The System of Legal Security Interests Securing Loans in Hungary – A Practical Guide for Lenders

In this article series, we present the legal security interest framework that fundamentally determines the safety of lending and financing transactions, together with the principal considerations relevant to its structuring.

Who is this article for and why does it matter?

This article series is primarily intended for lenders, financial institutions, investment funds and financing decision-makers who rely on legal security interests when structuring loans, investments or complex financing transactions in Hungary.

A clear understanding of the Hungarian security interest regime is critical for lenders, as the actual value of collateral depends not on its label or theoretical strength, but on its proper legal creation, perfection, registration and enforceability. A well-structured security package can materially reduce credit risk and improve recovery prospects, while formal or structural deficiencies may significantly weaken, or even eliminate, the protective function of otherwise strong collateral.

One of the most critical elements of loan transactions and credit facilities is the establishment of an appropriate security package. Security interests are not merely “ancillary guarantees”: in many cases, they determine the extent to which a lender is able to enforce its claims against a borrower upon an event of default, and the portion of the loan amount that can ultimately be recovered. Accordingly, the structure of collateral is not only a financial consideration but also a distinctly legal one, governed by detailed statutory and case-law rules that both lenders and borrowers must understand.

In the first and second parts of this three-part series, we describe the main components of the Hungarian security interest system, while the third part addresses the key issues of enforcement in practice. Throughout the series, we adopt a practice-oriented approach and place particular emphasis on decisions of the Hungarian Supreme Court (Kúria) that are authoritative in the application of security interests, security deposits and other collateral arrangements.

1. Key considerations in selecting collateral

When selecting appropriate collateral, the lender must carry out an individualized and careful assessment, taking into account a number of principal factors as follows:

1.1. The borrower’s financial position and creditworthiness

Where the borrower has a stable financial position, fewer security interests, or collateral providing greater operational flexibility to the borrower, may be sufficient. In contrast, in higher-risk financings, it is generally necessary to expand and strengthen the collateral package.

1.2. Purpose and maturity of the loan

• For investment loans, long-term, hard collateral is typically preferred, such as a mortgage over real property.
• In the case of working capital facilities, collateral that can be realized more quickly, such as assignments of receivables or cash collateral, is usually advisable.

1.3. Value stability and liquidity of collateral

Real property and certain financial instruments, including government securities and bonds, tend to be more value-stable, while the value of inventory or other categories of personal property may fluctuate more rapidly.

1.4. Legal enforceability of collateral

A security interest is only as strong as the legal framework allows for its actual enforcement. This consideration is particularly relevant in the context of security interests over receivables and personal property.

2. Principal forms of security interests

2.1. Pledge and security agreement

Under a pledge, the lender is entitled to obtain satisfaction from the collateral through its disposition upon the borrower’s default. The pledge is accessory in nature, meaning that its existence and enforceability depend on the secured obligation. Consequently, if the secured claim is extinguished or its amount changes, the corresponding security interest is likewise extinguished or modified.

2.1.1. Mortgage over real property

A mortgage is one of the most secure and commonly used forms of collateral. In Hungary, it is created by registration in the real estate registry. Due to its in rem character, the mortgage remains effective even if ownership of the property is subsequently transferred and may be enforced against any later acquirer. Hungarian court practice consistently confirms that a registered mortgage may be enforced against the current owner of the encumbered property, who participates in enforcement proceedings as a successor-in-interest.

2.1.2. Security interest over personal property and receivables

Security interests over personal property, rights or receivables must generally be registered in the Hungarian collateral registry, or, where the asset is subject to an official register, in the relevant public registry. Registration may be effected by a declaration of either the secured party or the grantor of the security interest. Collateral may also be defined by description rather than individually, in which case the security interest attaches at all times to those assets, rights or receivables meeting the description and subject to the grantor’s power of disposition. The collateral registry is public and may be accessed online free of charge.

The effectiveness of a security interest in personal property vis-à-vis third parties depends on proper registration. According to established Supreme Court case law, failure to register results in lack of enforceability against third parties.

2.1.3. Floating collateral and framework-type security

Hungarian law permits collateral to be defined by description, particularly where registration in the collateral registry is required. This enables a structure comparable to the “floating lien” concept known in U.S. secured transactions law, under which

• the collateral consists of a continuously changing pool of assets, such as inventory or accounts receivable, and
• the security interest attaches to the relevant assets from time to time.

Although Hungarian statutory law no longer expressly uses the term “framework mortgage,” judicial practice and legal scholarship recognize that a security interest may secure all present and future obligations arising from an ongoing or revolving credit relationship, up to an agreed maximum secured amount.

Security interests over equity interests

Equity interests in business entities, including membership interests and shares, may also serve as collateral. The creation of such security interests is subject to corporate law requirements and, in certain cases, to restrictions contained in the entity’s constitutional documents. In regulated sectors, including financial services and strategically significant industries, additional regulatory approvals or notifications may be required.

Following this overview of the foundations of the security interest system and the operation of pledges and mortgages, the next part of the series addresses other key forms of collateral, including cash collateral, security assignments, guarantees and surety arrangements, as well as the practical considerations involved in combining multiple forms of collateral within a single security package.

How can we assist?

Our firm not only advises on the legal issues outlined above but also provides practical support in their implementation. Our expert team assists clients in the structuring, review and enforcement of security arrangements under Hungarian law, including the selection of appropriate collateral, the proper legal documentation thereof, and the handling of priority, registration and enforcement-related issues.
This article is provided for general informational purposes only, does not constitute legal advice, and should not be relied upon as a substitute for legal advice tailored to a specific transaction or factual circumstances.