Juristica International

Subsection 15 (1) of the Estonian Residential Privatisation Act *1 provides that in dwellings where in the course of privatisation there are five or more owners, the owners must found an apartment co-operative for the common management of the dwelling. In a purchase and sale agreement of a dwelling unit concluded on the privatisation of an apartment, the buyer must assume the contractual obligation to become a member of the apartment co-operative.

The foundation and activities of apartment co-operatives are regulated by the Apartment Co-operatives Act. *2 The following is an overview of the main provisions of this Act with references to the Law of Property Act *3 and the Apartment Ownership Act, *4 supplemented with commentary.

Pursuant to subsection 2 (1) of the Apartment Co-operatives Act, an apartment co-operative is a non-profit co-operative established by apartment owners, whose purposes are the common management of the legal shares of the buildings and the plot of land that are part of the object of ownership of the apartments, and representation of the common interests of the members of the apartment co-operative. It follows from this legal definition that the members of an apartment co-operative are always the owners of the apartments in their possession. Hence, an apartment co-operative is always an organisation of apartment owners, and consequently their existence is one of the prerequisites for its foundation. In other words, an apartment co-operative cannot be founded in a dwelling with no apartment owners. Apartment owners who found an apartment co-operative may be the owners of apartments as immovables or the owners of apartments that were privatised as movables.

Is membership of an apartment co-operative compulsory or optional?

Part II of the standard articles of association *5 of apartment co-operatives approved by the Director General of the State Housing Board by the directive of 6 September 1995 is based on the principle that membership in an apartment co-operative is optional. Clauses 7 and 8 of the standard articles of association provide the procedure for acceptance of new members. An apartment co-operative may refuse to accept an applicant for membership (clause (1) 11), and natural persons may contest such refusal in court (clause (5) 11); the decision of an apartment co-operative to refuse to accept a legal person, however, is final. Consequently, each member of an apartment co-operative has the right to withdraw from the co-operative while still remaining an apartment owner in the dwelling where the apartment co-operative was founded.

Pursuant to § 3 of the Co-operatives Act *6 and subsection 1 (1) of the Non-profit Associations Act, *7 optional membership in a co-operative is indeed the leading principle on which the activities of a co-operative are based. An apartment co-operative, however, is a non-profit association of a special kind. Its peculiarity consists first and foremost in being a non-profit association which is established by persons, specifically by the co-owners of a dwelling, who already are in a legal relationship with one another. Pursuant to subsection 75 (1) of the Law of Property Act, a co-owner shall bear the expenses relating to maintenance of the shared thing corresponding to the size of the share belonging to him or her. Hence, even if an apartment owner refuses to become a member of an apartment co-operative, he or she is not exempt from participating in bearing expenses relating to the maintenance of the dwelling.

For the same reason, an apartment owner is not exempt from participating in bearing expenses relating to the maintenance of the dwelling, if he or she refuses to conclude a shared activity agreement. Such agreements set out in detail and in writing the obligations imposed on the co-owner by the Law of Property Act.

The specific nature of an apartment co-operative as a non-profit association created the need to enact another law, the Apartment Co-operatives Act.

Pursuant to subsection 3 (1) of the Apartment Co-operatives Act, foundation of an apartment co-operative is effected on the basis of a majority resolution of the apartment owners, if the greater part of the building where the co-operative is founded belongs to that majority through their legal shares of the object of ownership of the apartments. The articles of association of the apartment co-operative must be approved by the foundation meeting.

A foundation agreement need not be concluded in order to found an apartment co-operative (subsection 3 (1) of the Apartment Co-operatives Act).

An application for registration of an apartment co-operative together with the other required documents including the articles of association of the co-operative are to be submitted to the registrar of non-profit associations and foundations working at the registration department of a county or city court (subsection 75 (2) of the Non-profit Associations Act).

Pursuant to subsection 5 (1) of the Apartment Co-operatives Act, all apartment owners in a dwelling where an apartment co-operative is founded will be members of the apartment co-operative. Therefore, part II of the standard articles of association of apartment co-operatives is not in full conformity with the Apartment Co-operatives Act.

