Taking counsel: Pros and cons of cooperative management associations

  • 2006-07-05
  • by Martins Mezinskis
After the state and local government privatization of apartments, new homeowners are faced with the question of how to manage their property.

There are two types of management. The building management can be entrusted to a physical and legal entity, or apartment owners can establish a co-operative association. In a situation where apartment owners have a choice, they should analyze both positive and negative sides of the two management forms prior to making a decision.
So what are the pros and cons?

A co-operative association is a voluntary organization, the management of which is in the hands of members. The establishment of a co-operative and the transfer of management to the co-operative require a certain level of hands-on involvement by all of the apartment owners. From an idealistic democratic participatory point of view, and where the members have the skills and resources to get involved, this approach may be right. Members of the co-operative associations, taking advantage of rights provided by law and the order provided in applicable articles of association, can make decisions about house management, the acceptance of which would be complex or perhaps even impossible in other cases. This flexibility of co-operative association in building management ensures a certain organizational structure to decisions in co-operative associations: decisions are made at a general meeting of members by a majority of shares.

Where a co-operative runs smoothly, the operating costs to the members can be economized substantially. This is possible because a co-operative association as a legal person can undertake obligations 's e.g., buy and lease premises, use funds received for building management. The co-operative association can also accumulate funds received from membership fees and management fees, and if the management and control of such funds is effective, this can produce good results.

The flip side of hands-on participation could be the burden of its establishment and resulting administration, especially in cases where a substantial group of apartment owners is opposed to this style of building management, or where there are owners who fail to perform or are working at cross purposes with the association. Theoretically such problems might be dealt with by expelling certain owners from the co-operative association. The expelled members would still have a duty to pay for management according to their prorata shares in the building. But as you can probably appreciate, such a conflict may not paint a pretty picture.

Concluding a management agreement with a third party is the most passive form of building management. Even in such cases, apartment owners may make decisions concerning house improvement, though it would be much more complicated than in a case of a co-operative association. This kind of management is ordinarily more expensive and harder to monitor and control 's more expensive because the management payment would include the enterprise's profit, and the collected management payment would not in most cases be accumulated and reserved for utilization for building improvements.

In addition, where a manager does not fulfil his management duty competently or in good faith, it may not be a simple matter for the owners to provide notice of management agreement termination or compel performance. Still, for some, the hands-off approach may be preferable, especially if they have no time to get involved. If that is the case, they should not, however, think any regulatory authorities will come to the rescue if there are problems in the management of the building.

The same problems may apply in the case of apartment owners who have purchased apartments in newly built houses. An apartment owners' rights to choose a management form do not depend on whether the apartment has been privatized or freshly built. An apartment acquirer should before making the purchase, wherever possible investigate what kind of building management structures are in place and whether they are acceptable to the acquirer or whether they may be changed. The key to minimizing disappointment in apartment acquisition is to assume nothing and basically leave no stone unturned 's not only with the legal title and physical aspects of the building, but with its management structure.

Martins Mezinskis is an advocate at Kronbergs and Cukste, a member of Baltic Legal Solutions, a pan-Baltic integrated legal network of law firms which includes Teder Glikman & Partnerid in Estonia and Jurevicius, Balciunas & Bartkus in Lithuania, dedicated to providing a quality 'one-stop shop' approach to clients' needs in the Baltics.