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HERE AND THERE Limited liability housing companies – an international comparison * Martti Lujanen

HERE AND THERE Limited liability housing companies – an international comparison * Martti Lujanen

INTRODUCTION This chapter outlines ownership arrangements in place for multi-apartment buildings outside Finland.

The purpose of this chapter is to describe the characteristics, geographical range, and strengths and weaknesses of the different systems. The Finnish limited liability housing company system is compared to other competing ownership arrangements.

Legal solutions associated with ownership in a multi-apartment building • Condominium system. The owner owns an individual property unit, and the plot and other parts of the building are jointly owned. The homeowners’ association (HOA) is the basic model for managing the jointly owned parts of the building.

• Fractional ownership. The owner owns a part of the property. Ownership gives a permanent right of possession to a specific home.

• Limited liability housing company model. The company owns the property, and each shareholder has a permanent right of possession to a specific apartment or other part of the building or property, based on their shareholding.

• Housing co-operative model. The co-operative owns the property, and each member of the co-operative has a right of possession to a specific home.

Co-operative housing has often been classified as a separate model and excluded from the owner-occupied system. However, in the following analysis it is considered in the same framework as owner-occupied homes, since co-operative housing is moving closer to the owner-occupied system in several countries. The forms of ownership associated with rental housing fall outside the scope of this analysis.

*** K E Y F O R M S O F OW N E R S H I P I N M U LT I A PA RT M E N T B U I L D I N G S Condominium Condominium is a Latin word from con- ‘together with’ and dominium ‘right of ownership’, i.e. owning something together.

However, in global terms, the word condominium is actually rarely used in legislative titles and legislative texts, with the exception of the US, Canada, and a few other countries. To resolve whether a system falls within the condominium

Housing in Toronto, the largest city in Canada. In global terms, condominium is the most common arrangement for governing owner-occupied multi-apartment buildings.

(Photo: Baker Jarvis, Shutterstock.com)

concept, it is insufficient to simply check whether the legislator has used the word condominium or not.

The substantial content of the system makes the difference, because then the question is not only whether something is ‘owned together’, but also whether the condominium concept is sufficiently accurately defined to refer to a certain type of ‘owning together’ in terms of property. In order to refer to a building as a condominium, each home must form a separate property. The homeowners jointly own the plot and the areas outside their homes, and the structures and technical networks of the building, such as stairwells, lifts, external walls, roofs, water and sewerage networks, radiators and heating pipes (in buildings with central heating), and the electrical networks.

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A Parisian condominium building. Legislation for the condominium concept has been adopted in most Western European countries. (Photo: Ralf Gosch, Shutterstock.com)

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The administration of these jointly owned areas, structures and networks takes place within the HOA. HOAs are statutory associations in countries with established market economies, while in most former socialist countries they are voluntary.

ation formed by the homeowners, or some other separate governance structure determined by legislation. The highest decision-making body is a general meeting of the joint owners, which elects the board of the association.

Fractional ownership In joint ownership based on fractional ownership, homeowners own a part of the property, giving them a permanent right of ownership to a specific home. The legal structure of ownership differs a great deal from the condominium structure but the governance and operation of the buildings are very similar. This is evident, for example, in the property’s decision-making body being an associ-

Limited liability housing company When ownership is based on a limited liability housing company model, the company owns the property. The company’s share capital is divided into groups of shares, each of which gives a permanent right of possession to a specific apartment.

Limited liability housing companies have a governance structure similar to that of limited companies, to the extent that the key decision-making

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bodies are the general meeting and the board elected by that meeting.

Housing co-operative In housing co-operatives, the residents are members of a co-operative, which owns the property (or properties). The members have a permanent right of ownership to a specific home. A housing co-operative may be based on co-operative legislation, as in Finland, or special acts may be drawn up for this purpose, as in Sweden and Norway.

The key decision-making bodies are the general meeting and the board of the co-operative. In Sweden and Norway, for example, the co-operatives’ regional units may also organise repairs and other matters.

T H E S I T UAT I O N I N D I F F E R E N T COUNTRIES Condominium For multi-apartment buildings, the condominium system is by far the most common ownership type across the world. Condominium legislation exists in the US and Canada, and in most Western European countries, such as Germany, France, Spain, Italy, Denmark and Iceland. The condominium system has also been recently introduced in England (2004) and Sweden (2009).

For historical and other reasons, in many Continental European countries rental apartments account for a high percentage of multi-apartment buildings, leaving little space for owner-occupation, such as condominiums. In Continental Europe, the percentage of condominiums in the housing stock is therefore often relatively low.

However, it may be possible that deficiencies of the condominium system itself may have, in part, reduced interest in owner-occupation of multiapartment buildings and, consequently, its share

has remained lower than elsewhere, for example in Finland. Even so, condominium apartments constitute about a third of housing in the largest metropolitan areas in some countries, such as Canada.

The share of condominiums remains particularly high in Russia, in the former soviet states, and in the former socialist states which have joined the European Union since 2004. In most of these countries, massive multi-apartment buildings were often quickly converted to condominiums when practically all government-owned rented homes were privatised in the early 1990s.

The condominium system is also used in the Far Eastern countries, such as China, Japan, South Korea, Hong Kong and Singapore, along with Australia and New Zealand, and the Republic of South Africa.

The condominium system is also widespread in many South American countries, Peru and Uruguay having enacted the condominium laws as early as in 1946 and Mexico in 1954. Next, the system was introduced to Puerto Rico in 1958, from there to all US states by 1969, and to all Canadian states by 1974.

