The Tenant as the Principal? – The Legal Nature of Build-to-Suit Structures

Build-to-suit (often referred to simply as BTS) industrial developments are playing an increasingly prominent role in the Hungarian economic and legal landscape. The essence of these structures is that the real estate developer carries out the investment specifically on the basis of the tenant’s – typically a manufacturing or logistics company’s – technical, technological and operational requirements, and the tenant then uses the property under a long-term lease agreement. The peculiarity of this model is that the development phase and the utilisation phase, together with all of their legal dilemmas, are closely and strongly intertwined. As a result, the parties are not only entering into a relationship regarding the use of real estate, but also into a relationship involving the allocation of risks and liabilities. All this requires a complex contractual structure, precise legal planning and a coordinated regulation of the construction, financing and leasing relationships.

Overview of the Hungarian Market

According to a statement published earlier this year by the Hungarian Investment Promotion Agency (HIPA), investors who placed their trust in Hungary decided to launch 77 new projects within a single year with the support of HIPA, bringing nearly EUR 10.3 billion in fresh capital and 18,500 new jobs to the domestic economy.[1] In addition to the figures, it is essential to consider the legal frameworks within which these projects materialise. Therefore, this article aims to provide insight into a structure increasingly observed in day-to-day legal practice: build-to-suit developments.

Automotive developments have played a significant role in Hungary’s industrial real estate market in recent years. The presence of automotive suppliers and manufacturers – especially with the rise of electromobility and the battery industry – continues to increase demand for modern, tailor-made industrial facilities.[2]

In build-to-suit developments, a specific demand meets a specific supply, so no unnecessary capacity or vacant property is created. Long-term lease structures motivate both parties to operate in an energy-efficient, renewable-based and environmentally conscious manner. As a result, the BTS model simultaneously promotes sustainability and economic stability.

Definition and Typical Stages of BTS

One of the most complex contract types in real estate law is the build-to-suit lease, which is essentially a customised, tenant-specific leasing structure. Notably, Hungarian law does not expressly recognise this type of contract, and according to my research, it appears to be relatively unknown even in court practice. In many respects, it resembles a combination of a construction contract and a lease agreement merged into a single, unified contractual relationship.

The essence of build-to-suit (BTS) is that the landlord designs and constructs the property according to the tenant’s unique needs, technical specifications and functional objectives, and the tenant subsequently leases the completed building on a long-term basis. Of course, this does not mean that the effective design and construction must be carried out by the landlord directly. The landlord is typically a professional investor familiar with the relevant industry.[3]

In this structure, the tenant does not select an existing, turnkey property available on the market; instead, it effectively takes the role of a client commissioning the development by defining design expectations, usage requirements and handover conditions.

The typical stages of a BTS development include[4]:

• non-binding or partially binding preliminary agreements and statements

• due diligence

• contract conclusion

• design

• construction

• leasing and occupancy

• closing or exit

It should be noted that although not typical in Hungarian practice, the so-called reverse build-to-suit is known internationally. This is essentially the opposite of the conventional BTS structure: the tenant assumes the developer’s role and oversees the design and construction of the property.[5]

The Road to Contract Conclusion

Because BTS developments ultimately materialise as long-term leases lasting many years—often decades—the parties frequently seek to progress through the development phase as quickly as possible. However, given that both parties have a vested interest in the long-term lease, clarifying preliminary issues and managing risks is essential. It is also important to recognise that the landlord, as an investor, aims to place capital into real estate, while the tenant primarily wishes to produce or provide services. Accordingly, disagreements arising during the preliminary steps—steps which may be less familiar to them—can lead to deadlock situations. Therefore, maximum cooperation between the parties is crucial precisely at these early stages.

At the outset, the parties typically enter into preliminary agreements (LOI, MOU, term sheet) that are not fully binding but establish the basic framework and timeline for the development. Common provisions include the allocation of costs should no final contract be concluded (for instance, due to adverse due diligence findings). These agreements also provide a legal basis for document disclosure during due diligence and often include an exclusivity period during which the developer refrains from negotiating with other prospective tenants.

A common mistake is that the parties attempt to regulate binding issues using Anglo-Saxon-style letters of intent. However, Hungarian law provides in Section 6:2 (2) of the Civil Code that obligations may arise from unilateral legal statements only where specifically permitted by law. For example, while an acknowledgment of debt under Section 6:26 may be made unilaterally, a classic unilateral letter of intent will typically not create enforceable obligations without statutory authorisation.[6]

The characteristics and importance of due diligence in real estate transactions were discussed in a previous article, which we do not repeat here:
https://jogaszvilag.hu/szakma/ingatlanjogi-due-diligence-miert-uzleti-kockazat-az-elmaradasa/

Contract conclusion in BTS developments is equally unique. On the one hand, the lease agreement provides a long-term guarantee to the landlord that – assuming proper fulfilment – the specialised development will recoup its cost over the term of the contract. On the other hand, the developer can only obtain bank or investor financing for the project once the lease agreement is in place. Therefore, the internal structure of the lease must already align with the requirements of the planned financier.

