EXPERTISE

Hungary: Summary of measures issued by the Hungarian Government in connection with the state of emergency

20 March 2020 – In view of the ”state of danger” (in Hungarian: “veszélyhelyzet”) declared by Government Decree No. 40/2020. (III. 11.) adopted by the Hungarian Government and the ”special legal order” introduced as a result of the European and Hungarian coronavirus situation, we summarize the most important information in connection with the state of danger, as well as the government measures created under the special legal order. In this summary we have considered the below topics:

• Certain particulars of the state of danger and the special legal order
• Capital markets transactions
• Steps initiated by the National Bank of Hungary (NBH) and impacts of Governmental Decree No. 47/2020. (III. 18.) on bank finance
• Extraordinary measures in the judicial system due to the coronavirus situation
• Real Estate law – with special regard to commercial lease agreements
• Certain measures affecting employment relationships
• Certain particulars of the state of danger and the special legal order

In the event of a state of danger, the Hungarian Government may deviate from the provisions of acts and statues by issuing a decree. Accordingly, we recommend to continuously follow these new Government Decrees issued as a result of the state of danger since the provisions contained therein in many cases differ from the currently effective legal requirements. This is because Government Decrees issued at the time of the state of danger shall be applicable (where the only exception is the Constitution) if the Government Decree provides for regulations which differ from the already existing legislation.

Government Decrees issued at the time of a state of danger remain in force for a period of 15 days, after which the Hungarian Government may extend the effect of the Government Decree in order to maintain the measures and provisions adopted in the state of danger.

In a state of danger, the Hungarian Government is entitled to take a number of measures, within the limits imposed by Act No. 138 of 2011 on Disaster Management (the “Disaster Management Act”). In a state of danger, the Government may, among other measures, require the Minister dedicated for disaster prevention to impose an obligation on economic operators to enter into a contract in order to secure production, supplies and service. In this case, the scope of the products and services subject to the aforementioned obligation to enter into contract may be determined by the respective Government Decree. If there an imminent danger that the state of danger may becoming more severe, the operation of economic organizations, based on a decree, may become subject to the supervision of the Hungarian State. In this case, the Minister or Government Commissioner acting on behalf of the Hungarian State, in accordance with the provisions of the Disaster Management Act may:

• review the financial position of the business organization;
• approve and countersign the financial commitments of the given business organization;
• and in relation to the immediate elimination of the danger situation and the mitigation of its consequences, decide on matters within the competence of the supreme decision-making body of the given business organization.

In addition to the above, the following may be ordered in a state of danger situation:

• restricting entry to, or to stay in, a specific area of Hungary and imposing an obligation that such entry or stay is only possible upon special permission;
• entering, transiting or leaving the specified area of Hungary is only possible if permitted;
• exiting from a specific part of Hungary may be authorized only after the danger situation no longer exists; and
• in a state of danger, among others, the use or the restriction of repair capacities as well as stations, ports, airports, warehouses can be ordered in order to secure rail, road, water and air traffic.

In addition to the above, based on the Disaster Management Act, other economic and material service obligations may be prescribed under the civil protection framework, such as the mandatory provision of services to natural and non-natural persons, including the provision of movable and immovable property to the Hungarian state, for the purposes of civil protection tasks. Thus, in the event of a state of danger, even ownership rights may be restricted within the limits regulated by applicable laws.

One of the special measures already introduced is that the Government resolved to establish a Task Force Responsible for the Security of Essential Hungarian Companies with the leadership of the Minister of Defence. This task force is assigned with identifying those state-owned and non-state-owned economic organizations that are vital to Hungary’s operation and preparing for the possible takeover of the supervision of these economic organisations under the Disaster Management Act.

Capital markets transactions

When it comes to capital market transactions (e.g. bond offerings and IPOs), additional focus is on the due diligence process.

In addition, there are several practical issues that the issuers and banks need to deal with, primarily by deploying virtual solutions, in relation to the due diligence and transaction process, including the rescheduling of personal due diligence meetings, interviews and on-site visits, and delays in contacting local regulators.