At the same time, the condominium model was gradually adopted by several countries in the Continental Europe. Germany, for example, introduced legislation in 1951 and France in 1965. It should be pointed out that, with the exception of a few countries, the condominium laws have been enacted after the Second World War. By contrast, the Finnish Limited Liability Housing Company Act entered into force in 1926, preceding the condominium laws in most countries to such a degree so as to make a marked difference.

Given that houses had been built before that under the Limited Liability Housing Company Act of 1895, and even earlier, the legal tradition governing the ownership of multi-apartment buildings extends much further back in time in Finland than in

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Riverside condominiums by the Spree River flowing through Berlin. (Kuva: ArTono, Shutterstock.com)

most comparable countries.

These factors may partly explain why the share of owner-occupied multi-apartment buildings is high in Finland in comparison with many other similar countries. When the analysis is extended to co-operative housing legislation, which also goes much further back than the condominium laws of most countries, the overall picture remains largely unchanged.

Fractional ownership An ownership system based on fractional ownership has been adopted in some countries, such as Austria, Switzerland, the Netherlands, and Norway.

This legal solution is perhaps most literally ex8

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plained by its Norwegian title: “ownership share act� (eigarseksjonslova).

Limited liability housing company This ownership form, based on limited liability housing companies, has been implemented, in addition to Finland, by the US, Canada, Norway, Denmark, Australia, New Zealand, and South Africa. The system has been adopted in various parts of the world, but it usually exists in parallel with the condominium system, and also often with the co-operative system. The limited liability housing company system has traditionally been less widespread than the other forms of ownership, and it continues to decrease because the condominium

system has gradually replaced or is replacing it.

The solutions adopted in Estonia should be observed at this point. Before the Second World War, Estonians commonly solved the ownership of multi-apartment buildings by adopting limited liability housing company legislation, similar to that in Finland. Nevertheless, the legislation drafted post-independence is fully based on the condominium model. The decision did not cause a wider debate, and the legislation – along with many other acts – was drafted on the basis of German legislation. In terms of the condominium associations, Estonia made use of the experience gained from the Finnish system of limited liability housing companies.

It should be pointed out that Finland is the only country in the world where the limited liability housing company model is the overwhelmingly dominant form of governing owner-occupied multiapartment buildings. In concrete terms, when a Finnish person looks at an apartment block, their first guess would be a limited liability housing company, whereas in many countries on the continent, in Germany for example, it would be rented housing. In this respect, former socialist countries, where apartment blocks are nearly always condominiums, constitute a separate group.

Housing co-operative Sweden and Norway are dominated by housing cooperatives, which form a significant part of the multi-apartment building stock. However, in Sweden housing co-operatives hold a larger share of the market in comparison to Norway, where the number of homes governed by the fractional ownership system is on a par with that of housing cooperatives.

Housing co-operatives also exist in Denmark, Iceland, Austria, Germany, Switzerland, the Netherlands, the Czech Republic, Poland, Russia, the US, Canada, and Australia. In many countries, housing

co-operatives increasingly resemble owner-occupied homes, or they have been changed to condominiums.

In Finland, the first co-operative houses were built immediately after the First World War. However, separate housing legislation was never implemented, and the building projects remained subject to the general co-operative legislation.

While a large part of Finland’s housing co-operatives has been converted to limited liability housing companies since the 1970s, some co-operatives are still in existence. For example, there are two relatively large housing co-operatives, established in 1920, in the neighbourhood of Puu-Käpylä in Helsinki.

A D VA N TA G E S A N D D I S A D VA N TA G E S O F T H E SY S T E M S Condominium Since the condominium model is the most widespread of these systems, it is discussed here in more detail. The applications of the system vary a great deal from country to country. There is a clear distinction between the legal solutions adopted in the more developed countries (e.g. the US, Canada, and many Western European countries) in comparison with those in former socialist countries.

General features of the condominium system will be analysed first, followed by the key challenges of the model. Attention is paid to the approaches adopted for certain aspects of the system in countries with more advanced market economies and, by comparison, in the former socialist countries.

The countries that have opted for the condominium model share a basic solution, with the owner owning a property unit and each home being a separate unit. These property units are registered in the same way as other properties, such as detached houses. Consequently, the owner of a unit can use it as mortgage security. Another feature

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shared by the condominium models is the property owners’ joint ownership of the areas, structures, and technical networks outside their homes.

Both the key benefit and the most significant flaw of the condominium model are found in these two fundamental aspects. The greatest benefit of the model is the unambiguous way in which the ownership of individual homes has been arranged. It follows that, in terms of mortgage security, there are no problems to arrange a mortgage to buy property or to carry out internal repairs in the property unit. However, the greatest weakness of this model relates to the difficulties of ensuring continued maintenance of, and the repairs to, the common areas, structures, and technical networks of the building, and the funding for these, because the jointly-owned areas do not have a single owner who could give the security for a mortgage, without special arrangements.

These two fundamental aspects are the only ones shared by all countries. One of the condominium model’s commonly accepted features is the homeowners’ association (HOA), established for the management of the jointly-owned parts of the building and the plot. The manner in which the HOA operates may be very similar to that of the management of limited liability housing companies.

If the HOA works properly, its general meetings decide on the most important matters affecting the building, such as the renovation of jointly-owned parts and any necessary debt financing. Another important point is the amounts of charges covering common expenses, collected from the owners.