The Apartment Co-operatives Act does not provide for exclusion of a member from a co-operative or acceptance of a new member. If a member of an apartment co-operative transfers the ownership of his or her apartment, the acquirer will be considered a member of the apartment co-operative as of the date of transfer of ownership (subsection 5 (2) of the Apartment Co-operatives Act). The date of death of a bequeather is considered the time that an heir who has accepted an inheritance becomes a member of an apartment co-operative (subsection 5 (3) of the Apartment Co-operatives Act). Upon transfer or inheritance of apartment ownership, all the rights and obligations of a member of the apartment co-operative belonging to the transferor or bequeather transfer to the acquirer of the apartment from the moment of transfer of ownership of the apartment (subsection 8 (4) of the Apartment Ownership Act). The transferor’s contribution must not be returned to the transferor of ownership. Subsection 7 (2) of the Apartment Co-operatives Act provides that upon transfer or inheritance of apartment ownership, its value must be assessed together with the contribution and obligations of the member of the apartment co-operative with respect to the assets of the apartment co-operative.

If not all apartments in a dwelling are privatised, both the owners of the privatised apartments as well as the obligated subject with regard to the unprivatised dwelling units will be members of the apartment co-operative. Membership in an apartment co-operative cannot be refused to the obligated subject of privatisation. On the contrary, in such a dwelling, an apartment co-operative is considered formed if, in addition to the obligated subject, at least five persons who have privatised dwelling units vote in favour and if the larger part of the dwelling belongs to the founders through their legal shares of the object of ownership of the apartments (subsection 16 (2) of the Apartment Co-operatives Act).

Preparation of the founding documents of an apartment co-operative and calling of the general meeting is effected on the initiative of the obligated subject of privatisation of the dwelling units (subsection 16 (1) of the Apartment Co-operatives Act). Section 6 of the Residential Privatisation Act contains an exhaustive list.

Subsection 15 (1) of the Residential Privatisation Act provides that until foundation of an apartment co-operative, management of a dwelling is organised by the obligated subject of privatisation. The apartment owners are required, however, to bear a share of the expenses relating to management of the dwelling on the basis of a corresponding agreement between the parties. The standard format of such agreement, known as the management agreement, was approved by the directive of 4 April 1995 by the State Housing Board. *8 It must be emphasised that an apartment owner is not exempt from bearing the expenses relating to maintenance of a dwelling in co-ownership even if he or she refuses to conclude a management agreement. As mentioned, an apartment owner is required to participate in bearing such expenses on the basis of subsection 75 (1) of the Law of Property Act.

After an apartment co-operative is founded, the obligated subject of privatisation of the dwelling units has a number of obligations to the apartment co-operative. Clause 9 of the Procedure of Residential Privatisation *9 prescribes that in addition to the technical documentation relating to the dwelling, the obligated subject of privatisation must submit to the apartment co-operative information concerning the maintenance payments received by class of expenditure and information concerning the use of these payments for maintaining the dwelling by month over the last twelve months.

It arises from the nature of an apartment co-operative that a person will be a member of an apartment co-operative as long as he or she is the owner of an apartment. He or she cannot be excluded from the co-operative for unsatisfactory performance or non-performance of the obligations of a member. Hence, the issue arises of how to guarantee claims for payments intended for specific purposes by members of an apartment co-operative (subsection 8 (2) of the Apartment Co-operatives Act).

Subsection 9 (1) of the Apartment Co-operatives Act attempts to solve the issue of guaranteeing a claim of an apartment co-operative by providing for a mortgage in the first free rank in the register on the apartment concerned in favour of the apartment co-operative to the extent of six times the amount of the owner’s contribution. However, pursuant to subsection 326 (2) of the Law of Property Act, the provisions concerning acquisition of an immovable apply to establishment of a mortgage unless otherwise provided by law. The Apartment Co-operatives Act does not provide otherwise. Pursuant to subsection 8 (1) of the Apartment Ownership Act, an apartment owner has the right to encumber his or her apartment with restricted property rights including a mortgage except for a judicial mortgage (section 363 of the Law of Property Act). The latter may be established by a court pursuant to clause 154 (1) 1) of the Civil Procedure Code *10 only to guarantee a claim and only to the extent of the claim.

