For most of us it is a significant event when we buy or sell property, and it’s important to minimise any risks in connection with such a transaction. This is exponentially true when we are in a foreign country with little or no knowledge of the language and the legislation. The key to the success lies in finding a reliable Attorney that speaks our language.
When – as a buyer – we found the proper apartment, we usually want to secure it by putting it down in writing so that the seller could not continue selling or change the offered price.
As a seller it could also be important to enter into contract as soon as possible, because we may need the purchase revenue or part of it for another purchase.
Binding preliminary contract
According to Hungarian law, a written contract is the condition of the sale of immovable property. Consequently a pre-sales-agreement must also be recorded in writing. As an Attorney I usually suggest to immediately conclude the final sales contract, unless the property is still under construction or the status of the property is not clear for some reason (e.g. successions)
A pre-contract cannot be registered by the Land Registration Office, but is suitable to enforce the obligation of the other party if need be.
Therefore, it is very important to consult with an Attorney before signing any written agreement.
In Hungary it is usual that the buyer deposits a s.c. Earnest Money with the seller. The rules are the following: If the contract is performed the earnest money shall be credited to the amount payable by the buyer. If the contract falls through for reasons attributable to neither or both of the parties, the earnest money shall be returned. The person responsible for the failure of performance shall forfeit the earnest money that he has given, or he shall refund twice the amount of the earnest money he has received. Most people don’t know that the forfeiture of the earnest money or the double repayment shall not constitute an exemption from the consequences of non-performance, i.e. the amount of the earnest money shall only be credited to the compensation.
In case we don’t have the total purchase price at our disposal, it is common to buy property with a bank loan. In such cases the Attorney must consider all requirements of the given bank when drafting the sales contract. Banks usually insist that it should be the last instalment of the purchase price that is paid with the loan and that this should be paid directly to the seller. It is very important to specify deadlines for payment that – having regard to the time necessary for credit assessment–we and the bank can meet. An experienced Attorney would in such case draw the attention of the parties to agree with whom the responsibility lies in case the bank rejects the loan; should the buyer forfeit the earnest money or shall it be refunded to him.
Mortgage, restraint on alienation and encumbrance
It is not seldom that the property we would like to buy is secured by mortgage (or restraint on alienation and encumbrance). In Hungary this does not have the consequence that you cannot buy the property. In such a case the secure way of buying the property is that first the full debt is paid back from the purchase price, and we hold back the last instalment until the mortgage is removed from the Land Registration (this is the task of the Attorney).
In Hungary parties usually agree to transfer the possession of the property simultaneously with the payment of the last instalment of the purchase price.
This is because it is in the interest of the buyer not to pay the full purchase price until he can take possession of the property. By the time of the transfer of possession the seller must acquire all proof that any overhead expenses and common costs have been settled.
Conclusion of the contract
Before concluding the contract, it is advisable to acquire the property deed (again a task of the Attorney) in order to check who is the owner, what are the main characteristics of the property and if there are any dues (mortgage, enforcement proceedings, etc.)
A thoughtful Attorney would also get a fresh property deed on the day of signing the contract in order to make sure that there are no new entries in the Land registry that could prevent or limit the transfer of ownership or cause other complications.
If you buy an apartment in an apartment block (condo), it is advisable to study the Deed of Foundation and the Rules of Organization and Operation of the Condominium to see what rules will apply to you as an apartment owner. It is very important to check if other apartment owners have a right of pre-emption. In other words somebody else might have the right to buy the apartment instead of you with the conditions you offered (of course an Attorney will help you with that, too).
Following that – once the parties agreed on all conditions – it is suggested that you have an Attorney draft the contract and send it to the other party to avoid situations where you have to huddle through important open issues when concluding the contract.
According to Hungarian Law a condition for a valid property sales contract eligible for registration by the Land Registration Office is counter-signature by an Attorney. Prior to counter-signing the Attorney – among other things - has to check the identity of the parties and the validity of their documents.
If the buyer pays in several instalments, parties usually request from the Land Registry Office that after filing the Sales Contract the proceeding should be left pending until the seller gives his consent to the registration of buyer’s title to the property. (a document called „Consent to registration” shall be deposited with the Attorney)
For the buyer it is important that the Attorney files the countersigned sales contract as soon as possible in order to avoid that any other registration gets filed before his one.
It is also important to know what expenses are connected with purchase or sale of an apartment.
The buyer is obliged to pay a property tax (4% of the property value) and the fee of the Land Registry procedure (currently 6.600 HUF, approx. 21 Euro) and usually it is the buyer who pays the Attorney’s fee.
The amount of property tax can be reduced if within 3 years before the purchase or one year following the purchase the buyer has sold (or is going to sell) another property, in such a case the basis for calculation is the difference of the property values.
The seller will have to pay any expenses related to the unencumbering of the property (including the fee of the Land Registry Office) and the personal income tax.
According to the Hungarian Law on personal income tax currently in force, the income tax does not apply if 4 full calendar years have passed since the previous purchase of the property (if less has passed a reduced tax has to be paid: 90% in the second year after purchase, 60% in the third and 30% in the fourth year).
If the tax applies, any expenses can be deducted from the tax basis (such as refurbishment, legal expenses, Land registry fee, etc.).
Although - for reasons of space - the above information is not complete, it can be seen that a property purchase in Hungary is a complex procedure with numerous pitfalls. Probably the biggest mistake one can make is to make decisions and declarations without an Attorney or with the wrong one.
Dr. Zsolt Rózsahegyi, LLM
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