European Investors vs Hungary 2:0 – Hungarian Land Act Condemned Again In Luxembourg

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Hopefully this time the Curia will have the chance to deliver a landmark judgment on state responsibility for EU law breach.
European Union Corporate/Commercial Law
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In May 2019 the European Court of Justice condemned again the Hungarian Land Act of 2014 cancelling usufructs on arable lands in Hungary without providing any compensation for right-holders. What is the "added value" of this second judgment, and why it is important for investors seeking damages for losing usufructs on lands?

Background

While acquisition of arable land in Hungary was always restricted or banned for non-Hungarians, foreign investors could "indirectly acquire" lands, due to a regulatory loophole, by setting up a company in Hungary which could acquire the usufruct of the property, which granted rights to the usufructuary close to ownership.

This loophole was closed in 2002, without affecting the acquired rights, however with effect from 2014 the new Land Act1 entered into force which cancelled the usufructs on arable land acquired earlier, and ordered the deletion of this rights from the real estate register, save if the owner of the land and the right-holder of the usufruct are close relatives ("close family tie" rule).

The Hungarian land offices deleted roughly 100.000 usufructs from the real estate register until the end of 2014, and cca. 5.000 foreigners were concerned.

Some of the right-holders challenged the land office decision in front of local courts, who started preliminary ruling procedure in front of the European Court of Justice ('ECJ') to interpret the free movement of capital, as basic principle of EU law, leading to the SEGRO case.2 In the SEGRO judgment, deliveed in March 2018, the ECJ held that the free movement of capital prevailed over the disputed provision Hungarian Land act, which cannot be applied in the SEGRO case.

The provisions of the Land Act impressed the European Commission too, who has started a so-called infringement procedure against Hungary back in 2014. While in SEGRO the interpretation of EU law was in focus to find the EU-conform solution for that particular case, this infringement procedure sought the declaration by the ECJ that Hungary has breached EU law.

The case in Luxembourg

In the litigation in front of the ECJ3, the European Commission argued that by cancelling usufructs on lands by law Hungary infringed the freedom of establishment and the free movement of capital, as basic freedoms provided by the founding treaties of EU, in addition the right to property enshrined in the Charter on Fundamental Rights of the EU, given the lack of any compensation.

The Hungarian government first contended that by the acquisition of usufruct, the right-holders circumvented the national rules restricting foreigners to acquire arable land in at that time, and invoked the "public policy exception" to derogate from the basic freedoms.

However, in the opinion of the ECJ, acquiring usufruct through local companies was a legal option for foreign investors in Hungary in the 90s, furthermore the Hungarian state bodies and courts have not challenged that type of transactions for more decades. I addition and a general presumption of abusive practices cannot be used to justify the public policy exception from the free movement of capital.

Hungary has also invoked the so-called "general interest" connected to farming, namely that the new Land Act aims at preventing land acquisition for speculative purposes, to ensure that the owner of the land is the person who actually farms it, which, in its opinion, justifies the derogation from the free movement of capital.

In relation with the above arguments the ECJ has questioned that the challenged measure of the new Land Act is appropriate to attain those objectives, since the "family tie exception" does not guarantee that the usufructuary farms the land, in addition, the above purposes could be achieved by less restrictive measures, so it is disproportionate.

Finally, in the opinion of the Hungarian government, the Land Act does not amount to a deprivation of property without compensation based on the Charter, since in accordance with the general provisions of the Hungarian civil law, the investments of the usufructuary can be compensated by the owner, in the framework of a private settlement.

In this regard the Court highlighted that the remedies in accordance with the general provisions of civil law the usufructuary should pursue lengthy and expensive procedures, which is not in line with the provisions of the Charter of Fundamental Rights setting forth fair compensation in good time in case of deprivation of property.

Based on the above, the ECJ declared that by cancelling the usufructs on arable land by law without compensation, Hungary has breached EU law, namely, the principle of free movement of capital in conjunction with the right to property, guaranteed by the Character of Fundamental Rights.

Outlook

This judgment of the ECJ is an important step ahead in the infringement procedure against Hungary. In case the government of Hungary fails to remedy the unlawful situation, the European Commission can start a second procedure in front of the ECJ, in which lump sum or penalty may be imposed by Luxembourg, as long as the non-compliance is remedied.

However, the real "added value" of this judgment is that by reason of the official declaration of breach of EU law by the ECJ, private individuals and companies affected by the condemned legislation of Land Act can turn to Hungarian courts with a better chance of success, to seek compensation for the damage caused by legislation.

Although the Hungarian Supreme Court (Curia) has not yet confirmed the doctrine of state liability for EU law infringement, lower Hungarian courts have already rendered more judgments, declaring the principle the state shall bear liability for the damage caused for individuals by non-EU conform legislation.

Hopefully this time the Curia will have the chance to deliver a landmark judgment on state responsibility for EU law breach.

Footnotes

1 Law No CXXII of 2013 on transactions in agricultural and forestry land

2 Joined cases C-52/16 and C-113/16– SEGRO Kft. v Vas Megyei Kormányhivatal Sárvári Járási Földhivatala and Günther Horváth v Vas Megyei Kormányhivatal

3 Case C-235-17 Commission c. Hungary

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