Given the expected global effect of the COVID-19 on the economy and industries, it is likely that all prospectuses and offering circulars going forward will also include, at least general, disclosure language and risk factors on the potential effects of the virus outbreak (e.g. travel restrictions, economic slowdown, labour market and business continuity disruptions) while certain issuers that may be more exposed to the potential effects will need to include more detailed disclosure language as to how their business may be impacted.

Issuers may need to pay special attention as to what is the expected impact of the COVID-19 on their 2020 Q1 and Q2 financials, since the impact of the virus will not be reflected in their annual financial statements for the financial year of 2019. We recommend active engagement with auditors regarding their deliverables on an ongoing basis in order to ensure compliance with the relevant deadlines.

How will the steps initiated by the National Bank of Hungary (NBH) and the Government affect bank finance?

On 16 March 2020, and on 18 March in respect of consumer loans, the NBH has announced that it is taking immediate action to help the business sector. The NBH requested that the banks provide a precautionary repayment moratorium regarding all loans due to the extraordinary situation, in order to improve companies’ liquidity. The NBH, at its discretion, announced a repayment moratorium in respect of loans provided under the Funding for Growth Scheme ("FGS") and approved the restructuring of loans and rescheduling of repayments. As a result of the FGS, small and medium-sized enterprises participating in such scheme will be exempted from their repayment obligations under the FGS loans until the end of 2020. Consequently, banks do not have to comply with their repayment obligations under their refinancing loans to the NBH. The NBH will publish detailed regulations in the coming days.

The Government introduced the following measures on 18 March 2020, in its Governmental Decree No. 47/2020. (III. 18.) ("Decree 47/2020") on immediate measures of the mitigation of the national economic effects of the coronavirus pandemic in connection with the above-mentioned announcement of the NBH.

Unless the parties agree otherwise, during the period of the state of danger, the principal, interest and fee payment obligations of a borrower under any credit, loan and financial leasing agreement ("Loan Agreement") provided by a lender in a business-like manner shall be modified so that the debtor will receive a payment extension regarding its principal, interest and fee payment obligations under its agreement ("Payment Moratorium"). The Payment Moratorium will not affect the right of the debtor to comply with its payment obligations in accordance with the original terms of the Loan Agreements. Consequently, the Loan Agreements will be modified automatically with regard to the Payment Moratorium and the maturity of the Loan Agreements will be extended unless the parties agree otherwise, or mutually confirm that the relevant terms and conditions of the Loan Agreements shall remain in full force and effect.

The modification of repayment dates under the Loan Agreements will also amend the ancillary and non-ancillary supplementary obligations; thus, the security period under the security agreements will automatically be extended, regardless of whether the parties incorporated the supplementary obligation in an agreement or in a unilateral declaration. The period of the Payment Moratorium will expire on 31 December 2020, which period may be further extended by the Government. The payment dates set out in the Loan Agreements, and the duration of the undertaking, will be extended by the period of the Payment Moratorium. It should be noted that this does not mean the wavier of the repayment principal and interest, but only a suspension until the end of 2020, which indicates the rescheduling of the repayments and the extension of the duration. Those Loan Agreements that would have terminated during the period of the state of danger will be extended, for now, until 31 December 2020.

The above provisions apply to any Loan Agreements entered into and to any loan utilised up to midnight, 18 March 2020; thus, the Payment Moratorium does not apply to loans which have not been utilised. If a borrower has unutilised facilities, from which it would intend to draw down but in respect of which it has also already made earlier utilisations, the repayments of the loans utilised before and after 18 March 2020 would differ.

We expect that banks have already started to identify those debtors/group of debtors that might be endangered in the near future or in mid-term. The following may be endangered in the near or immediate future: airlines, tour operators, entities organising or hosting group events, hotels and shopping malls; however, entities producing raw materials and entities with wholesale activities might also be endangered soon. Moreover, it is expected that numerous surrounding countries will implement similar banking or governmental measures that will severely impact, in particular, the regional banks. With regards to the above and the prevention, or at least mitigation, of the effects of the future financial crisis, both borrowers and lenders should diligently review their finance documents and identify those undertakings that should be continuously monitored and those that will be difficult to comply with in a longer term, given the changed circumstances. These include a review of conditions precedent of further utilisations, consideration of the ability of the borrowers’/the borrowers’ group to comply with their financial covenants as a result of cash-flow deficiencies caused by the slow down or suspension of businesses and the adverse financial effects, the interpretation of the material adverse effect definition and material adverse change clause (MAC), and the management of a crossdefault situation.