Only an immovable can be encumbered with a mortgage. On the other hand, pursuant to subsection 13.2 (2) of the Law of Property Act Implementation Act *11 , apartments that have been privatised as movables can be pledged without a transfer of possession. At the same time, pledging an apartment as a movable is possible only with the expression of will of the apartment owner. Therefore, guaranteeing a claim of an apartment co-operative with a mortgage or a pledge on movables is fairly problematic.

Subsection 18 (2) of the German Apartment Ownership Act *12 provides that if payments intended for specific purposes are not made, transfer of ownership of the apartment of the debtor may be requested in court (Entziehung des Wohnungseigentums) if the indebtedness has lasted longer than three months and the total sum of the debt exceeds a fraction of the usual value of the apartment as determined in the pertinent law. Issues relating to such court judgments are regulated separately by § 19 (Wirnung des Urteils) of the same Act.

It would be reasonable to include a provision similar to clause 18 (2) 2) of the German Apartment Ownership Act in the Estonian Apartment Co-operatives Act. The very fact that such provision exists would discipline the members of an apartment co-operative in their proprietary relationship with the apartment co-operative. The inclusion of such provision in the Apartment Co-operatives Act would not be contrary to § 32 of the Constitution of the Republic of Estonia *13 or with the Immovables Expropriation Act. *14 The reason for the expropriation of property would be the owner’s debts, whereas § 3 of the Immovables Expropriation Act prescribes expropriation in the public interest.

Expropriation of ownership of an apartment pursuant to the above-mentioned provision would differ from a claim for the debtor’s property pursuant to Chapter IV of the Enforcement Procedure Code *15 in that on the application of the above-mentioned provision the debtor’s apartment would be expropriated by a court judgment.

Pursuant to Estonian legislation, it is possible to request the compulsory sale of part of a dwelling in court even if there are no debts involved. Namely, § 12 of the Law of Property Act Implementation Act provides that if a co-owner of a dwelling does not wish the restitution, substitution or privatisation of the land under the building and the land necessary to maintain it, the co-owners who wish the restitution, substitution or privatisation have the right to request the sale of the part of the building by the court.

The Apartment Co-operatives Act attempts to solve issues relating to the legal shares of a dwelling as well as to apartment insurance. Pursuant to subsection 10 (1), an apartment co-operative may insure, in its own name, the legal shares of the dwelling. Consequently, an apartment co-operative does not act as a purchaser of insurance with regard to individual apartments; these can be insured by the apartment owners themselves. Pursuant to subsection 10 (2) of the Apartment Co-operatives Act, a member of an apartment co-operative may insure his or her apartment only supplementarily and only to the extent of the “useful and sumptuary expenses”.

Solving insurance-related issues in such a manner clearly raises contradictions. In addition to that, the manner in which an item of insurance is dealt with in § 10 of the Apartment Co-operatives Act is contrary to the items of insurance listed in § 7 of the Insurance Act. *16 The property of the purchaser of insurance but not his or her possible expenses, moreover, useful and sumptuary expenses, can be items of insurance. It is not clear when expenses of an apartment owner are useful or sumptuary and when they are not. Therefore, the wording of § 10 of the Apartment Co-operatives Act cannot be regarded as serving its intended purpose. New amended wording should proceed from the fundamental concepts of the law of insurance and use appropriate terminology.

A member of an apartment co-operative as an apartment owner is also a co-owner of the dwelling for which the apartment co-operative is founded. An apartment owner does not have the right to request the separation of a legal share in the building belonging to him or her as a physical share (subsection 8 (3) of the Apartment Ownership Act). Also, he or she does not have the right to transfer, encumber or bequeath the legal share separately from the apartment (subsection 2 (3) of the Apartment Ownership Act). Consequently, upon transfer of an apartment a member of an apartment co-operative also must transfer his or her legal share in the dwelling. However, upon transfer of a legal share of a co-ownership, the question arises of the right of pre-emption of other members of the apartment co-operative as co-owners.

