office.

One might hope that, following such expropriation or rescission, at least the purchase price already paid to the Hungarian seller could be recovered. Hungarian legislation, however, has also dispelled such hopes: the new Implementation Act likewise excludes access to the courts for the recovery of amounts already paid. As a result, the affected party loses not only the land, which passes to the State without compensation, but also the earlier investment.

3. Five years’ imprisonment for pocket contracts
In addition to the substantive deprivation of rights described above, with retroactive effect, the Hungarian legislature has also sought to ensure that no future “circumvention” of the now supposedly EU-compliant legislation can occur. All persons involved in such “circumvention” — including lawyers and notaries drafting the contracts — may face imprisonment of up to five years. If an injured party were therefore minded to disregard the law and hope for successful legal remedies, whether at national or EU level, their position would be considerably worsened by the threat of possible imprisonment.

4. De facto discrimination against EU citizens
Even if one were to argue that former “speculators” deserved to be deprived of their rights, current EU law requires Hungary, as from 1 May 2014, to grant unconditional national treatment to all EU citizens. At first glance, one might assume that the new Land Act complies with this requirement because of its neutral rule that only “farmers” may acquire land, since the term “farmers” includes both Hungarian and other EU citizens. A closer look at the definition of “farmer”, however, shows that it requires either Hungarian agricultural vocational training or an agricultural business carried on in Hungary for at least three years. Although vocational training may also have been obtained in another Member State, the competent Hungarian authority decides, on the basis of criteria that remain unknown, whether it is equivalent to the required Hungarian qualification. Nor is there any exception to the rule that the relevant agricultural activity must have been carried out in Hungary, even where the person concerned has in fact worked as a farmer elsewhere in the EU for several years.

What legal options are available to landowners or interested purchasers?
a) Annulment by the Constitutional Court on grounds of a violation of fundamental rights
Article XIII(2) of the Hungarian Fundamental Law provides — like most European constitutions — that expropriation is permissible only exceptionally, in the public interest, in cases and in the manner determined by law, and subject to full, unconditional and immediate compensation. This is plainly not the case where nationalisation takes place without compensation.

Furthermore, the Hungarian Act on the legislative process provides that subsequent legal provisions may not declare earlier legal transactions or legal relationships unlawful, nor may they exclude or restrict rights that have already arisen. This is precisely what occurs, however, through the arbitrary exclusion of access to the courts and the annulment of earlier contractual rights.

As in Germany, Hungarian law also provides the possibility of lodging a constitutional complaint for violation of fundamental rights, as well as the possibility of having the Constitutional Court review the constitutionality of legislation in constitutional review proceedings. Such a review may also be ordered by the judge hearing a dispute, either ex officio or upon application by a party, by referring the matter directly to the Constitutional Court. In addition, a party who considers that a judicial decision has violated their rights, after exhausting all ordinary remedies, may apply directly to the Constitutional Court within 60 days of receiving the reasoning of the final-instance court decision, by way of constitutional complaint proceedings.

In the present cases, there are relatively good prospects that such claims would be admissible and well-founded.
b) Annulment by the Court of Justice of the European Union

Whatever “crusades” the Hungarian government may have announced against “speculators”, all Hungarian legislation must comply with the requirements of EU law. In the event of conflict, EU law clearly takes precedence over national rules, so that even the courts of a Member State may and must disregard national law.

Although EU law permits certain restrictions on the free movement of EU citizens, such restrictions may not be arbitrary or discriminatory. If an affected person claims that their freedom of movement has been restricted by the Hungarian State through de facto discrimination, there is therefore the possibility of bringing the matter before the Court of Justice of the European Union. Under section 155/A of the Hungarian Code of Civil Procedure, the Hungarian court may initiate preliminary ruling proceedings before the CJEU either ex officio or upon a reasoned application by the parties. In such a case, the proceedings before the Hungarian court are stayed until the CJEU gives its ruling. A preliminary ruling procedure, however, always requires pending proceedings before a Hungarian court. This requirement may also be met where, following an adverse decision by the Hungarian authorities — in the present cases, the land registry authority — an administrative action is brought against that decision, so that in the subsequent judicial administrative proceedings a judge may decide whether to request a preliminary ruling from the CJEU.

In this case, it is not necessary to exhaust all national remedies, meaning that a preliminary ruling may already be requested during the first-instance proceedings. This also makes it possible for the final decision to be taken by a body that is entirely independent of the Hungarian government and geographically removed from it.