Shared Common Parts & Facilities
Apartment Development
In the case of apartments, the common areas comprise not only the internal common hallways, the stairwells and the external shared gardens and facilities but crucially the physical structure of the building including the structural and loadbearing part, roofs and foundations. In apartments and other multi-unit developments, the actual area in the exclusive ownership of each apartment owner comprises the internal envelope of the apartment or other commercial or retail unit as the case may be.
Units in apartment developments are invariably sold by way of a long lease at a low or nominal rent. The long-term lease is normally long (e.g. 250 to 999 years) and can, in any event, be renewed by legislation. It contains the obligations to pay service charge and comply with the covenants necessary for the management and good governance of the common areas and the estate as a whole.
The developer is the landlord under the lease. The long lease contains the necessary conditionality of ownership. This allows for house rules which are a condition of the title and for the obligation to pay the service charge. The lease may ultimately be forfeited and cancelled, if the lease covenants are not complied with, or the service charge is not paid.
Under a typical development scheme, the landlord/developer contracted to transfer the common parts to the management company upon completion of the estate or on the sale of the last unit. This contract which was required by standard conveyancing practice and expectation, in multiple unit developments required that the developer’s interest, including its ownership of the common part and the reversion (i.e., the landlord’s interest in the lease of the units) to be transferred to the management company.
Management Companies
The typical scheme contemplates that each unitholder will be a shareholder in the management company, from purchase. On completion of the development, the common parts, comprising both the common external areas and the internal common parts and the structure of the buildings are to be transferred to the management company, of which all unitholders are shareholders.
Through company law, the unit owners as shareholders have a say in the operation of the company. They elect the directors who are the board of management of the management company.
Where there are complex multi-unit developments, such as those with commercial units at ground floor level and apartments at upper floor levels or an estate with a combination of multi-unit apartments, duplexes and houses, different classes of shareholders’ rights may be created in the management company. Apartment shareholders may have sole rights in relation to matters concerning apartments, while house owners may have rights in relation to external area issues only. There may be shared infrastructure where both categories have rights and responsibilities (service charge contributions).
The management company in this context is a company or entity which is designed to acquire, ultimately, the ownership of the common parts. In the meantime, it may covenant in the various unit leases to provide services.
The management company is distinct from the managing agents, who are typically a professional firm of property managers appointed by the developer or the management company. The latter is commonly also called the management company so that the level of confusion might exist between the management company in the sense of the managing agents, who undertake the management under contractual arrangements, and the management company entity itself of whom the unitholders are usually shareholders, which covenants to provide the services and which should ultimately acquire the ownership of the common parts.
Leases
Because an apartment is part of a larger structure, an apartment lease usually gives the apartment holder exclusive ownership of the inside of the apartment only, together with certain easements and rights over the common parts. These include rights of protection provided by the structure, shelter, rights for services, rights of access, the use of the common parts of the building and the external common areas.
The common parts of the building include the structural parts, foundations, roof together with the internal common parts such as corridors lifts etc and external common parts such as gardens and car parks. They are usually vested in the landlord or management company and may be managed by either. The “landlord” may be the original developer or a successor.
The landlord’s or management company’s ownership of the common parts will be subject to the easements and rights of the apartment owners. On some occasions, the landlord will reserve rights to build and develop further.
It is essential that the landlord or management company is responsible for the repair, management and maintenance of the common parts. There must be a system for the maintenance and management of the common parts so that the title is acceptable in accordance with the conveyancing practice and standard bank requirements.
The common parts may be held by the original landlord or may have been transferred to a management company. Preferably the apartment owners will be members or shareholders in the company. Under company law, where the apartment holders are members of the management company, they will control it. They will be entitled to elect the board of directors which will run a management company.
In some developments, the original developer will remain as landlord and there will either be no management company or the apartment holders will have no rights of participation in the management company. The management company will generally set the service charge by reference to a budget for its entire costs in managing, maintaining, repairing etc. the development. Typically, the service charge will be fixed and charged in one, two or more instalments.
After the end of the relevant period, the management company or landlord is obliged to make up an account of the expenses and charges. There will then be reconciliation between the previous year’s accounts and the next year’s budget so that any shortfall or surplus is added to or credited against the following year’s liability.
Apartment Lease Obligations
Apartment owners are usually liable for repair, maintenance, compliance with legal requirements and decoration in relation to their own apartments which usually include the interior part of the unit only. The more significant long-term repairing obligations in relation to the structure and the common parts will be undertaken by the landlord or management company and will be paid for through the service charge.