If an apartment has been privatised as an immovable, subsection 73 (2) of the Law of Property Act concerning the right of pre-emption of co-owners is not applicable upon transfer of ownership of the apartment. Taking into consideration the nature of apartment ownership, subsection 8 (2) of the Apartment Ownership Act provides that another apartment owner has a right of pre-emption to ownership of the apartment only if the right is established in favour of the owner by law or a transaction. Such right of pre-emption, however, is not the right of pre-emption of a co-owner but the right of pre-emption as a restricted property right (§ 256 of the Law of Property Act).

The issue concerning the right of pre-emption of co-owners upon transfer of an apartment privatised as a movable has been solved somewhat differently. Subsection 17 (3) of the Apartment Ownership Act provides that the right of pre-emption of other members of an apartment co-operative does not extend to transfer of an apartment privatised as a movable and the corresponding legal share of the dwelling. However, it should be emphasised that this is a general provision. Subsection 13.1 (2) of the Law of Property Act is a special provision establishing an exception. Pursuant to this provision, the right of pre-emption of co-owners does not apply to transfer of an apartment privatised as a movable if there are more than six co-owners. The obligated subject of privatisation of the dwelling units shall not be regarded as a co-owner.

Pursuant to § 3 of the General Principles of the Civil Code Act, *17 the above-mentioned special provision should also be considered while interpreting subsection 13 (2) of the Housing Act. *18

Section 20 of the Law of Property Act Implementation Act grants a right of pre-emption to a local government until 1 January 1999 concerning immovables being transferred in its administrative territory. However, pursuant to § 21 of the Apartment Ownership Act, the general right of pre-emption of a local government does not apply to transfer of ownership of an apartment as an immovable.

It must be emphasised that ownership of an apartment, both as a physical share and as a dwelling unit privatised as a movable, can be in the co-ownership of two or more persons. Such co-ownership arises upon division of an immovable into ownership of individual apartments (subsection 6 (2) of the Apartment Ownership Act). Co-ownership of an apartment will also arise if a communal apartment is privatised by the tenants as a co-ownership (subsection 3 (10) of the Residential Privatisation Act).

The right of co-ownership of an apartment does not prevent the apartment owners from joining an apartment co-operative. Each separate ownership in an apartment represents one vote at a general meeting of the members of the apartment co-operative unless otherwise provided for in the articles of association of the apartment co-operative (subsection 11 (1) of the Apartment Co-operatives Act).

Since only a dwelling unit enabling separate use can be apartment ownership as a physical share (subsection 2 (1) of the Apartment Ownership Act), termination of co-ownership of an apartment by separation of a share from the co-ownership of the apartment is in obvious conflict with the nature of the thing in general, and a co-owner cannot request separation of his or her share as a physical share (§ 78 of the Law of Property Act). Therefore, another co-owner of an apartment has, upon transfer of a legal share of co-ownership of the apartment, the right of pre-emption on the general bases thereof.

This article concludes with a few comments on the foundation of apartment co-operatives in dwellings which belong to dwelling co-operatives.

The concept of a dwelling co-operative is defined in subsection 14 (1) of the Housing Act. It follows from the definition that members of a dwelling co-operative are not the owners of the apartments in their possession. Unlike apartment co-operatives, a dwelling co-operative is not an organisation of owners but rather an organisation of apartment possessors who do not own the apartments. Possession is based on membership, and membership on contributions, the amount of which corresponds to a share of the dwelling’s construction costs according to the size of the dwelling unit in possession of a member (subsection 14 (2) of the Housing Act). In order to found an apartment co-operative as an organisation of apartment owners from a dwelling co-operative, the members of the dwelling co-operative must acquire the right of ownership to the apartments in their possession.

Whereas rental apartments and unoccupied apartments are privatised as movables, apartments of a dwelling co-operative may be transferred to its members as ownership of the apartments, that is, as immovables. For this, a dwelling co-operative has to first privatise the land under the dwelling belonging to the co-operative and the land necessary to maintain the dwelling (subsection 18 (1) of the Apartment Ownership Act). After that, a general meeting of the dwelling co-operative may decide the division of the privatised land and the dwelling becoming an essential part thereto into ownership of individual apartments, and entry of them in the land register of apartment ownership in the name of the apartment possessors (subsection 18 (2) of the Apartment Ownership Act).