Extraordinary measures in the judicial system due to coronavirus

In order to stop the spread of coronavirus, the Hungarian Government has also adopted extraordinary measures that affect the judicial system. Pursuant to Government Decree 45/2020, an “extraordinary court vacation is implemented” from 15 March 2020 for an indefinite period.

In normal conditions, court vacation means a period during which, in civil and administrative cases, the deadlines are suspended (i.e. they do not count), and no hearings are held. Usually there are two such periods in each year: from mid-July until the end of August, and in December during the holidays. However, the application of these rules within the current, extraordinary circumstances raises several questions, unfortunately most of which remain as yet unanswered.

The biggest uncertainty revolves around the deadlines, because currently there is no official interpretation of the rules – following several guidelines issued by the National Judicial Office, with different content -, but laws will regulate this issue according to the National Judicial Office. Our experience is that every court has interpreted the effect of the extraordinary court vacation differently, and several courts have stated that the deadlines are still ongoing. Seemingly, court hearings will not be heard during this period, therefore, all hearings will be delayed ex officio.

During the extraordinary court vacation, the courts will not close entirely, as organisational and managing tasks will be still performed. Tasks requiring immediate action will be carried out without personal contact through telecommunication means, but if it is not possible, special precautionary measures are to be implemented. Entry into court buildings is restricted to judges and judicial employees, the courts only provide information via electronic means, and the personal customer service and file review have also been stopped. Judges will continue to perform the judicial tasks if they require no personal contact, so, for example, the court will serve claims, order remedying the claims’ deficiencies, issue court orders, or, if no hearing is required, will even decide in appeal cases. It must be noted that, in administrative cases, the court must decide on the request for the suspension of the enforcement of the administrative decision.

Note that, based on our current understanding, the court vacation does not affect the so-called substantive deadlines (i.e. deadlines that are not regulated by procedural but rather by substantive laws), such as the filing of a claim. Thus, for example, a warranty claim will elapse regardless of the court vacation if the claim is not filed within the statutory deadline, so the claim must be filed in time in order to preserve a person’s rights. Moreover, the non-contentious civil proceedings, as well as the so-called priority proceedings and actions (for example, action media claims, high profile actions or certain cases of preliminary evidence-taking) are exceptions, and must be taken irrespective of the extraordinary court vacation. The court has issued a general guidance for clients, available here in Hungarian: https://birosag.hu/hirek/kategoria/ugyfeleknek/ugyfeltajekoztato-birosagokmukodese-rendkivuli-itelkezesi-szunet

We recommend that, for the time being, you to actively perform your obligations in your ongoing lawsuits, at least until more precise guidance comes out in terms of the deadlines and other open questions.

Notarial Proceedings

According to the announcement to the Chamber of Hungarian Notaries, the extraordinary court decision break effects all notarial proceedings.

In respect of ongoing transactions where the security documents or other documents are to be concluded in the form of a notarial deed, we advise that parties consult with the relevant notary public on a daily basis (in the current circumstances, the business hours of the notarial offices may significantly vary from the ordinary and from each other), in order to clarify whether he/she is still in the position to comply with his/her mandate for the preparation of the notarial documents, despite the lack of capacity or the limitations in opening hours.

Real Estate law considerations – with special regard to commercial lease agreements

According to further measures implemented by the Government, certain catering facilities and retail shops that are defined as such by the act on commercial activities (not including grocery stores, drugstores, cleaning supply stores, as well as pharmacies, medical supplies stores, gas stations and tobacco shops) shall be closed from 15:00 to 06:00 (except for ordering and handover of food as well as the time needed for staying there for the purposes of and for the period to pay the purchase price for such food).

