Insights

The Government recently released a White Paper entitled “Reforming the Condominium Act” which invited comments on proposed changes to be made to such Act. This is a positive development as it is an area of law which needs reform considering that property complexes have developed to a larger scale in Malta in recent years.

Definition

The definition of ‘condominium’ needs to be revisited to catch within it not only what there is in the current law but more complex situations, such as, for example, multiple blocks within the same complex. These are a collection of condominia (each block) within a condominium (the complex) and it could be made clearer that the condominium can be set at different levels or for the whole complex to avoid ambiguity on the point of focus and the obligation to contribute. Furthermore, the definition should cater for buildings within condominia complexes which share common areas with the blocks of apartments, even if other parts are not common. For example, in a complex there can be a hotel, an office block and apartments which share common gardens and other facilities intended for common use by all users of the complex and to which all owners, whether of the apartments, or of the offices, or of the garages, or of the hotel (clearly not having common ownership anywhere), contribute to the common upkeep of the whole complex. Some of the provisions of this Act look too limitedly at one building implying that in complexes, each building may have to be registered separately resulting in multiple registrations, multiple administrators, multiple fees and costs and resulting in a cumbersome process for everyone involved.

The Condominium Regulator

The Whitepaper proposes the introduction of a new Condominium Regulator. Having a Regulator can certainly work and is a positive idea, provided that such Regulator is given adequate resources to be competently manned and efficient, especially in relation to enforcement. Condominia probably run into thousands, and the Regulator will require substantial resources, skills, knowledge, and experience to be effective and efficient. If not, there will be delays, costs, bureaucracy and the positive outcomes intended by this Whitepaper will not be achieved.

An idea may be for such Regulator to be an educator, particularly on problem solving approaches to typical condominium issues, good neighbourhood practices, and the establishment of proper standards when parts of a building are shared. The Regulator may establish a national guide for good behaviour as in the case of traffic, refuse and other areas where members of the public share a common space. This would help create a support system as, unfortunately, in a block there can be the best and the worst of human nature, with selfish people engaging with persons who see and support the common interest which is necessary for peaceful co-existence. Otherwise, having a government body regulating the area, with enforcement powers it may not use due to lack of resources or even lack of “political” willingness, will only result in frustration across the board.

The Condominium Tribunal

The Whitepaper proposes the introduction of a new Condominium Tribunal. This is a good proposal as, in some cases, some form of imposition must exist to resolve disputes in an efficient manner given the impact these kinds of disputes have on the daily lives of so many people. This will reduce recourse to the Courts. In this regard, an effort needs to be made to facilitate efficiency, such as, the ability to issue decisions on the basis of submissions made, without any hearings, the publication of standard decisions for easy reference to identical or similar cases, and higher costs when frivolous arguments are made on topics when standard decisions already exist. If the above mentioned educational role for the Regulator is implemented, then the Regulator can publicise decisions and issue guidelines based on judgements for public awareness. When people know they will lose a dispute and have to pay for the costs, which could be doubled when the contestation is frivolous, they may act more carefully on what is already obvious.

Unfortunately, this does not happen with our courts, and it could save a lot of time for everyone. However, in this context where there are continual personal relationships which need to be peaceful, strong enforcement is critical so that people are not forced to resort to self-help to challenge bullies and others who just do not care to respect standards. That is the ultimate function of law: to organise human interactions on all levels by setting out clear rules for all to follow.

Bank Accounts

The Whitepaper is proposing the establishment of a Co-owners’ Association which will be administered by an Administrator together with a committee representing the condomini of the block. It is suggested that the Co-owners’ Association will be granted legal personality to avoid disruption whenever there is a change in Administrator, particularly with regard to the condominium’s bank account.

Whilst we agree with some suggestions in that direction, the bank account issue is a multifaceted problem. First there is the problem of the banks being bound to carry out due diligence on all persons and transactions relating to its clients. The condominium as a client is not a “normal” client in that it is an administrative structure connected only to a type of property and nothing else. All income and expenditure is ONLY permitted in relation to that designated property, but as we stated it could be an enormous complex and administration costs will run into huge amounts.