The peculiarity of the foundation of an apartment co-operative in a dwelling that formerly belonged to a dwelling co-operative is that it is not founded by apartment owners but is decided at a general meeting of the dwelling co-operative at the same time as the land and the dwelling on it are divided into ownership of individual apartments. Pursuant to subsection 18 (2) of the Apartment Ownership Act, the above is known as the reorganisation of a dwelling co-operative into an apartment co-operative. However, pursuant to subsection 39 (1) of the ESSR Civil Code which was in force until 1 September 1994, the term reorganisation stood for merger, division or liquidation of a legal person. The General Principles of the Civil Code Act does not contain such term. The concept behind this term is not explained in subsection 18 (2) of the Apartment Ownership Act either. The Apartment Co-operatives Act does not provide for the foundation of apartment co-operatives prior to individual apartment ownership. Only apartment owners themselves can found an apartment co-operative (subsection 3 (1) of the Apartment Co-operatives Act). Therefore, the wording of subsection 18 (2) of the Apartment Ownership Act with regard to the foundation of apartment co-operatives does not serve its purpose and should be amended.

In addition to the reorganisation of a dwelling co-operative into an apartment co-operative, § 19 of the Apartment Ownership Act provides for the foundation of an apartment co-operative based on a dwelling that belongs to a dwelling co-operative. This is possible if a dwelling co-operative has two or more dwellings and if a general meeting of apartment possessors of one of the dwellings decides to separate from the current dwelling co-operative and found an apartment co-operative based on the dwelling (subsection 19 (1) of the Apartment Ownership Act). Thus on one hand, there are not yet any apartment owners at the foundation of the apartment co-operative, and on the other, the dwelling co-operative for the dwelling does not exist any more. This is why subsection 19 (4) of the Apartment Ownership Act provides that the newly founded apartment co-operative itself has the right to privatise the land under the dwelling and the land necessary to maintain it, and becomes the owner of the land and the dwelling as an immovable which becomes an essential part thereto. After that, the apartment co-operative will divide its immovable property into the ownership of individual apartments, and on the basis of a notarised application of the apartment co-operative, ownership of the apartments will be entered in the land register in the name of the apartment possessors.

Since the apartment co-operative above is founded on the basis of the dwelling, the members of the apartment co-operative are the apartment possessors who, at the foundation of the co-operative, were not yet the owners of the apartments in their possession. This apartment co-operative is not an organisation of apartment owners and thus does not comply with the definition of the concept of an apartment co-operative given in § 2 of the Apartment Co-operatives Act.

Founding apartment co-operatives “based on the dwelling” has in practice given rise to different interpretations. *19 Procedure of the Apartment Ownership Act *20 approved on 17 March 1995 by regulation of the Government of the Republic does not elucidate the matter either. Clause 18 of the procedure focuses on the foundation of an apartment co-operative based on the dwelling and clause 19 focuses on the foundation of an apartment co-operative based on the dwelling co-operative. There are no further clarifications.

In conclusion, at present the foundation of apartment co-operatives in dwellings that formerly belonged to dwelling co-operatives is not regulated by the provisions of the Apartment Co-operatives Act. The Apartment Ownership Act does not contain a consistent procedure for the foundation of such apartment co-operatives either. All depends on whether a dwelling co-operative has one or two or more dwellings. This should not, however, be the basis for different procedures for the foundation of apartment co-operatives in dwellings belonging to dwelling co-operatives. Therefore, it would be reasonable to omit from § 19 of the Apartment Ownership Act everything that regulates the foundation of an apartment co-operative “based on the dwelling”. Subsection 19 (1) of the Apartment Ownership Act also provides for the foundation of a new dwelling co-operative separated from a current dwelling co-operative. A dwelling co-operative founded in this manner has the right to privatise the land under the dwelling and the land necessary to maintain the dwelling pursuant to the general procedure established for dwelling co-operatives (subsection 19 (5) of the Apartment Ownership Act). The foundation of an apartment co-operative in a dwelling belonging to the new dwelling co-operative that has separated from a former dwelling co-operative should also take place pursuant to the general procedure.