Non-residential lease agreements cannot be terminated by unilateral termination until 30 June 2020 in sectors that are most affected by the coronavirus outbreak (specifically tourism, hospitality, entertainment, gambling, film, performing arts, event organizer and sport service provider industries). Furthermore, the rent amounts of these lease agreements cannot be raised during the danger situation declared by the Hungarian Government, even where the underlying lease agreement would provide the possibility to raise the amount of the rent.

It may be possible for tenants that are directly impacted by the legislation enacted due to the special legal order to petition the court (see also the below paragraph) to request an amendment of their lease if, in spite of the significant change of the circumstances compared to the time of entering into their lease contracts, they cannot agree with the landlord on a possible reduction in the rent (or service).

According to the Hungarian Civil Code, contractual parties may claim the amendment of their respective agreement if in a long-term contractual relationship (such as a lease agreement), performing the agreement under the same terms is likely to violate the contractual party’s lawful interests in consequence of a circumstance that has occurred following the entering into the respective agreement, if all of the following conditions are met:

• the possibility of change in circumstances could not have been foreseen at the time of conclusion of the agreement;
• the contractual party did not cause that change of circumstances; and
• such change in circumstances cannot be regarded as normal business risk.

In such a situation, it must be examined on a case-by-case basis whether the above conditions to an amendment are available the tenants. If the activity of the tenant is forbidden by law in the future, or otherwise the activity of the lessee becomes impossible or significantly restricted, it should also be examined on a case-by-case basis whether such “force majeure” event makes it possible for the tenant to be exempted from the obligation of paying the rent for the period affected by the rent amounts.

Certain measures affecting employment relationships

With view to the declared state of danger, the Hungarian Government resolved by way of its decree No. 47/2020. (III. 18.) (the “Government Decree”), that as of 19 March 2020, the following derogations shall be applied in respect of Act I of 2012 on the Labour Code (the “Labour Code”) until 30 days following the cessation of the state of danger:

• In general, the employer may modify the communicated work schedule only upon the occurrence of unforeseen circumstances in its business or financial affairs and only at least ninety-six hours in advance. The Government Decree permits derogation from this provision, i.e. the employer may modify the already communicated work schedule without taking into consideration any deadline for such modification.
• The employer may unilaterally instruct the employee to work from home by way of home office or teleworking.
• The employer may take the necessary and justified measures to check the health condition of the employees.

A further important provision of the Government Decree is that provisions of collective agreements derogating from the above shall not by applicable during the period of the application of the Government Decree. The introduction of the above provisions will certainly help employers and their employees as these matters have arisen at almost every company employing a larger number of employees.

Further to the above derogating provisions, the Government Decree generally entitles the employee and the employer to derogate from provisions of the Labour Code by way of a separate agreement without any restriction in time, but ending 30 days following the withdrawal of the state of danger.

Further details of the above provisions, in particular in connection with the last point are to be laid down in separate decrees by the Government, given that the above entail a number of questions still to be answered, among others, whether the employer and the employee may actually derogate from every provision of the Labour Code, i.e. including those that are regulated in more detail by other laws.

Kinstellar Legal Response Hotline

We are at the disposal of all our Clients at any of the below contact details or at our Legal Response Hotline which can be accessed by clicking .

In some cases, some of the provisions below are expected to be followed in the near future by decisions of the Government, the Parliament or other bodies and authorities. We will keep you informed about these measures.

For more information please contact:

Dr. Ákos Nagy
Partner, Head of COVID-19 Legal Task Force
Kinstellar, Budapest

Dr. Kristóf Ferenczi
Managing Partner
Kinstellar, Budapest

Dr. Csilla Andrékó
Partner, Head of Banking & Finance
Kinstellar, Budapest

Dr. Péter Vörös
Partner, Head of Competition and Dispute Resolution
Kinstellar, Budapest

Dr. Mónika Frank
Managing Associate, Head of Real Estate
Kinstellar, Budapest

Dr. Dalma Ördögh
Of Counsel, Banking & Finance
Kinstellar, Budapest