When a condominium model works properly, the general meeting elects a Board of Directors, which then appoints a manager or administrator. In the more developed models, the HOA’s general meeting also appoints an auditor.

In Finland, those who know how the limited liability housing companies work would find this very familiar. However, there are problems, espe10

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cially in the former socialist countries, including nearly all of the new EU member states. The existence of HOAs has been ensured only in Poland and the Czech Republic.

In Estonia, only about one in two of privatelyowned multi-apartment buildings has an HOA. Estonia’s political leaders thought that the voluntary take-up of associations was too slow and introduced an act in 2014 to ensure their establishment. Pursuant to this act, associations must be established by 1 January 2018. Otherwise, they will be set up through an administrative process, without the owners’ co-operation.

In this regard, the situation remains particularly unsatisfactory in Russia. In addition to associations not being compulsory to establish, even in the case of new homes, the owners are not required to belong to an association, even when there is one.

According to the decision taken by the Russian constitutional court in 1998, an obligation to belong to a HOA would infringe the citizens’ freedom to belong or not to belong to an association. This decision led to the 1996 act on the homeowners’ associations being repealed. As a result, only one in five multi-apartment buildings have a functioning HOA. If the HOA does not exist, building management is organised by external service companies. This restricts the owners’ influence on the residents’ general meetings. The owners can only affect the preparation of the matters on the agenda to a very limited degree. The situation is unsatisfactory because it leaves service companies largely beyond the control of the owners. In addition, the owners’ involvement in the continuous maintenance and funding of repairs of the shared parts of the building often remains limited.

However, the problems affecting the condominium model are not restricted to whether it has been possible to establish an HOA and how it has organised the management of the building. It is

Concrete apartment blocks in the suburbs of St. Petersburg in April 2016. In the former socialist countries, most of the housing stock was privatised in the early 1990s and the buildings were converted to condominiums.

(Photo: Aleksandr Borovikov, Shutterstock.com)

specifically the use of associations as a mode of organisation that presents a major problem. Typically, associations are set up for leisure activities.

However, in this case they must deal with decisionmaking related to governance and ownership. The HOA’s decision-making is also hampered by the requirement for a two-thirds, and often higher, qualified majority in many countries when decisions are made on the renovation of the shared parts of the building. These problems occur both in the established market economies and in the former socialist countries.

The HOA’s key responsibility is to maintain and repair the areas, structures, and technical networks

jointly owned by the residents. To this end, the HOA should be able to decide on the amount of the charge for common expenses, collected monthly and essential for building maintenance. The HOA should also be able to secure debt finance. With regard to both forms of financing, the HOA should have adequate powers to take action against owners that have failed to meet their financial obligations.

In most countries, the sanction for the nonpayment of charges means that the company can take to court a homeowner and demand the sale of the property by compulsory auction, unless the homeowner pay their share. The problem with this kind of sanction is that it is too heavy, especially

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A Bulgarian condominium building in the capital, Sofia. An owner has changed the external elements of an apartment to improve thermal insulation. Buildings with similar arrangements can be found in the cities of some former socialist countries. (Photo: Bulgarian Housing Association)

when relatively small sums of money are concerned.

Particularly in many former socialist countries, the slow speed of the court processes, and unpredictable decisions, are also problematic. Many residents find it awkward to think that they would be, even indirectly, involved in this type of legal processes. In such circumstances, it is understandable that the outstanding amounts often remain uncollected. However, also in this respect there are major differences between countries.

The points discussed above are partly related to the significant problems the condominium system has to secure loans, for example for the repairs of the jointly-owned parts in the building. Firstly, in practice the HOAs do not own any property that 12

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they could give as a mortgage security. For the HOA to be able to obtain security without special arrangements, the homeowners should be able to pledge their homes as security for the HOA’s loan.

However, this is not a viable solution for the security problem, because most homeowners would not be willing to sign such a pledge.

In some cases, for example in Slovakia, certain banks accept a sufficient number of individual homes as a security, even though not all homeowners have pledged their homes. However, those who do, take the risk of their homes being repossessed, if the HOA cannot pay the capital expenditure to the loan-issuing financial institution.

Since a procedure based on the consent of individual homeowners is usually impractical, many

countries with developed systems, such as the US, Canada, Germany, France, Spain, and Sweden, have adopted a so-called statutory lien. In that case, individual apartments are given as a security for the loan without the consent of the owners. Where necessary, the security can be realised if the homeowner has not met the loan obligations.

However, statutory liens are only used in a few countries. The HOAs mostly find it very difficult to secure the necessary loans to repair the jointlyowned areas. When it is usually difficult, if not impossible, to access the homeowners’ cash financing, or their personal debt financing, to fund even slightly more extensive repairs (for example in many former socialist countries), many necessary repairs are just not carried out.

There are some exceptions, such as Estonia, where the tradition of paying back loans is so strong that banks provide loans for condominium repairs even when the security does not meet the normal requirements. In Estonia, borrowing is also facilitated by access to central government guarantees, even though these are not comprehensive.

Grants can also be issued to fund capital improvements. In Poland, the Czech Republic, and Slovakia, the practice of repairing condominium buildings is also relatively widespread. In Estonia and the Czech Republic especially, the ability to obtain funding from international sources has facilitated the financing of condominium repairs.

