Developing crisis for owners of multi-apartment buildings in Ukraine

The British Ukrainian Chamber of Commerce (“BUCC”) focuses on addressing important problems affecting the development of Ukraine [1]. This article has been commissioned by the BUCC to alert all owners of a residential apartment and non-residential premises in multi-apartment buildings in Ukraine of an important legal development that risks permanently depriving them, from 1 July 2016, of all management control over the common parts of their buildings and the land underneath and adjacent that, effective from 1 July 2015, they jointly own.

Under the Law of Ukraine “On the Peculiarities for the Realization of a Right to Property in a Multi-Apartment Building”, No. 417-VIII, dated 14 May 2015 (hereinafter – the “Multi-Apartment Building Law”), the owners of apartment and non-residential premises have until 1 July 2016 to register a condominium (commonly referred to as an “OSBB”) or make certain other arrangements for the management of their buildings. If they do not meet this deadline, then their buildings are to be managed by private managers appointed by designated local government authorities under contracts that will automatically be forever renewed, except as such contracts may be terminated and replaced by the appointing local government authorities.

It may already be hard to organize such OSBB’s and obtain their registration or complete other real estate management arrangements before this deadline because:

(1) there is very poor knowledge of the new requirements of the Multi-Apartment Building Law by most apartment and non-residential premises owners, as it was not well-publicized, so obtaining the necessary cooperation to form a general meeting of co-owners and take the required action in time may be difficult,

(2) there can be legal issues and ambiguities in the delineation of many common areas and land, as well as to ascertain who owns certain premises within a building as necessary to give all owners the required notice of a meeting, etc.;

(3) the registration authorities are overburdened and may not be able to timely act due to the current mass of OSBB registration applications being filed, especially because it appears that most notaries will not register OSBBs due to alleged legal liability risks;

(4) a number of legal acts that are required in principle for the Multi-Apartment Building Law to be implemented are not yet in place, in particular for the transfer of rights to the land underneath and adjacent that pertains to a building, and (5) such land transfers to an OSBB may take considerable time to properly document and complete, even once the
necessary legislation and regulations are in place.

The Adverse Consequences for Apartment Owners

It, therefore, seems probable that most of the owners of premises in such multi-apartment buildings will miss the 1 July 2016 deadline. Consequently, no matter how poor the management services provided by the state-appointed property managers are, or how unfairly expensive the charges for these services may be, and despite the land ownership issues that will likely exist, these owners will never thereafter:

1. Have any opportunity to cause the dismissal of their building manager, that will thereafter be appointed by the local government authority, no matter how unhappy they may be with its conduct, or lack of activity, for their building;

2. They will never have any ability to control the cost for this private manager, which expense will simply be passed onto them, or to change any other contract terms for engaging such manager. This results, despite the owners of the premises, at least in legal theory, jointly owning the common parts and land pertaining to their building. Instead, the local government shall, reminiscent of Soviet times, forever “act on their behalf”, undermining the joint legal ownership by the premises’ owners; and

3. These owners may, in fact, therefore never actually obtain any joint legal ownership interest in their building’s land, and consequently have only ambiguous “use” rights, which can cause serious problems in the future, for example, if due to fire their building is destroyed. The Multi-Apartment Building Law seems to provide for the owner’s rights to be protected, but until the relevant land law is clarified, these rights to land of the owners may be difficult to implement in practice.

The Risk of Corruption

Obviously, this new government building management system may also create a risk of corruption, as public officials can enter into contracts with private managers to agree fees for each building’s management that will be paid by the owners of the building’s premises, although they will have no control over this cost. Private managers might make improper payments to government officials to try to secure such contracts and contract renewals, irrespective of whether the co-owners may actually be very unhappy due to poor service or high prices. While public tenders are supposed to be held to select the private managers that are to be appointed by the government, it is not clear how promises of various levels of service and prices by different bidders will actually be evaluated or verified by the government officials taking the decisions. There are also no clear standards provided for the implementation and supervision of these management contracts with the government-appointed private property managers. At the very least, these local government officials should be required to take into account the views of the owners of the premises affected, that they, in theory, represent, but there is no requirement, mechanism or even encouragement for this (Ukraine’s city and regional administrations should adopt legal acts to provide for this, while waiting for parliamentary action, including to reassure their residents).

Proposed Remedies

Consequently, the Multi-Apartment Building Law urgently needs to be amended to delay the 1 July 2016 deadline for OSBB registration or other private management arrangements until at least 31 December 2016, and preferably until 1 July 2017. Such a
postponement (1) would allow the necessary revisions to the Multi-Apartment Building Law to be adopted, and for needed related legislation and regulations, in particular for land delineation and transfers, to be created as required for proper implementation of the Law, and (2) would give most owners of the premises of buildings sufficient time to organize OSBBs for their buildings.

In particular, during the proposed time extension, the Multi-Apartment Building Law should be amended so that a majority of the owners of the premises of a building can at any time (1) cause the termination of a contract for the management of their building that has been concluded by the local government authority with a private manager, and (2) replace such terminated contract by creating an OSBB to take over the management or to provide for management by another entity that their OSBB or they authorize. There is no valid reason why, after the 1 July 2016 deadline (or the date that it is hopefully extended to), the premises
owners should not be able to take over the management of their building and the common parts that they jointly own if they are dissatisfied with the manager appointed by the local government authority, subject only to a reasonable notice period for transition to a new manager, except where new management is urgently required. If the owners of the premises of a building have the right to dismiss and replace the government-appointed manager, this by itself should encourage such mangers to provide better services and not to overcharge for their services, and should discourage any manager from making improper payments
to government officials in order to obtain or keep management contracts.

In addition, supplemental legislation should be adopted during the time extension on a number of technical legal issues, such as

(1) to provide for what happens if a registered owner of some premises is later determined not to have been the correct legal owner so that the ownership registration is later revised, i.e. it needs to be provided that action by a general meeting of premises owners taken based on official registration records at that time should remain effective,

(2) to state that if an owner’s representative acted under a power of attorney that was later found to be technically defective for some reason, such as due to limits on what it provided authority for, the said owner should be able later to cure such problem retrospectively with a confirming document; and

(3) to prevent technical legal challenges to the validity of action by a general meeting of premises owners, including to create an OSBB, based on non-material issues that do not raise genuinely serious legal problems, while protecting the material substantive rights of owners. If any action by the general meeting of owners is found to have been improperly taken, then the general meeting should be able to cure this retrospectively by properly confirming its action, or cancelling the challenged action, without allowing technical legal games to be played that would deprive the general meeting of its authority to act concerning
a building’s common parts and land.

Insurance Issues, Etc.

Another issue that should be addressed for the public is that when ZHEK (the local state agency that until 1 July 2016 administers the common parts of buildings, at least theoretically) is replaced by the new private building management system, whether some entity will be able to cover the cost if there is a significant structural problem for a building, such as from subsidence (a problem that actually occasionally occurs in Kyiv). Although rare, such structural problems can be extremely expensive to repair. Therefore, it should be considered whether some general insurance fund can be created to protect the public by spreading the insurance cost, so that the state or certain reputable private insurance companies, possibly supported by proper reinsurance, can organize to cover this potential burden, when it is no longer theoretically covered by ZHEK acting for the state.

Conclusion

For most Ukrainian residents, their residential premises are their principal asset, so the management of their building’s common parts and related land, that they are supposed to co-own legally, is an important issue. It is imperative that its regulation be conducted in such a way that owners can genuinely exercise their co-ownership rights and are not exposed to abuse.

B C Toms [2]