There is always the risk that the management company will be inefficient or that other apartment owners refuse to contribute service charge leaving shortfalls in the budget. However, the rights of apartment owners are stronger in England than in Ireland.
Apartment leases usually contain obligations on the part of the apartment owners which are designed to protect and maintain the standard of the entire development. Nearly all apartment leases contain restrictions requiring the apartment to be used as a single residential unit, prohibiting alterations and changes to the layout of the apartment and restricting what can be placed on the outside.
Typically prohibited are signs, satellite dishes and washing lines. Apartment leases will usually contain rules regarding pets, nuisance, antisocial behaviour, noise etc. House rules will often be found in the lease or in a separate rulebook published by the management company.
Breach of the lease obligations can leave the apartment owner liable for damages and ultimately, could cause the lease to be forfeited. The obligations are strict and remain with the apartment owner, irrespective of whether the particular problems have been caused by tenants to whom the property has been let. It is a matter for the apartment owner to ensure that his tenants are compliant.
Apartment leases may place conditions on the sale, transfer or subletting of the property. It is usually necessary to notify sales or changes of ownership to the landlord and/or management company. Mortgages may also need to be notified. The lease will say whether and to what extent the management/landlord company must be notified of a subletting. Generally subletting for more than a particular period must be notified to the management company and registered in its books.
Insurance and Service Charges
Because apartment developments form a continuous structure, it is necessary to insure them in common. There will typically be a block insurance policy which insures the entire development. Usually, the interest of individual owners will be noted automatically.
It is important as a residential investor to ascertain exactly what is covered by the block policy. This varies from case to case. A residential investor should not assume a policy will cover his moveable items in the property nor that it will insure potential liability to tenants in respect of accidents, falls, claims etc. A residential investor should always consider what additional insurance may be necessary before he lets a property to a tenant.
Many / most developments are managed by professional managing agents. Failure to pay service charge constitutes a serious breach of the lease. The management company/developer is entitled to sue to recover the charges concerned.
The insurer or management company may well alert the investor’s bank which is likely to take a serious view of the matter as it jeopardises their mortgage. Mortgage banks may pay service charges and recoup it from the borrower/investor.
Abuses
Although the above arrangements are appropriate and usually worked in practice, a number of abuses and perceived abuses developed in practice. The legal structure was not prescribed by law, but by conveyancing practice. The developer might design the management scheme in its own interests. In a seller’s / developer’s market, developers were free to set the terms of the multi-unit arrangements as they saw fit on a take it or leave it basis, while buyers were prepared to accept whatever was offered, on the basis that all other owners had accepted the position.
Developers might in practice retain control of the common areas for very prolonged periods by the simple expedient of retaining a number of units. Developers might retain rights to develop the common parts, for example, by the development of further units on common areas. This would, of course, require future planning permission, but the developer would retain the requisite property rights and planning authorities might change their requirements on density.
Pending the transfer of the common areas, the developer or a management company might perform the services. The developer might place the managing agent contract with an entity with whom he was connected. In some cases, the terms might be unduly favourable to the management agent. Commonly, the developer might levy the cost of services for unsold units, leaving the developer immune from contribution in respect of unsold units.
The structure commonly enabled the developer to control the development until the transfer of the units, regardless of who controlled the management company. In any event, the developer would simply retain special voting rights to the management company which would enable it to control the management company until the common areas were transferred and beyond.
In other, typically smaller developments, the developer might simply not have the time or interest to manage the common areas and might neglect or refuse to manage the common areas properly or at all. The residents might find themselves powerless, where the developer had not yet transferred the common areas by reason of having retained units or controlling the management company.
In other cases, the residents might not wish to take a transfer of the common areas, because of outstanding compliance obligations or where the works to them were incomplete..
Law Reform Commission Report
The Law Reform Commission identified a number of problems with management companies including
- lack of transparency about the roles of developers, unitholders and managing agents;
- property managing agents having too much control over the management companies and confusion between their roles;
- developers holding on to management companies after almost all units are sold;;
- increases in service charges without explanation;
- struck off management companies;
- AGMs organised at short notice at inconvenient times and locations
The Law Reform Commission produced a draft Multi-unit Development Bill, the main provisions of which became law in the Multi-unit development Act, 2011.
The Multi-unit Development Act has effectively overruled the existing management schemes, where there are residential units involved. Where the Multi-unit Development Act applies, it is pre-emptive and overrides the existing management scheme.
The above-described arrangement still commonly apply, to commercial developments with no residential content.