The specific problems faced by the former socialist countries moving over to a condominium system have been referred to in several cases discussed above. Since these challenges substantially differ from those affecting other countries, a short general analysis is provided below.

In some former socialist countries, condominium owners have very low incomes, partly because the condominium model has been applied to the entire privatised rental housing stock. When the housing stock was privatised, homes were either distributed

free to the residents or sold at a very low redemption price, converting practically all tenants to condominium homeowners. Consequently, condominium residents belong to all income classes, including the lowest.

In this respect, the situation in the established market economies differs from that found in the former socialist countries. In the former, individuals can become homeowners only by purchasing their home, which requires a certain level of solvency, inherited homes being the only exception to this rule. (It should be pointed out that in the former socialist countries owners of newbuild condominiums have higher income levels than the owners of privatised rental houses.

However, the share of these newbuilds in the total housing stock is significantly lower than that of privatised rental homes.)

The often relatively low income levels of residents in privatised rental homes naturally impede the operation of these buildings, because some residents live on such low incomes that they have nowhere near enough money to meet the increasing building repair costs. While this matter does not fall within the scope of this publication, attention should be drawn to it, simply to ensure that the system is not blamed for all the condominium problems without justification.

Nevertheless, a significant portion of the problems faced by condominiums in the former socialist countries is specifically caused by the condominium model, and the decisions made at the time of its introduction. One of the most obvious problems is related to deficiencies in the decision-making and day-to-day operation of condominium communities in the former socialist countries. Not only has the establishment of condominium associations been slow in most countries, but the other necessary actors have also been few in number. For example, in some countries the profession of a property manager does not exist or only

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plays a small role. Deficiencies in the transparency of the HOAs’ financial operations also present an overall challenge.

To summarise, the fundamental weakness of the condominium model is its tendency to focus on the ownership of individual homes, which leaves the jointly-owned parts of the buildings as a secondary concern. This is particularly evident in the housing stock of many former socialist countries where the homes themselves are often in good condition but where nearly all jointly-owned parts are increasingly dilapidated. Functional legislation is required, specifically to govern these jointly-owned parts of the buildings. In this respect, significant differences can be found in legislation between countries.

The second key weakness of the condominium model is the legal form of HOAs. An association is a somewhat artificial construction in this context.

For the operation of the buildings, the HOAs must be given tasks that require it to be able to order sanctions against individual homeowners. Since this is clearly not in the interest of all owners, they often seek to reduce the HOA’s relative power. This has been reflected in the preparation of legislation and in the operation of the HOAs. While it should be pointed out that, in many countries, the operation of such statutory bodies is established and does not show any particular problems, the key point concerns the definition of the HOA’s position, governance, and powers in legislation.

Fractional ownership Even though the legal solution associated with fractional ownership differs from that of the condominium system, in many respects its problems are identical to those of condominiums. This is partly due to all countries that have opted for this solution, i.e. Austria, Switzerland, the Netherlands, and Norway, having similar arrangements to implement the governance of fractionally-owned 14

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properties, i.e. HOAs. The key difference between the fractional and the condominium model is the home ownership aspect. When ownership is based on the fractional model, homeowners own a share of the property, giving them a permanent right of ownership to an individual home. These shares can be given as security and the fractional owners can be issued a mortgage, for example for the purchase and repair of their homes. In practice, the situation is identical to that of condominium ownership. Because in the fractional ownership model the total of these individual shares forms the entire mortgaged property, it is not possible to provide the security normally required by house-specific loans. The problems with debt financing for the repairs of the jointlyowned areas, structures, and technical networks are therefore the same as with the condominium models.

Austria, Switzerland and the Netherlands have solved this problem by adopting the statutory lien used in many of the more developed countries where the condominium model is applied. With this solution, the shares of individual homeowners are given as security for house-specific loans.

Norway has not adopted the statutory lien. Since mortgage security cannot be used for loans in Norway, in practice house-specific loans do not normally exceed 10 percent of the value of the property.

All in all, the operation of buildings based on fractional ownership is similar to the condominium model to such an extent that the homeowners do not necessarily even notice the difference. Consequently, many of the problems associated with the condominium model and discussed above also apply to fractional ownership.

However, there is a difference in that fractional ownership does not overemphasise individual homes at the expense of the other parts of the building in the same way as the condominium

model. In this respect, the fact that the ownership forms based on fractional ownership are implemented in highly developed countries, where continued building maintenance has been widely understood to benefit the homeowners, probably has practical significance. It should also be noted that problems such as those caused by the lack of HOAs do not occur in these countries.

Limited liability housing company The following section provides a general outline of the Finnish system of limited liability housing companies, which has many clear benefits when compared to the alternatives. Firstly, each property has a clear owner that is able to take responsibility for building maintenance and repairs.

Secondly, the company has an unambiguous administrative process because each decisionmaking body (the annual general meeting, the board, and the manager) can easily use their respective decision-making powers. A governance structure that is similar to that of conventional limited companies improves matters because it is widely known across Finnish society. Furthermore, most of the annual general meeting’s decisions can be made by a simple majority, which eases the decision-making process.

Thirdly, attention should be drawn to the high level of accountancy in Finnish limited liability housing companies. For example, housing company accounts are usually audited. Similarly, the governance of Finnish limited liability housing companies is very transparent throughout.

The fourth benefit is the ease and speed of the administrative process of selling homes based on the ownership of shares in comparison with other countries, providing Finland with clear benefits of economic efficiency.

