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Dear clients and cooperation partners,
On 1 January 2017, major amendments to the Apartment Property Law (Law) came into force. The full text of the amendments is available here.
Unfortunately, the amendments have not been properly thought through; they lack a careful analysis of the situation, thus likely causing disagreeable experiences for real estate developers and apartment owners. Here, we comment on three material aspects of the amendments.
Precondition for division into apartment properties - one building on one land plot
From a developer’s viewpoint, the most significant changes affect Section 4 of the Law, stating that upon listing the composition of notional shares in a joint property all the elements must be located in a separate residential building. In other words, the Law does not allow the option for a property consisting, for example, of one land plot and two residential buildings, to be divided into apartments. The purpose of the amendments is understandable and supportable - to avoid situations when one community of apartment owners consists of apartment owners from several buildings; these situations actually paralyse some statutory decision making because, for example, building management services should be agreed upon jointly by the apartment owners of both buildings. However, it is less likely that the amendments would achieve their target.
Note, too, that the amendments apply to objects under construction and even physically finished objects which have not yet been divided into apartments at the State Land Service. This means that if the developer had not planned to divide the land plot, now division is a must in order to divide constructed buildings into apartment properties. This, first, will cause unexpected additional direct costs in relation to division of land, and, second, losses due to project delays, especially when more than two buildings are involved.
Moreover, in most cases division might not be possible for practical reasons. For example, the amended definition of “joint ownership share” included in Section 4 of the Law states that it includes “engineering systems servicing separate residential buildings“ (author’s emphasis). This means that, in addition to the requirement of a separate land plot, building division into apartments will also have the requirement of separate communications.
In cases when one undivided land plot is developed, sometimes a common communication system is built servicing all the buildings to be constructed on the land plot. In these cases, it is disproportionate to expect the developer after building construction to reconstruct the communications in order to allow division of the building into apartments. Most likely, the buildings will not be divided and will remain in joint ownership, thus the target of the amendments cannot be achieved and the situation grows even worse.
Likewise, the legislator has not taken into account such aspects as construction requirements that apply to improvement of the site, for example, the number of car parks and playgrounds. Undeniably, upon developing one large land plot as an undivided unit, it is possible to provide for a much larger and qualitative playground – indeed, residents of all buildings would benefit from that - rather than developing many small separate land plots where each would have a miniature playground because regulatory enactments provide that each land plot of a residential fund under development must have a playground.
In our opinion, an “ideal legal situation” has been created, but this does not correspond to reality and does not facilitate well-considered and complex, qualitative development of land plots. In order to ensure development of the construction industry, the legislator should create a legal framework that follows the practice of developing the residential fund, and not the other way round. The purpose intended by the legislator - ensuring that residents of one building decide only on their own building - could have been achieved by, for example, separating the joint ownership of the building and the land. In that case, joint ownership shares in the building would be in the joint ownership of the apartment owners of the particular building alone, and they would have to decide only on their own building. In turn, the land would be in the joint ownership of the apartment owners of all buildings on the land, and all the owners would be entitled to decide on operations with the land. For this purpose, a procedure should be carefully drafted for adoption of decisions. As a result, both the legislator’s purpose would be achieved and development of the residential fund would not be encumbered without reason.
Presently, the legislator should think about adopting urgent transitional provisions, so that the amendments would not apply to those construction plans that were legally started before the amendments came into force. This is important to ensure that the state can avoid potential litigation risk (for example, in the form of constitutional litigation). In turn, during transition, a regulation could be drafted facilitating the legislator's purpose in essence without imposing an unreasonable burden on developers.
Number of votes decreased to determine use of joint ownership
Starting from 1 January 2017, apartment owners are entitled to agree on a procedure for using shares in joint ownership if apartment owners representing at least three fourths of all apartment properties vote for an agreement. This is a significant deviation from the principle of joint ownership where joint ownership can be handled only by all joint owners together, with each of them separately having absolute veto rights. The reasonable purpose behind this novelty is clear: to facilitate decision making with regard to shares in joint ownership. However, there is no regulation that would protect rights obtained as a result of these decisions or before the coming into force of the amendments.
For example, under this procedure, apartment owners can decide on rights to use the car park in the yard of the building. Taking into account that such a decision does not require consent from absolutely all owners, there is a risk that by their decision the community of apartment owners could change car park provision in the absence of car park users. This procedure certainly does not facilitate legal stability; so apartment owners should consider whether these decisions would still need 100% consent in compliance with Section 16(3) of the Law.
Upon acquiring an apartment by auction, the maintenance fee is payable from the moment of auction confirmation
This provision is a significant deviation from the general principle that in relation to third parties (including the housing manager) the acquirer of an apartment is considered to be the owner only after registration of ownership at the land registry. In addition, the amount of costs to be paid by the apartment bidder as from the day when the auction deed is confirmed is not only the fee for management services but also for services received that are related to use of the apartment (for example, heating, cold water, sewerage, waste removal), as well as rent for use of the land if the residential building is located on land owned by another person.
By this regulation, a share of the previous owner's debt has in fact been transferred to the new owner because the duty to pay for the apartment occurs before the right to use it (namely, the new owner can obtain possession of the apartment (that is, to start using it) only after the auction deed has been confirmed (ie, after the new owner becomes liable to pay for services)). Moreover, the amendments have not been followed by corresponding amendments to the Civil Procedure Law; this means that upon organising an auction the bailiff need not find out the amount of the costs involved and to include these in the auction information. Thus, buying an apartment at an auction has become even more risky.
Please contact our specialists if you have any questions about the amendments or if you need any clarification.
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