Levente Bihari

Under a less-known rule of the new Civil Code it’s now possible for a property owner to separate the titles to a plot of land and the buildings built on it, and to manage or commercially exploit these as separate properties. Businesses are taking a cautious approach to making use of this opportunity in practice: although splitting titles can make property development or borrowing more flexible, for the time being legal uncertainties are preventing it from becoming more widespread.

The old Civil Code set out, as a fundamental principle, that the owner of the land has the right to own the building built on the land, and there were only limited cases in which it permitted a person other than the land’s owner to obtain stand-alone title to the building, thus enabling the land and the buildings on it to be separately sold or encumbered.

The new Civil Code coming into effect in 2014 broke with the old stance, making it possible for the owner of a property to opt, at any time, to separate the titles to the land and the buildings, or to the individual buildings on the land, while retaining ownership of all these assets. 

A world of new opportunities

The separability of titles solves a host of practical problems that used to exist. In the case of inheritance, there was always uncertainty about how a property should be divided up between the heirs. In most cases, the property came under the joint and several ownership of the heirs – with all the drawbacks and difficulties that this entails. If a property consisted of several buildings, or separable parts, in principle it was possible to divide up the various components physically, but this was only possible if the heirs reached an agreement and entailed a lengthy plot formation procedure. The new Civil Code remedies this problem, as the titles to the land and the buildings standing on it can be separated by the bequeather while still alive, so that eventually each building will come under the exclusive ownership of a different heir. It is also now possible to leave just the plot of land to an heir – presumably one who doesn’t want to use any superstructure built on it – who in this way can receive a regular land usage fee from the owner of the superstructures.

The new regulations also allow for greater flexibility with respect to loans and the collateral securing them. This is because banks no longer have to register their mortgage rights on the debtor’s entire property, but can also do so on just one or more buildings (or perhaps the land on which it stands). In this way, the remaining part of the property can stay unencumbered.

No less importantly, the rule of the new Civil Code could also provide a good opportunity for the development of separate buildings on a single plot. At the moment, certain property owners (often the State itself) are sitting on massive real estate assets that, before the new Civil Code came into effect, were impossible or very difficult to develop or sell in one piece. Under the new Civil Code, however, there is no longer anything to prevent the land owner from finding different buyers for each of its buildings on the same plot, or a developer from selling the buildings constructed on its own land, one at a time if needs be. 

But legal problems can still arise

As long as the land and the building remain under the same ownership, but as separate properties, the division of the property in this way is unlikely to generate any problem. Legal disputes can arise, however, once the owner subsequently transfers the separated building (or land) to someone else.

In particular, if the parties make an agreement regarding the substance of the land usage right granted to the building’s owner (typically on the extent of the land usage fee and the precise scope of the land usage), it is uncertain whether this agreement will continue to be binding on the new owner of the land or the building in the event of a subsequent change of owner. Although the new Civil Code stipulates that the agreement should also bind any legal successors as long as the fact of its conclusion is registered in the property register, the legal literature still fails to give a consistent answer to this question.

Disputes could also arise over how the owner of the superstructure will be able to sell the building independently, without the consent of the land owner. According to the Civil Code, the parties can make the sale of the building subject to the land owner’s consent, and such consent may be demanded by the owner of the building as long as the transfer does not endanger the fulfilment of the building owner’s obligations or the purpose of constructing the building. This requirement, however, has been worded too broadly, making it a potential hotbed for disputes.

What will the future bring?

Clearly, the opportunity to separate land from the buildings on it is only being taken up slowly in practice. However, given the potential for such separation of ownership to significantly improve flexibility in the case of property developments and sales, it’s likely that once the legal questions have been answered, this solution will be a genuine and popular alternative in the property market environment.