Having said that, the type of transactions can be listed very easily and definitely, excluding all others which will, by definition radically reduce the possibility or context of money laundering and terrorist financing.  Furthermore, we have the co-owners who are involved in the property. These are certainly subject to due diligence requirements when they buy property and even when they sell it; however, once they own a condominium property the issue should not arise in relation to their contributions to the upkeep of common parts as these payments are obligatory, like paying tax or VAT, and should be exempt from a due diligence review because they are (a) necessary by operation of the law, (b) are used for strictly limited purposes and (c) cannot be made by persons other than the co-owners to any persons other than registered administrators. How can one consider not accepting to support a bank account based on the identity or track record of the co-owner?  Co-owners can even be persons of bad character. In all likelihood many criminals are owners and live in apartments and there is no way one can stop the condominium from being a condominium. So how will it operate in such case?  This is not a normal financial transaction.

It is reasonable that a bank identifies the co-owners and seeks information on who they are, but for a bank to run a risk based on transactions for co-owners is clearly unacceptable and the law may possibly address that problem which goes to the root of the practical problems we are seeing today. Banks should therefore have very clear exemptions of liability to carry on verification functions for co-owners and should only focus on ensuring that use of the accounts is limited only to the stated list of expenditure, to the registered administrator only, and in relation to the maintenance of the condominium property and nothing else. Thresholds are needed to avoid condominium administration from being subject to excess documentation, and technology may be a solution towards transparency of payments in and out of the account. On large amounts over the thresholds then one can conceive a system of verification but these will be very rare and should not pose a problem.

The second issue relates to whether the administrator, who administers the condominium, and who is appointed by the co-owners or possibly by the court or tribunal, is an agent for the co-owners or is a special type of administrator of a pool of assets – not representing the co-owners personally at all. This is of course a double edged knife which can help the context function by separating the administrator from the co-owners, but can also create a risk as the owners contribute money which then they cannot control. But making the administrator an independent operator, not an agent of the co-owners, also reduces the need for compliance, as the focus is now on the funds, the payments and the administrator only.

Naturally the law pegs the appointment and removal of the administrator to the co-owners but that does not necessarily make him their agent. Just like the common parts of the condominium are an appendage to the building, so too is the administrator who is autonomous as long as he holds office and directly administers the bank account in the same way as he administers the common parts.

This is nothing to do with whether the co-owners association is an organisation called an “association” or not, as an unregistered organisation can have a bank account, or whether the association has legal personality or not. It all depends on whether the administrator is recognised as an external administrator of a fund of assets which includes (a) the common parts (b) any equipment purchased to maintain the common parts and (c) a restricted type of bank account which can only be used for the purpose. That fund can be operated by an administrator correctly called a fiduciary, without needing to own the property and without the need of legal personality, as the law can give him the status and the powers to do so.

A Co-owners’ Association

In the Whitepaper, it is being proposed that “A Co-owners’ Association without share capital is constituted and given a legal personality managed by the Administrator in liaison with a committee of representatives of the co-owners / condomini elected annually by the General Meeting of the Condomini.”  This is converting what is a special set of rights which emerge naturally from particular types of property into something which appears to be contractual. In practice we do find a level of contractual agreement but the relationships start at the level of factual context, even absent agreement.

In the context of a condominium, which is private property, such co-owners’ associations would be classified, if they were to be introduced as a form of legal organisation, as associations established for the promotion of a private benefit.

In such an association, persons join voluntarily and they are also free to leave. This highlights the voluntary element (free will) of the members within an association of persons. In the case of condominia the consent or otherwise of the co-owners is irrelevant as the state of fact of a condominium automatically creates the context – and the applicable law – under which the co-ownership must be enjoyed. The co-owners cannot withdraw from such arrangement unless they sell their apartment in the block.

The term “association” is used in common practice but is in fact a misnomer and an incorrect term to use because there is no intent to associate in such an arrangement. The use of the term is incorrect and, in fact, a review of the Condominium Act and subsidiary legislation demonstrates that the term “association” is never used because the concept of “association” as understood in our Civil Code does not exist in this case.

