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Muddy waters

01 Nov 2019 / Property Print

Muddy waters

Apartment developments and managed estates form an expanding part of Ireland’s stock of residential real estate. In 2016, there were approximately 205,000 occupied apartments in the country.

With the recovery in residential construction, the number of planning applications for apartments is rising. Compact urban growth and increased residential densities are key planks of Government policy, in the context of a growing population and decarbonisation.

Feel like going home

The Multi-Unit Developments (MUD) Act 2011 introducedlimited statutory regime for the governance of owners’ management companies (OMCs). The MUD Act deals with the transfer of estate common areas, setting of service charges, and related matters for managed estates.

Running to 34 sections, it was formulated to accommodate the unique challenges, rights and responsibilities that come with home ownership in a MUD.

Taking control

The act enables apartment owners to take control of common areas and the management of a development, for the benefit of all residents, through the vehicle of the OMC.

The OMC, usually a body corporate, looks after shared services, such as cleaning, lighting, landscaping, waste management and insurance. Each unit owner, upon closing their sale, automatically becomes a member of the OMC.

The act primarily covers four key areas:

  • Conditions and obligations relating to the compulsory transfer of the common areas from the developer to the OMC,
  • Obligations of the developer upon completion of the development stage,
  • New remedial mechanisms for dealing with disputes, and
  • New rules, rights and obligations of OMCs in relation to directorships and voting rights; reporting and infor-mation; the calculation, apportion-ment and recovery of service charges; the provision of a sinking fund; and other related matters.

Under section 3, where units have not yet been sold, a developer may not transfer an interest in a residential unit unless:

  • The OMC has been established by the developer at the developer’s expense,
  • Ownership of the common areas has been transferred to the OMC,
  • Certification from an appropriately qualified person has been delivered confirming the MUD has been constructed in compliance with the Fire Safety Certificate,
  • A contract has been entered into between the OMC and the developer outlining the obligations of each party, and
  • An independent legal representative has been appointed (at the developer’s expense) to advise the OMC. 

Key to the highway

Under section 4, developers were required to transfer ownership of the common areas in existing MUDs to the OMC within six months of the commencement of that section – that is, by 30 September 2011.

Accordingly, the common area ownership in all then-existing, partially and substantially sold developments should, by now, have been transferred. In practice, this transfer has often not occurred. Developer insolvency aside, delays can be attributed to the absence of effective sanction.

A blot on the landscape

The Conveyancing Committee of the Law Society advised in a practice note in June 2013 that the failure to transfer common areas in a pre-2011 development does not constitute a ‘blot’ on the title at the date of the certificate of title.

Where a development is unfinished, a transfer of the common areas does not relieve the developer of its obligations to complete. Of course, given the financial climate of recent years, many instances arose where MUDs were left unfinished.

Attempts have been made to utilise provisions of the MUD Act to compel liquidators to complete unfinished developments. However, in the recent case of Re Lance Homes Ltd, the High Court (Baker J) held that the MUD Act did not, of itself, impose an obligation on a liquidator to take positive steps to carry out works of construction and development.

The court further held that the obligations to complete a development in accordance with planning permission and under the building regulations are enforceable as a matter of statute by virtue of section 24 of the MUD Act; however, like any action in specific performance, it may be one that is enforceable only as a claim in damages, and may not give rise to mandatory orders being made.

My home is in the delta

On the sale of a residential unit in a MUD, membership of the OMC transfers to a purchaser automatically. The MUD Act waives requirements in relation to formal stock transfer forms and director approvals of transfers; however, a register of members must be kept.

One vote of equal value is assigned to each unit. Provision is also made for voting rights in mixed use developments – that is, estates with residential and commercial units.

‘Fair and equitable’

The governance of mixed-use schemes complies with the act where there is a “fair and equitable apportionment of the costs and expenses”, and where voting rights are “apportioned in a manner which is fair and equitable”.

While the act offers stronger arrangements, terms, and greater rights and protections for homeowners in MUDs, it also imposes additional obligations on directors of OMCs, over and above their responsibilities in company law. Requirements are introduced in relation to the holding of AGMs, and the determination and agreement of budgets, service charges, and sinking funds.

You shook me

The act stipulates that every member of an OMC must pay service charges. The developer is deemed to be the owner of a unit the sale of which has not completed from when the first unit of a sale was closed. This means that the developer is responsible for service charges for unsold units.

Service charges may not be used to defray expenses that are properly the responsibility of the builder or developer, unless authorised by 75% of the OMC’s members.

‘Sinking fund’

All MUDs must establish a building investment or ‘sinking fund’ to pay for refurbishment, improvement, or maintenance of a non-recurring nature. The act states that the annual contribution to the sinking fund is to be €200 per unit, or such sum as is agreed at a general meeting of owners.

In theory, this allows for the varying financial needs of developments of differing sizes and specifications. However, the advisory nature of the provision can mean a failure to build up funding for future capital expenditure.

On a related point, attention is drawn to the March 2018 Design Standards for New Apartments – Guidelines for Planning Authorities. Chapter 6 requires that a ‘building life-cycle’ report, intended to inform sinking-fund calculations, be included with all apartment planning-permission applications.

Sinking-fund moneys must be held in a bank account, and funds due to the OMC may be recoverable as a simple contract debt.