The fifth point is the ability of both natural and legal persons to own housing company shares.

Since the homes can be let, the housing stock

adapts better to the market conditions for owner-occupied and rental homes at any one time. In this regard, the Finnish system of limited liability housing companies differs from the practices applicable to housing co-operatives.

Sixthly, the company can ensure that the individual shareholders do not carry out such repairs in their homes that may compromise the structure of the building or the other shareholders. This is not as easily controlled in condominiums because the position of the HOA, which is concerned with the overall benefit of the housing community, is usually weak in relation with the owners of individual homes.

Finally, a limited liability housing company can obtain debt financing, for example for building renovations, secured by the property which the company owns. Individual shareholders can also take out a loan, for example for the purchase and repairs of their home, by using the shares they own in the limited liability housing company as their security. This last point will be discussed first in the following section.

Shares in limited liability housing companies can be used as security for loans to purchase the home or carry out internal repairs. However, in principle the systems based on condominiums or fractional ownership are better in the sense that they use mortgage security, whereas limited liability housing companies use movable assets as their security.

This is significant in that, due to the prudential requirements for financial institutions, mortgages are more favourable for banks than credit that uses movable assets as security. As a result, the interest levels on mortgages are generally lower than those where credit is issued against share certificates.

However, the position of the Finnish limited liability housing companies changed, when the relevant EU directives were amended after Finland and the European Union member states signed the Treaty of Accession on 24 June 1994. This made

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the shares of Finnish limited liability housing companies comparable to a mortgage security.

The latest relevant act, Article 4(1) of the Regulation (EU) No 575/2013, lays down the following provisions: “2. Where reference in this Regulation is made to real estate or residential or commercial immovable property or a mortgage on such property, it shall include shares in Finnish residential housing companies operating in accordance with the Finnish Housing Company Act of 1991 or subsequent equivalent legislation [- -].”

This EU regulation has made a clear and positive impact on how the banks operating in Finland can meet the prudential requirements. This impact is underlined by the well-known fact that the percentage of loans where housing company shares are used a security is high in Finland, accounting for over 40 percent of the financial institutions’ lending.

For the operation of housing companies, it is important that they can take out loans to finance the maintenance, repairs, and modernisation of the premises and parts of buildings for which the company must assume responsibility. Such areas include stairwells and other public areas, exterior walls, roof, water and sewage pipes, central heating system, electrical wiring, and often the internet and other networks. The company is also responsible for the maintenance of any shared outdoor areas.

The residential property owned by the housing company is provided as the security for such loans.

Shareholders are responsible for the loan repayments.

To reduce any negative consequences of joint and several liability, a sanction procedure is laid down in the Finnish Limited Liability Housing Companies Act. According to the procedure, if the shareholder does not pay their share of the capital expenditure of the loans taken up by the company, or other expenditure covered by the charges, the company can issue a written warning and take 16

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possession of the home until it is able to settle any unpaid charges for common expenses or capital expenditures, or other claims determined in the Act, by using rental income. However, the company cannot take possession of the home for more than three years.

Possession can also be used in situations where the way of life of those living in the apartment creates a disturbance. Even in these situations, possession is a more efficient method than compulsory purchase, which in many countries is the only option for intervention, and often particularly problematic.

In order for the sanction to function, it must be so credible that even a threat of using one makes the owners behave in the desired manner, and the need to use the sanction is eliminated. The possession of a home enabled by the Limited Liability Housing Companies Act works in this manner, and just being aware of the sanction has a preventive effect. At the latest when the annual general meeting has decided on taking possession of the apartment, the unpaid charges are paid almost without exception, making it unnecessary to enforce the sanction.

According to the Finnish Housing Company Act, decisions do not require that the company take the matter to court, as is the case in many other countries, for example with the sanctions based on compulsory purchase. Under the Finnish Housing Company Act, an opposite approach is taken concerning the burden of proof and the process: an individual owner who has failed to meet their obligations can avoid enforcement of the sanction only by bringing an action for annulment against the company and showing that, for example, the unpaid charge that led to the possession is unjustified.

In seeking to minimise any negative consequences of joint and several liability to the residents, an important point on the use of pos-

session should be mentioned: a sanction will not work as intended if the company cannot receive enough rental income from the apartment to settle the outstanding amounts. For example, problems may occur if the company has taken relatively large loans for a newbuild and/or repairs, and the level of capital expenditure exceeds the rent that may be obtained for the apartment.

For joint and several liability cases, the most problematic situation is the housing company’s inability to meet its financial obligations. In that case, the company may face bankruptcy. As a last resort, the property owned by the housing company may have to be sold in a compulsory auction and the financial institutions that issued the loans to the company may suffer credit losses. However, a more important point is the fact that the housing company no longer owns the property, its shares no longer have any value, and the owners lose their homes. Since the shares that have been given as securities for apartment-specific loans also lose their value, the financial institutions that issued mortgages may suffer considerable credit losses.

This point is worth noting, simply because in the literature concerning the forms of ownership of multi-apartment buildings, the dependence of shareholders on each other is considered a key weakness of the limited liability housing company model. In extreme cases, the actions of some shareholders may lead to all shareholders losing their homes. (See C.G. van der Merwe: Apartment ownership. In: International Encyclopedia of Comparative Law. Tübingen 1994, p. 188) Observations like this seem to provide one of the key reasons why the more widespread use of shares in housing companies has not been supported in the industry literature, and why the share model has not become more common even in the countries where it has existed for a long time.

