Taking counsel: Building management as a jack-in-the-box

  • 2007-01-17
  • By Martins Mezinskis [ Kronbergs and Cukste ]
You've just set your sights on a stunning new residential building project. The architectural plan looks good, the layout for your target unit is impressive, the reputation of the developer is solid, and their marketing material weaves a magical spell bringing the whole positive picture together.

You've conducted your own market research about where prices are heading on good quality new projects, so you don't believe the naysayer about lukewarm future capital gains prospects. The numbers look good. But have you checked the contemplated building management structure?

A purchaser should be cautious when it comes to standard document content. Legal issues should not be left aside just because the economic analysis looks good.
We have noticed in the market lately that there is a tendency for some developers to organize a management structure for multiple unit dwellings in the form of an association, or "biedriba." Naturally the deposit agreements or purchase and sale agreements often contain authorization to bind the purchaser to a management arrangement with such an association, with an undertaking from the purchaser to abide by the decisions of the association.

What you may need as a purchaser is not an association managing your building, but instead, a cooperative. Although they may superficially look similar, in fact there is quite a difference between them, whether that is with respect to the process of formation, their purpose, or the legal regulation surrounding their operation.

The purpose of an association is that which is set out in its articles of association. An association is more prone to a passive role involved in the management of a building, without a view to engaging in activities that will bring benefits for its members in the form of dividends or services provided. What's more, anyone can become a member of the association if so approved by the board of the association. If the applicant for membership is rejected, he/she may appeal the decision to a meeting of the association members, which will render a final decision.

In contrast, membership application processing in a cooperative that is established to manage a residential building is regulated by the Law on Residential Apartments and such law does not permit the board or the existing membership to reject an application from an owner of a unit which is among the units under management.

What this means is that if your building is managed by an association, you may be facing a jack-in-the-box approach to management decisions, surprising you at any time and ignoring your requirements. That association may be concluding non-arms-length contracts with building maintenance teams or otherwise serving interests other than your own.

If you agree to the terms of a contract of adhesion from the developer, which includes an undertaking by yourself to abide by decisions of an association and authorizing the association to appoint a building management company to manage the building, you may be signing over control of your building management to an unaccountable third party that has no interest in your level of satisfaction, including satisfaction with the amount of building management fees you will be compelled to pay.

Yes, you may enter into lengthy court processes thereafter with the vendor and/or the association to try to alter the terms of the management agreement. But that is nothing to necessarily take great comfort in. It is far better to negotiate from the outset adequate content in the purchase and sale documentation. That usually means having a legal professional scrutinize the draft agreements, including matters concerning building management structures, with care.

Martin Mezinskis is a lawyer 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