Legal challenges in ensuring regular maintenance and repairs of owner-occupied apartment blocks

• Author: Martti Lujanen
• Position: Helsinki, Finland

The way in which apartment block ownership and administration can be effectively managed is a problem which has come to the forefront because of the mass privatization and sale, or granting of apartments to former tenants in new EU member states. In these cases, there are inadequacies in the law ensuring the continuous maintenance and renovation of common parts, such as the roof, walls, stairwells and lifts, and of utilities, such as water, sewage and electrical systems ( Gruis et al., 2009 ). Several old EU member states are also interested in legislative solutions for home ownership problems in apartment blocks. The issue is, however, broader – as the lack of a well-functioning legal ownership is also a problem in, for instance, Russia and in Balkan, Central Asian and Caucasus countries, as well as in China.

This paper reviews two basic legal systems of apartment ownership, and how these apartment blocks are governed. This raises issues concerning the decision-making process for such governance, how to finance repairs using ownership as collateral, how to enforce payment of charges for current and future repairs to common parts and facilities and how to ensure that governance is transparent. The Finnish model for apartment ownership provides solutions to many of these problems. This paper offers a relevant analysis of the factors which can be used to assess apartment ownership in different countries. In view of the general lack of comparative work of the law in this area, such an assessment would provide a basis for comparison and help improve legal structures of apartment ownership in many countries.

Different forms of ownership

There are two basic systems of apartment ownership. The first is called the dualistic system, in which individual ownership of an apartment, and joint ownership of the land and common parts of the building are combined. The second variation is a unitary system, in which the apartment owner is regarded as a co-owner of the whole building and land, with exclusive rights of permanent occupation to a particular apartment in the building. Unitary systems have been adopted mainly in legal systems which were unwilling to break with the maxim superficies solo cedit ( van der Merwe, 1994, p. 24 ; see also Paulsson, 2007, p. 56 ).

The first model is often called condominium ownership, though other expressions exist in different parts of the world. It is noted that the word “condominium” is most widely used in North America and Italy and seldom used in other jurisdictions ( van der Merwe, 1994, pp. 19-20 ).

It is also important to note that not only are different terms used for the same system, but that the same term often mean different approaches. In the case of condominium ownership, the expression is sometimes used as a concept which includes both the dualistic and unitary systems.

The term condominium ownership is used in this paper instead of dualistic system. This is because the condominium ownership concept is used widely to mean the same as that of dualistic system defined above ( Paulsson, 2007, pp. 36, 55 ; see also Economic Commission for Europe, 2003, p. 2 ) and because the term condominium ownership is better known than dualistic system.

The unitary ownership system is used in Europe in Austria,¹ The Netherlands,² Norway³ and Switzerland⁴. In these countries, the co-owners own a certain share of the property, and connected to that share is an exclusive right to use a particular apartment in the building. This type of co-ownership can be called undivided, since the right of ownership is not accompanied by physical division of property ( Paulsson, 2007, pp. 36-7 ).

In the Finnish housing company model, the property is owned by a special form of limited liability company of which the co-owners are shareholders. As in the unitary system, in the Finnish model the shares are divided in such a way that they provide a exclusive right of possession of a certain unit. Because the Finnish model is based on a different juridical application than that applied in unitary system countries, it will be treated separately.

Condominium ownership

In most cases, the legislative solution applied could be described as a “condominium model”. This model means that the owners own their dwelling, but, more accurately, they own the space which is defined by the internal walls of the dwelling, which might not be connected to the ground on which the building stands. Their ownership is listed as property in official records. The common parts and the land are, however, owned jointly by all owners.

In many countries, the management of jointly owned parts and facilities are organized by an owners' association, but the legal forms vary greatly. In the USA, these are called, for instance, organization of unit owners, and the legal form can be a corporation, trust or association⁵. In Canada, the term used is condominium corporation⁶. In England and Wales, the expression commonhold association is used although its legal form is a private company limited⁷. In Germany, the term is Gemeinschaft der Wohnungseigentümer (community of apartment owners)⁸, which is legally a specific type (typus sui generis) of an association with limited disposing capacity based on the Wohnungseigemtumsgesetz ( Bärmann et al., 1983, p. 45 , see also p. 33).

In this paper, the expression “owners' association” is used because it is probably the most common term, although some other juridical forms may function better than an association. On the whole, it must be emphasized that the major responsibility of an owners' association (or similar administrative bodies) can be compared to running a business, with the need for an organizational structure with clearly defined rights and obligations at each level ( Paulsson, 2007, p. 71 ).

Alternatively, the administration of the apartment block can be based on a condominium-only solution. In this context, it means that the owners have to co-manage the management, maintenance and repair of common parts without a proper, specifically designated decision-making body. In such a case, the traditional solution is that an agent makes most decisions concerning the management of the condominium. This kind of solution produces a number of administrative problems. One of them is that the unit owners should always have the authority, if they are dissatisfied with the performance of the management agent, to discharge the agent and choose a new one⁹.

Yet, owners' associations are optional in many countries and thus have been set up in only a fraction of condominium blocks. This is the case in many former socialist countries, especially when condominiums are created in existing buildings where sitting tenants have become owners¹⁰.

In the Russian Federation, even if an owners' association exists, the membership is voluntary¹¹. From 1996, the Russian Federation Law on Homeowners' Associations had included a provision that made this membership compulsory, but it was found to be unconstitutional by the Russian Federation Constitutional Court (decision of March 4, 1998), because it was seen as contrary to the right of free association ( Vihavainen, 2009, pp. 100-101 ; Institute for Urban Economics, 2003, p. 99 ). In Lithuania, the Constitutional Court of the Republic of Lithuania came to a similar decision on December 31, 2000 regarding compulsory membership ( Victorin et al., 2001, pp. 21-3 ).

A much more effective solution is to combine the condominium model with owners' associations ( Economic Commission for Europe, 2003, pp. 6-7 ). However, the legal framework varies greatly in different countries and this model also often has deficiencies in several areas.

The decision-making process

The most important question here is how to organize decision-making in such a way that it guarantees the opportunity for all owners to participate in major decisions concerning the common parts of the building. However, if a small number of the owners can have a decisive role in decisions concerning major repairs, this naturally creates severe difficulties in reaching a decision. There are many different rules about majority voting – simple or qualified (two-thirds, three-quarters, etc.). In addition, a quorum requirement is often used. In this case, a minimum percentage of the members of the owners' association or a minimum number of the members of the owners' association present at the meeting could constitute a quorum. The problem with high quorum requirements and the wide use of qualified majority, or even full consensus, is that the owners' association may not be able to reach necessary decisions (see, for instance, Yovera et al., 2003, pp. 381-2 ). There are, however, significant differences between countries. For example, in France a simple majority is needed for deciding on measures for increasing the energy efficiency of a building.¹² In Spain, a decision to install any renewable energy source, such as a solar energy system, requires a one-third vote in order to bind all of the owners¹³.

In addition to guaranteeing that the owners' association is able to reach necessary decisions, it is crucial that decisions on everyday management and on other matters which need quick decisions are secured. Therefore, in most countries the meeting of the owners' association elects an Executive Board which, together with managing agents, is responsible...