Can’t be satisfied

An OMC has the right to alter, amend or add to the house rules of the development, so long as any changes are consistent, fair and reasonable, and have been circulated and agreed to at a general meeting of the owners.

Although the MUD Act does not offer any specific sanctions for a breach of house rules, it does allow for the recovery by the OMC of the costs of remedying a breach.

House rules

Landlords who sublet their properties are obliged to ensure that their tenants adhere to the house rules. In Kennedy v Sweepstakes Owners Management Company CLG, the High Court (Barrett J) granted leave to a tenant to bring proceedings under section 24 of the MUD Act in connection with the implementation of house rules under section 23.

Section 25 lists parties that may apply for, or appear and be heard at, an application under section 24. A tenant of a landlord (owner) in a MUD is not listed. In this case, the court exercised the discretion afforded under paragraph (f) of subsection 1 of section 25 to grant permission to “such other persons as the court sees fit”.

My dog can’t bark

Exclusive jurisdiction for the MUD Act lies with the Circuit Court. Dispute resolution by means of mediation is encouraged in the first instance. Mediation is an important feature, as it may prove beneficial to the consumer in terms of time and costs saved.

The abridged company restoration procedure under the Companies Act 2014, whereby application may be made to the Companies Office within 12 months of being struck off, is extended to a period of six years for OMCs.

Fair and equal voting rights

The MUD Act was intended to be a reforming piece of legislation, to deliver improved protection and dispute resolution. It provides for the transfer of control and power from the developer to the OMC and the owners. OMC members benefit from fair and equal voting rights, as well as transparency around the calculation of annual service charges.

Owners of apartments may influence the way in which their develop-ments are being run. Developers may be pursued in court to hand over control and transfer the common areas to the OMC, if they have not already done so.

Got my mojo working

Having considered the principal provisions of the MUD Act, it should be remembered that while, in the main, OMCs are not-for-profit companies, by virtue of their corporate personality they are governed by the Companies Act 2014. In view of the centrality of the OMC to secure title and property values, the importance of good governance and corporate compliance cannot be understated.

Of the sections of the Companies Act relevant to OMCs, perhaps the most frequently invoked in practice are those governing company membership, directors’ duties, and the particular provisions dealing with companies limited by guarantee (CLGs).

Under section 169 of the Companies Act, a company must keep a register of its members – also a requirement of the MUD Act. The register becomes relevant where, for example, members seek to coalesce to elect directors, pass budget items, or fix new house rules. The necessity for an up-to-date register is obvious, and responsibility rests with the directors.

Best interests

OMC directors, albeit usually unpaid, are bound by the same duties as attach to directors of other bodies corporate. Directors and advisors would do well to refresh themselves on the principal duties, enumerated in part 5 of the Companies Act, in particular the requirement to act in the best interests of the company. The exercise of independent judgement and the disclosure of conflicts of interests are key to the running of a successful OMC board.

As noted, most OMCs are CLGs. The Companies Act provides an audit exemption for CLGs. However, under sections 334 and 1,218, any one member may require that an audit be carried out. In the context of assurance, transparency, and governance, an audit can afford comfort and value to members.

Rollin’ and tumblin’

Practitioners should be cognisant of the framework in which OMCs operate, in particular the interactions between the Multi-Unit Developments Act 2011, and Companies Act 2014.

The widening of the scope of the Property Services (Regulation) Act 2011, regulating property management agents, is delivering enhanced service standards in the sector.

With the expansion in the number of apartment and managed developments throughout the country, including those owned by institutional landlords, further maturing of the law affecting the sector may be expected.

No escape from the blues

The largest of the country’s OMCs issue annual service charges in multi-millions of euro. Estimates are that there are about 8,000 OMCs in the country. CRO records indicate that, over the last five years, on average three new OMCs were registered each week.

A recent independent report, Owners’ Management Companies – Sustainable Apartment Living for Ireland, jointly com-missioned by the Housing Agency, and Clúid Housing, considers the position of OMCs and reviews the limited effectiveness of the MUD Act. The inadequacy of service-charge levels, failure to provide for sinking funds, and the persistent problem of mounting debtors are some of the topics addressed.

Recommendations for change

The report makes recommendations for change across a range of relevant regulatory systems. Of interest to the legal profession will be the recommendations for regulation of OMCs, non-judicial mechanisms for the enforcement of lease covenants, and supports for OMC directors.

Regulation, over and above the usual CRO filings, and enforcement of company law by the ODCE, is recommended. Dispute resolution via a non-judicial tribunal is advocated, as are more effective avenues for the recovery of service-charge debt, moving away from the courts. In this context, it is worth noting that OMC service-charge debt is ‘excludable’ from a personal insolvency arrangement under the Personal Insolvency Act 2012. Service-charge debt may be written off in a PIA only with the consent of the creditor – that is, the OMC.

Other recommendations of the report include mandatory training for OMC directors, the standardisation of financial accounts to a format prescribed for OMCs, and enhanced insurance cover and reporting. Removal of the audit exemption is also recommended.

Patricia Murphy and David Rouse
Patricia Murphy is a senior executive solicitor with the County Solicitor’s Office of Cork County Council. David Rouse FCA is an advisor with the Housing Agency. The views expressed in this article are those of the authors