The BTS Lease as a Mixed Contract

Classic lease transactions have been known since Roman law, even including the leasing of labour. Under Section 6:331 (1) of the Hungarian Civil Code, the landlord is obliged to grant the temporary use of a specific thing, and the tenant is obliged to take possession and pay rent. BTS developments, however, involve situations in which the leased asset does not yet exist at the time of contracting or, if it exists physically, it does not meet the tenant’s specifications. Under the statutory definition, a lease requires a ready and available object; therefore, without a completed property, there is effectively no subject of the lease.

Interpreting BTS within private law is challenging because the Civil Code’s lease provisions do not allow the leased asset to be developed in cooperation with the tenant within the framework of the lease. While the Civil Code recognises certain post-contract obligations of the landlord (e.g., necessary works), it contains no rules on pre-leasing development obligations. Interestingly, provisions on contracts of sale relating to goods produced with the buyer’s contribution (e.g., agricultural products under Section 6:233) indirectly regulate similar situations. From a legislative policy perspective, this suggests that modernising lease law to reflect market realities may be justified.

It is therefore clear that a BTS arrangement cannot be governed solely by lease provisions. Hungarian legal practice recognises mixed contracts: agreements composed of elements from multiple (sometimes atypical) contract types.[7] In such cases, the rules applicable to each contractual element must be applied according to its nature, and issues spanning multiple contract types must be resolved using the general rules of contracts and the provisions of the contract type most closely resembling the issue.[8]

A further complication is determining whether the BTS structure merges a lease with a construction contract (or its sub-types such as design or construction). Construction contracts are unique in that the contractor does not acquire ownership of the result; the client becomes the first owner. Section 6:238 provides that the contractor is obliged to achieve the result, the client to take delivery and pay the fee. If the building (the “result”) is viewed as an asset to be transferred, it becomes questionable whether the pre-leasing design and construction phases can be classified as construction contracts.

This is not a merely theoretical concern; practical consequences are significant. Under Section 6:249 (1), the client may withdraw from a construction contract at any time before performance begins and may terminate it until completion. Applying this to BTS developments could be highly detrimental to the developer if the development phase is considered a construction contract. Conversely, the tenant would face exposure to issues such as additional or extra work fees under Sections 6:244 and 6:245.

After Contract Conclusion

BTS developments differ from many other transactions in that contract conclusion and achievement of the long-term objective occur at very different times. The true goal is not construction itself but the utilisation of the completed development.

After signing, the design phase begins. Concept and permitting plans are prepared, technical documentation is produced and the building permit procedure is initiated. The tenant typically defines key technical specifications during this phase. Because the lease often contains hard deadlines for handover and occupancy, the parties must cooperate efficiently. It is common for the contract to deviate from Section 6:4 (4), stipulating that silence shall be deemed acceptance.

During construction, the parties frequently adopt an automatic “client–contractor” mindset, disregarding the fact that the tenant does not acquire ownership of the building. Therefore, practices typical in construction contracts should not be applied automatically.

It is crucial to regulate the consideration—or lack thereof—because the landlord does not receive a traditional contractor’s fee; its remuneration is embodied in the rent. If inadequate contract drafting allows the tenant to withdraw before the lease begins, it becomes unclear what consideration was agreed for the development. Termination and withdrawal rights must therefore be carefully regulated because the Civil Code is permissive towards the client.

Concerning ownership issues, it is often observed that contracts regulate additional or extra works, which is problematic. For example, upgrades or increased technical standards invoiced separately from rent may be considered an implied transfer of ownership, potentially leading to unintended tenant ownership absent explicit clauses to the contrary.

Before full handover, tenants are often granted partial or temporary possession to install machinery, IT systems or other equipment, typically without rent payment.

Exit Options

Since BTS developments are built for a specific tenant’s needs, the most obvious potential buyer for the property is the tenant itself. Tenants also frequently seek the option to purchase the property in the future.

Ideally, such intentions should be formalised as option agreements (e.g., call options) and registered in the land register. Even better if secured by adequate collateral.

However, because BTS projects are typically financed externally, strong purchase guarantees for the tenant are often not feasible.

Distinguishing Speculative and Tenant-Specific Developments

In practice, companies in different growth phases have differing infrastructure needs. Young, fast-growing companies often prefer speculative developments because these are immediately available and require no significant investment.[9] These properties frequently appear on the market, typically under short-term or indefinite leases. Developers in speculative projects often prohibit or heavily restrict tenant alterations.

In contrast, financially stable and mature companies prefer build-to-suit, tenant-specific solutions. Here, risks are multiplied for both parties: the developer undertakes improvements valuable only for a particular tenant, and the tenant becomes bound by long-term contractual and market constraints. In this sense, the tenant becomes an indirect investor in the project. BTS structures often include long-term leases and sometimes ownership options. Tenants often implement their own technology and treat the property almost as if they were the owners—clearly distinguishing BTS from speculative developments.

In summary, companies seeking high added-value BTS solutions are rarely clients of speculative developments, except when bridging between two BTS periods. Thus, the choice of development type effectively determines the clientele. In our experience, this distinction is often unknown in the real estate brokerage market and even among property owners, causing mismatches between relevant landlords and tenants.

Author: Dr. István Herdon LL.M., Managing Attorney, Specialist in Economic Law (Herdon Ügyvédi Iroda)

This article is for informational purposes only and does not constitute legal advice. For specific matters, please contact our law firm.