Finally, it should be emphasised that the issuing of loans to individual shareholders to purchase or

repair their homes does not have the same potential effects as the loans issued to housing companies.

The effect of loans taken to purchase individual homes only extends to the housing company shares that have been given as a security. If the borrower cannot meet their repayment obligations, and the loan’s security value is insufficient, the financial institution may suffer credit loss and the shareholder may lose their home.

In principle, this situation does not affect the housing company or the other shareholders, as long as a new shareholder can be found and they are able and willing to take over the previous owner’s defaulted payments. (Chapter 3, section 7 of the Limited Liability Housing Companies Act, however, lays down some restrictions on the new shareholder’s liability for defaulted payments.) The system itself, however, is healthy. Since the previous shareholder is liable for payments, for example the charges for common expenses, up until the transfer of ownership, they have a genuine interest to find a new owner.

To summarise, the limited liability housing company system generally works efficiently, and has a logically arranged framework for governance and decision-making. A key benefit of the system is considered the ability of the limited liability housing company to obtain debt financing, for example for building renovations, secured by the property which the company owns. Individual shareholders can also take out a loan for the purchase and repairs of their home, by using the shares they own in the limited liability housing company as their security.

While this parallel opportunity to take out loans is a central benefit of the system, it also involves the risk associated with the practical implementation of the model. This risk seems to culminate specifically in the consequences of the loans issued to the housing company, if the capital expenditure arising from such loans rise too high in relation to the

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Horisonthuset, a housing co-operative building developed by Riksbyggen in the district of Västra Hamnen, Malmö, Sweden. (Photo: Andrei Nekrassov, Shutterstock.com)

housing and rental market. However, such a potential risk that could endanger the operation of the entire housing company is not associated with the loans issued to shareholders.

Housing co-operative Housing co-operatives refer to a form of ownership whereby the housing co-operative owns one or more residential properties. The co-operative members have a permanent right of ownership to a specific home.

Since housing co-operatives constitute a significant form of housing in Sweden and Norway, and the co-operative housing models in these countries have undergone major changes, particularly since the 1990s, these countries are considered next.

In Sweden, all co-operative economic activity has 18

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been carried out within the framework of economic associations since the 1800s. Nevertheless, it was deemed necessary in Sweden to enact a specific cooperative housing act in 1931. In Norway, the first housing co-operative using the current form (OBOS) was founded in 1929. However, the first housing co-operative act was not introduced until 1960.

In Sweden, the right of possession of individual co-operative homes as security for personal loans was not possible until the beginning of the 1980s.

Therefore, housing co-operatives were nearly always built with the help of association-specific loans taken by the housing co-operatives. The part of the loan carrying the highest risk was first issued, and later guaranteed, by the state. The rest of the financing of newbuilds – a share of one

percent at its lowest but in practice a slightly higher share – was covered by the co-operative members’ own capital contribution.

This practice was completely transformed in the late 1990s. Consequently, the share of associationspecific loans, taken by housing co-operatives, to the value of newbuilds fell sharply, currently being approximately 15 to 30 percent. The rest of the financing need is covered by the prospective member’s own contribution, mostly by personal loans issued by financial institutions. Such loans are secured by the right of possession to the co-operative home, authorised by the association’s board.

In Norway, the development has followed a similar trend. Personal loans have been issued since the early 1970s but their share has grown clearly more slowly than in Sweden.

Before that, co-operative homes were largely developed by the major Swedish co-operative associations. Currently, particularly in the largest cities, the developers are often building companies that work very much like the Finnish developers. The position of building companies in developing cooperative homes has also increased in Norway.

Since the 1990s, a co-operative regional association, responsible for the development, and a local building company have been able to set up a jointlyowned company for a specific property development.

In Sweden, the current situation has led to the operation of housing co-operatives closely resembling that of the Finnish limited liability housing companies. The following sections outline some features of housing co-operatives, showing the difference between co-operative housing and limited liability housing.

It is a characteristic of the housing co-operatives that generally they must be used to meet the housing needs of their co-operative members. It has therefore not been possible to use the co-operative housing stock to provide rental housing, like is

the case with the Finnish limited liability housing companies. However, the situation is changing, and the practice is moving closer to the Finnish limited liability housing. Nevertheless, legal persons often still cannot be accepted as co-operative members according to the co-operative articles of association, and residents cannot let their homes, other than in exceptional cases.

However, according to the Swedish legislation, the right of possession for municipal housing cannot be restricted. In Norway, municipalities have the right to own ten percent of co-operative homes and assign tenants to them, meaning that these houses can be used to meet the needs of social rental accommodation. In Norway, the right of cooperative homeowners to let their homes is restricted, and a letting permission can be granted for a period of no more than three years.

Essentially, an individual cannot purchase a cooperative home in Norway and Sweden for investment purposes. This has been one of the central explanations as to why the share of fractional ownership of newbuilds has increased in Norway. For a similar reason, it is estimated that the take-up of the condominium model, introduced in 2009 in Sweden, may increase, even though it has not been very popular so far.

A typical feature of co-operative housing is the ability of the association to approve the new members of the co-operative, as is the case both in Sweden and Norway. For example, a sheltered retirement housing development can select residents that meet the criteria. In Norway, a regional body responsible for the governance of co-operative homes can reject a new owner if they have not been able to meet their financial obligations or they have caused serious disruption in their earlier home.

