Hungary: Unfair general terms of business in loan and financial leasing transactions in the retail sector

Hungary

The Hungarian Supreme Court, Curia,  issued a final and binding decision (Gfv.VII.30.122/2015) on July 7, 2015 in a class action initiated by the Consumer Protection Association for Financial Services against Lombard Lízing Zrt., which is one of the major Hungarian car leasing companies, in which the court found certain clauses of the general terms of business of Lombard Lízing Zrt. (“GTB”) included in contracts concluded with customers (private individuals and SMEs) to be unfair contract terms and therefore invalid.
 
Since only certain clauses of the GTB were declared invalid, it did not automatically trigger the invalidity of the entire GTB. Notwithstanding that, partial invalidity may also lead to the invalidity of the entire GTB if the transaction would have not been entered into by the parties in the absence of the invalid clause(s).  An invalid clause cannot be referred to by the parties and they cannot exercise any rights originating from such clauses.
 
Although this decision is binding on Lombard Lízing Zrt the principle of the decision may serve as a guideline for future decisions. Therefore, financial institutions providing lending and/or financial leasing services in the retail market should be aware of the most important statements of the Curia listed below.
 
In an announcement published on its website, the National Bank of Hungary has declared that it will closely monitor the entire Hungarian leasing sector and will take the necessary actions to terminate, on the basis of the recent Curia decision, the invalid clauses of the general terms of business used by the leasing companies.

This summary aims to demonstrate a number of the uncertainties arising in relation to the requirements that have to be met in leasing and/or lending transactions according to the Curia’s reasoning.

  Unfair clauses of the GTB  Judicial Reasoning 
1.  The lessee may terminate the leasing agreement without any notice if the car, serving as the primary security of the leasing, is stolen or totally destroyed.

This provision grants a unilateral and unreasonable advantage to the lessor. The lessor should mitigate its risk in a way which is less unfavourable for the lessee, e.g. requesting that the lessee provide a new security for the benefit of the lessor. 

 

2. Upon the occurrence of any extraordinary market event, the creditor may unilaterally change the interest rate.

Unless each and every extraordinary event is listed in the GTB, the respective clause is unfair.

 

3. The lessee may not unilaterally terminate the leasing agreement without any notice.

Such clause generally deprives the lessee, without any justification for doing so, from exercising its right to terminating the leasing agreement. This is disadvantageous for the lessee, especially because the lessee would have the right to terminate the agreement in certain cases (no further specification is provided by the Curia).

 

4.

The lessor may terminate the loan without any notice, in particular, in the following cases

a) either filing for enforcement (in Hungarian: “végrehajtás”) or liquidation (in Hungarian: “felszámolás”) proceedings against the lessee or filing for bankruptcy moratorium (in Hungarian: “csődmoratórium”) by the lessee or if the lessee initiates solvent winding-up proceedings against itself (in Hungarian: “végelszámolás”);

b) the lessor becomes aware of the lessee suspending payment of its debts to third party creditors (i.e. within 15 days it does not meet the payment obligations) or if the enforcement against the assets of the lessee is not successful.

Re a) The fact that a request for enforcement or insolvency (which might be vexatious and without any grounds) has been filed with the court (i.e. the court has not decided whether the proceedings will be commenced) does not mean that the financial status of the lessee has seriously deteriorated.

Also, without knowing all of the circumstances, the fact alone that the lessee has requested bankruptcy moratorium does not provide sufficient ground for the lessor to immediately terminate the leasing agreement.
Initiation of a solvent winding-up procedure means that the company will manage its dissolution but will remain solvent until it is deleted from the company register (i.e. normally it would be able to meet its payment obligations towards the lessor).

Re b) There could be several reasons for the lessor not meeting its payment deadlines. Not only serious deterioration in the financial status of the lessee may result in payment defaults. Therefore, termination without any notice in such cases cannot be considered a proportionate measure.

Finally, it is not transparent if the lessor may set additional payment deadlines, at its sole discretion, in the case of a default, since in this case the lessee may not be aware of the appropriate deadlines at the time of entering into the leasing agreement.

 

5.  The lessee may only prepay its outstanding obligations under the leasing agreement if such prepayment does not threaten the fulfilment of the lessee’s payment obligations under any other agreement entered into between the lessee and the lessor or any company in the scope of the interest of the lessor.

A closed list of such further entities within the scope of interest of the lessor should be included in the GTB to make the agreement transparent.

 

6. Possession of the car cannot be acquired through force.

The lessor will only be entitled to take possession of the car if it terminates the leasing agreement, litigates against the lessee and wins the case. Then the bailiff will assist the lessor in taking possession of the car.

Furthermore, the lessor is no longer entitled to disclose confidential information (personal data and other bank secrets) to the debt collection companies and any other company within the scope of the interest of the lessor.