3 THINGS A LESSOR IN HUNGARY MUST KNOW ABOUT LESSEES’ INVESTMENTS

20 March 2019

In case of leasing an office, warehouse or other industrial property, lessees often make significant investments to the premises, which can easily result in a dispute when the contract is terminated. From our article, you can learn what should you to take into account as a lessor in relation to investments made by lessees.

Good contract = less trouble

It is not a secret that having a well drafted, detailed contract is the key to a secure legal relationship. It might seem obvious, but many lessor fail to foresee its importance. If you want to avoid unpleasant litigations, you better forget oral agreements and two page “beer mat” contracts.

Some save on legal work, saying "the laws settle the matters anyway". Guess which one will be simpler and more effective during a demonstration? Presenting your contract that regulates the issue in black and white, or if you refer to a general rule and hope that the judge is on the same page with you. This risk is so significant in itself, that you can see that the best safeguard for the lessor is a good contract.

Prevent the problem

I guess you would not be pleased, as a lessor, to pay lessee millions for an investment which increases the value of the premises on paper, but useless for you in practice.

The safest solution is to link lessee investments to your prior approval and to exclude lessee from claiming any reimbursement for the investments he made to the premises. In fact, there is no obstacle to do so, since the principle of “contractual freedom” allows the parties to freely determine the content of the contract.

In practice, the above means that, with a few exceptions, parties may depart from the provisions of both the Civil Code and the “Housing Act”, allowing you to conclude a contract with favorable terms.

Alongside the costs, it is recommended to exclude reimbursement for possible enrichment, as in a Hungarian judicial decision, despite the exclusion of the reimbursement of costs, the court ordered the lessor to reimburse unjust enrichment, because the investment made by the lessee increased the value of the property.

The most obvious solution is to completely exclude lessee investment, as it is completely legal and prevents the problem from happening. If the investment becomes necessary later, the parties can enter into a separate agreement at any time.

If the investment has already been made

What are the possibilities of the lessor, if the investment has already been made and the reimbursement of the costs has not been excluded? In such a case, several factors influence how and to what extent the lessor may be obliged to reimburse the investment.

If the investment is necessary for the preservation of the premises or for the use in conformity with the contract, as the performance of these tasks is the responsibility of the lessor, the lessor is obliged to reimburse the costs to the lessee if the works are performed by the latter.

If the investment does not fall into the above category, (for example it is needed for the lessee's activity), there may be two situations:

a) investments approved in advance

In case the parties have negotiated that the approved investment should be carried out by the lessee, the performance of the works legally can be considered as an agency contract. In this case, at the end of the works, the lessee may ask the lessor to reimburse the costs.

b) Investment without prior consultation

If the lessee failed to inform the lessor about the work, or the lessor did not want the realization of the investment, we can talk about impromptu (i.e. unauthorized) agency. In this case, the lessee may, in accordance with the rules of unjust enrichment, request the lessor to reimburse the financial advantage he received through the investment made by the lessee.

We highlight two aspects, considering Hungarian judicial practice:

• Reimbursement may only be due after the lessee has left the premises, so the lessor can lease it to another tenant.
• The amount of compensation is different from the cost of the investment. The court pointed out that a costly investment does not necessarily result in financial advantage for the lessor, for example, if it is unable to lease the premises at a higher rent.

Conclusion

In the case of a lease relationship, the most important safeguard of the lessor is a detailed contract that adequately protects its interests. Hungarian law allows you to freely determine most of the parts of the contract and to depart from the legal provisions, so we recommend that you exclude reimbursement of investments made by the lessee. To ensure that the law effectively protects your interests as a lessor, we strongly advise you to involve a lawyer experienced in rental contracts during the process.