In Sweden, if a housing co-operative member has failed to pay their monthly association fee, the association can give notice to the member, causing them to lose their right to live in the co-operative

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and forcing them to move out. In that case, the cooperative member must sell their home or, alternatively, the home is sold by a compulsory auction.

The dismissed member will keep the sale price, less any outstanding payments to the association and expenses. It should be noted that the monthly fees paid to the association cover the association’s total expenditure, including the interest and repayments of any loans taken out by the association.

The notice can be postponed if the non-payment of fees is caused by illness or other similar reasons, or if the payments are supported by the municipal social services. However, the notice cannot be cancelled if the payments are repeatedly delayed.

This Swedish system largely applies to Norway as well. If a member of the co-operative fails to meet their obligations, they can be given notice and must sell their home. However, the Norwegian system is different in that, according to an amended contractbased procedure, a loan taken by the association can be linked to a distribution of liabilities, detailing each member’s liability for the capital expenditure of the loan. The borrowers do then not have liability jointly and severally for the capital expenditure of the association’s loan. However, joint and several liability enters into force if the co-operative is placed in liquidation.

The co-operative model also leads to a situation whereby each member usually has only one vote in the association’s meeting, irrespective of the size of their home, as is the case both in Sweden and Norway. In limited liability housing companies, the number of votes used by a shareholder directly depends on the number of shares owned, which in turn is largely dependent on the size of the home.

Since residence is based on membership in housing co-operatives, a member does not necessarily have to find a buyer for their home, and they can simply hand in their notice. The period of notice is three months before moving out in Sweden and six months in Norway. The Finnish 20

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limited liability housing companies have a different practice, whereby the shareholder must first transfer their shares to the new shareholder, before they are released from liability towards the company.

The high share of building-specific loans and the ease of being released from the joint and several liability towards the co-operative led to a clear risk associated with the loans issued to Swedish housing co-operatives. With the change to the market conditions, this risk was realised in the 1990s. Hundreds of Swedish housing co-operatives found themselves having to refinance their loans.

However, it should be noted that the difficulties that arose in the housing market in the 1990s affected all forms of housing, increasing the total credit and other losses to approximately SEK 100 billion.

A single owner of the property, a legal person just like in limited liability housing companies, is a common feature of all co-operative housing in different countries. Problems that can be observed in condominium housing across several countries, arising from features such as the legal structure and decision-making, do not arise in housing cooperatives.

The Swedish and Norwegian housing co-operative models have been described here partly because these countries have a high market share of co-operative housing. Both are also Finland’s neighbouring countries. Nevertheless, the co-operative housing models vary a great deal from country to country, and some applications are relatively close to rental housing. A country may also have adopted several forms of co-operative housing.

S U M M A RY A N D C O N C L U S I O N S The table below shows the key features of the forms of multi-apartment ownership and how common they are across the world.

The condominium system is widely used in

Ownership models of multi-apartment buildings Condominium

Fractional ownership

Limited liability housing company

Housing co-operative

How common is the system?

Common around the world

Mainly found in some European countries.

Rare; the most common form of ownership only in Finland.

Relatively common, but less widespread than the condominium system.

Type of ownership

Each apartment forms a separate property owned by the homeowner; other parts of the building and the plot are jointly owned.

The apartments are owned as fractions of the property.

Each owner has shares in a housing company.

Ownership is based on the membership of a co-operative.

Building governance

Apartment owners become members of an association, which governs the building.

Fractional owners become members of an association, which governs the building.

A limited liability housing company governs the building.

A co-operative governs the building.

different parts of the world, and is much more common than any of the alternative systems. Even when a country has adopted other forms of ownership discussed here, the condominium system usually has the highest share of the market.

Fractional ownership is only used in certain European countries where it usually replaces the condominium model.

The respective market shares of housing co-operatives and limited liability housing companies are also clearly lower than that of condominiums. Even though the limited liability housing company model is used in certain countries across the world, its market share is often low. In this respect, Finland constitutes an exception.

The condominium model differs from the other three systems in that the home ownership is separated from the ownership of the other parts of the building and the plot. This separation does not exist in the other three models, which share the same legal solution, according to which the owners of a fractional share, or shares of the limited liability

housing company, or the members of the housing co-operative have a right of possession to a specific apartment.

Another way to group these four models is the ownership model based on the direct ownership of the property in the condominium model and the fractional model, whereas the ownership is indirect in the limited liability housing company model and the co-operative model.

Even though there are easily distinguishable differences between the forms of ownership, the models are applied differently depending on the country. This is particularly true of condominiums because, including in the former socialist countries, the governance structure of condominiums is often flawed, and the HOAs that are a common part of the system are not compulsory in most of the former socialist countries. Even when HOAs exist, their operation is often hampered by strict majority rules, among other things.

The operation of condominiums is also made difficult by their generally poor ability to obtain debt

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In the centre of Singapore, the Singapore River is flanked by high-rise offices and condominiums.

(Photo: JPL Designs, Shutterstock.com)

financing, since the HOA does not usually own any property that could be used as security for a loan.

Many developed market economies have solved this problem by introducing a statutory lien, according to which individual homes can be used as security for a loan taken by the HOA, even without the owner’s consent. Where necessary, the security can be realised if the homeowner has not met the loan obligations.