It should be noted that it is not unlawful for co-owners to voluntarily create and administer an association under the Civil Code with the purpose of taking care of the common areas in a block of apartments, but this will not eliminate the operation of the Condominium Act. In such cases, when a property is transferred, the seller remains the associate of the association, and the purchaser does not automatically become involved in the association. This demonstrates the inefficiency of creating a contractual solution outside the Condominium Act.

When associations in general came to be regulated for the purposes of identifying the beneficial owners, because a co-owners “association” is not an association in terms of the Second Schedule, these were expressly excluded from the operation of the Civil Code (Second Schedule)(Register of Beneficial Owners – Associations) Regulations, S.L. 16.17, Laws of Malta. This is the only instance in the laws of Malta where there is a reference to a “condominium association” and this was done to be clear, based on common practice, what was being referred to.

Co-owners’ associations should not be classified as “associations” in terms of the Second Schedule, unless this is amended to state that, notwithstanding the lack of voluntary element, such co-owners’ associations are to be deemed to be associations for the purpose of the Second Schedule of the Civil Code. In such case, the rules governing associations will also apply to co-owners’ associations. If this happens, we will then have two sets of rules governing the same context – one under the Second Schedule and one under the Condominium Act and possibly a third under the condominium rules contractually agreed to. Care must be taken to reflect the dynamics of co-ownership arrangements (which are not organisations) as opposed to associations which are organisations, whether they are legal persons or not.

Legal Personality

It is also being proposed that such co-owners’ associations be granted legal personality. If co-owners’ associations are to be classified as “associations” in terms of the Second Schedule, they will need to be registered with the Registrar of Legal Persons, and this, will create an enormous flow of registrations burdening the Registrar of Legal Persons at the MBR.

If they are required to register with a new Registrar in a new Register which will result in the co-owners’ association obtaining legal personality (similar to what we see with companies), then these will not need to register with the Registrar of Legal Persons. However, new provisions will need to be drafted addressing the non-transferability of membership interests in these kind of associations to persons who are not new owners of the property within the existing condominium.

The Administrator

The registration of the co-owners’ association is not to be confused with the proposed Register of Condominium Administrators which will deal with Administrators and not with co-owners’ associations.

Persons who provide administration services on a professional and remunerated basis should be registered, meet qualification requirements and so on. However, this may not be feasible particularly in small blocks, where there are volunteers amongst the co-owners who are able and willing to carry out this function. Imposing a regulated administrator on everybody will imply unnecessary costs which many families may not even afford. An administrator from among the co-owners will be sensitive to the reality of the owners of the block and will limit the costs to what is agreed upon. An external professional may be less sensitive and may charge high fees. A regulator who promotes good practices could help by establishing minimum and maximum budgeted expenditures to achieve desired outcomes without being socially insensitive to the realities.

Insurance

It is a good idea to impose a property insurance for the common parts but this will imply new costs. People hardly ever insure their own property, so it is doubtful that they will be interested to insure the common parts. If this idea is adopted, then the proposed regulator may establish guidelines to ensure affordable insurance by:

• determining what risks need to be insured and for what value;
• negotiate policies with the insurance industry in Malta to produce an insurance package which is designed to purpose and context and therefore remains within affordable limits keeping in view that the take-up of such policies will be across the whole country; and
• avoid speculation in the market on products, risk covered and premia to the consumers’ detriment.

As a final comment, persons who do not pay the condominium fees approved by the General Meeting (with review possibilities by the Registrar in case of abuse) should be subject to some form of publicly registered privilege which will attach to their property and will only be removed once it is paid which means that a purchaser will insist on it being paid before concluding a sale. That is a practical method of enforcement which can change bad behaviours without court intervention.

In summary, the proposed amendments to the Condominium Act present significant opportunities for reforming the legal framework governing condominia in Malta. However, careful consideration and fine-tuning of the proposed changes are crucial to ensure efficient implementation, prevent unnecessary bureaucracy, and ultimately achieve the intended positive outcomes for all persons involved.