The Ministry of Justice has initiated a third round of coordination of the draft Apartment Ownership and Apartment Association Act. The latest amendments concern possibilities for elimination of debt arising from unpaid management costs (including communal costs) in situations where apartment ownership is encumbered with a mortgage.
The draft Apartment Ownership and Apartment Association Act will facilitate codification of apartment ownership law in the framework of which the draft Act will replace and merge the Apartment Ownership and Apartment Association Acts currently in force. The new Act will regulate all legal ties and relations concerning apartment ownership.
Under the draft Act, management of all apartment ownerships will be carried out through an independent legal entity – an apartment association. Once the Act is in force, an apartment association will be automatically established when establishing apartment ownership. When apartment ownership is already in existence before entry into force of the new Act and is managed in the form of a community of apartment owners, an apartment association will be established by the state.
The planned reform should eliminate problems that arise from the coexistence of the community of apartment owners and its administration. For example, when concluding contracts with third parties such as a contractor carrying out repair works, it is unclear under existing law who exactly constitutes a party to the contract – the administrator or owners of apartments. It is also difficult to ensure that an individual claiming to be an administrator in fact qualifies as such. An apartment association which is established automatically under the draft Act constitutes a far clearer and concrete party to any contract.
In comparison with the Act currently in force the activities of apartment associations will become increasingly transparent for apartment owners. Each apartment owner will have access to banking details of the apartment association. Thus the new Act will eliminate risks of breach of confidence by the administration of the apartment association as all changes in the apartment association's bank account are visible to apartment owners.
The new Act will slightly modify the principles of liability of apartment owners as co-owners of the building. According to the draft Act, in case of danger associated with the building (e.g. falling icicles) claims for damages will be presented against the apartment association.
In the case of management debt incurred the new Act will offer increased clarity for all parties concerned (apartment owners, apartment associations and mortgagees). A claim by an apartment association against an apartment owner will be secured by a lawful right of security enabling the apartment association to successfully enforce its claims even in situations where apartment ownership is encumbered with a mortgage which exceeds the value of the apartment.
As opposed to transfer to the buyer (under procedures currently in force) of debt associated with apartment ownership, the new Act will clearly limit the scope of the right of security (up to 5% of the amount secured by the enforcement procedure).
The new Act will further clarify regulations regarding insolvency of apartment associations. As with any legal entity, permanent insolvency of an apartment association involves applying for a declaration of insolvency. Following bankruptcy the apartment association will not be liquidated but will be reorganised. This means that the court will appoint a management arrangement for the apartment association to ensure its sustainable activities as well as rights of creditors.
The amendments to the draft are based on the principle that an individual (whether an apartment owner or third parties bound by a loan agreement) wishing to exploit an apartment as security will ensure full payment of management costs of the apartment in addition to repayment of the loan. At the same time clear limitations established on the right of security enable increased security and clarity for mortgagees as opposed to legislation currently in force which enables an apartment association to present claims of unlimited scope on sale or execution of apartment ownership.
Urmas Volens, head of the SORAINEN Estate & Construction Team, participated in preparing the draft Act.
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