The problems of the fractional ownership model are largely similar to those of the condominiums because ordinary mortgage securities are not 22

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available to building-specific loans. Austria, Switzerland, and the Netherlands have solved this problem by adopting the statutory lien used in many of the more developed condominium countries. With this solution, the shares of individual homeowners are given as security for house-specific loans. Norway has not introduced this option and, consequently, the share of building-specific loans does not usually exceed 10 percent of the property value.

Limited liability housing companies and housing co-operatives do not have this problem. In both

cases, the property is owned by a legal person who can use it as a security, for example to finance property repairs.

When it comes to the loan securities available for the different forms of ownership, the situation changes if the loan is issued to purchase or repair an apartment. In this case, condominiums are the least problematic model because the apartments can be given as security in the same way as detached houses. The fractional ownership of a certain apartment also provides the owner with the option to use their home as security for a personal loan.

In limited liability housing companies, the permanent right of possession to an apartment is based on the housing company shares. These shares are given as a security for personal loans, therefore using the shareholder’s movable assets as the security. The situation is similar concerning cooperative housing where the membership of the cooperative and the related right of possession to the apartment can be used as security.

In applying for a loan, the nature of security is significant, simply because the financial institutions have less stringent prudential requirements

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Condominiums in Bratislava, the capital of Slovakia. (Photo: Grafxart, Shutterstock.com)

for mortgages and, in principal, this should lower the interest rates. However, the EU Regulation on prudential requirements (see page 224) has placed the shares in Finnish limited liability housing companies in a position that is comparable to mortgage security lending across the EU. In comparing the efficiencies of the systems, the condominium model has the benefit of unambiguous ownership of apartments. However, this is not enough to make condominiums a more efficient or better model. In particular, problems with the decision-making and financing concerning the maintenance and repairs of the jointly-owned parts 24

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of the building should be observed. In this respect, the condominium models adopted in several countries have significant flaws.

Housing communities rely on legislation to guarantee that the decision-making and governance can be implemented efficiently and transparently.

The ability of housing communities to give security for the loans and ensure that the funds to cover common expenses are available are similarly significant points. In this analysis, the system of limited liability housing companies has clear advantages over the condominium model.

In summary, even though the condominium

model is considerably more widespread in many countries than the limited liability housing company model, the application of the limited liability housing company model makes me conclude that it would be, in many respects, more efficient and would have a more easily understandable structure than the condominium model. ▪

Here and there: Limited liability housing companies – an international comparison

Rönnberg, M.: Staten fick Svarte Petter en ESO-rapport om bostadsfinansieringen 1985 1993, Ds 2002:9. Finansdepartementet. Stockholm 2002.

Martti Lujanen

Searl D.: You and the Law in Spain, 2006/2007 Edition. Malaga 2006.

Literature and articles

Tosics I.: Refurbishment of multi-storey housing in Hungary: social, legal and financial conditions. In Amann W. (ed.): Immobilienforschung in Mittel-Ost- und Südost-Europa. Vienna 2004.

Bärmann J., Pick E. and Merle W.: Wohnungseigentumsgesetz.

Kommentar. Munich 1983.

Canada Mortgage and Housing Corporation: Condominium Buyers’ Guide. Ottawa 2006.

Economic Commission for Europe: Guidelines on Condominium Ownership of Housing for Countries in Transition. New York 2003.

The Institute for Urban Economics: Practice of Reforms in the Housing and Communal Service Sector. Moscow 2003.

Karlberg B. ja Viktorin A.: Housing tenures in the Nordic Countries.

In Lujanen M. (ed.): Housing and Housing Policy in the Nordic Countries. Copenhagen 2004.

Lujanen M.: Legal challenges in ensuring regular maintenance and repairs of owner-occupied apartment blocks. International Journal of Law in the Built Environment, vol. 2, 2/2010.

Lux M. (ed.): Housing Policy: An End or a New Beginning? Budapest 2003. van der Merwe C.G.: Apartment ownership. In Yiannopoloulos A.N. (ed.): International Encyclopedia of Comparative Law. Volume VI, Property and Trust. Tübingen 1994.

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TemaNord 1998:571. Copenhagen 1998.

Paulsson J.: 3D Property Rights – An Analysis of Key Factors Based on International Experience. Stockholm 2007.

Victorin A., Lilleholt K., Argale D., Paal K. and Vainauskas A.: Legal Framework of User-Owned Dwellings in the Baltic Countries.

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Vihavainen R.: Homeowners’ Associations in Russia after the 2005 Housing Reform. Helsinki 2009. Österberg T.: Samfälligheter. Handbok för samfällighetsföreningar. Stockholm 2007.

Acts, regulations and model provisions Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms.

Uniform Condominium Act. Drafted by the National Conference of Commissioners on Uniform State Laws and by it Approved and Recommended for Enactment in all the States at its Annual Conference Meeting in its Eighty-Ninth Year on Kauai, Hawaii, July 26–August 1 1980.

Key legislation on the ownership of apartments in multi-storey buildings in the following countries: Australia (Victoria), Austria, Bulgaria, Canada (Ontario), China, England and Wales, Estonia, France, Georgia, Germany, Kazakhstan, Netherlands, Norway, Poland, Russian Federation, Slovenia, Spain, Sweden, Switzerland, and USA (Florida, Illinois, Massachusetts).

Roy F.: Legal requirements for models of free market management of privatised panel-block buildings in Central and Eastern Europe. In Amann W. (ed.): Immobilienforschung in Mittel-Ost- und Südost-Europa. Vienna 2004.

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