Collateral security in homeowner associations

In this article, we will take a closer look at homeowners’ collateral in homeowner associations, how collateral security works in practice, and how it may be structured.

As security for the payment of common expenses and other requirements from the homeowner association, a collateral for the homeowner association will typically be registered for each apartment. The collateral usually amounts to a minimum of one year’s payments to the homeowner association. If a member unexpectedly defaults on obligations to the homeowner association – for instance, by not paying common expenses, and the apartment is put up for foreclosure – the homeowner association can recover any loss within the registered collateral. If the loss exceeds the registered collateral, the loss will be distributed among the respective members of the homeowner association.

The collateral security may be structured like a title deed, a letter of indemnity, or in the articles of the homeowner association, which are registered as pledge for an amount. If the collateral is drawn up like a title deed, a transfer of creditor/debtor must be made to the title deed. In this case, there will usually be a handling fee of DKK 2,500 including VAT and a fixed registration fee of DKK 1,825 in accordance with new regulations as of 01 January, 2023. However, the handling fee may vary greatly depending on who is making the change to the collateral.

If the collateral security is registered in the form of pledging articles, a transfer of creditor/debtor does not need to be registered.

The registration procedures are usually carried out by the paying party. This could be, for instance, the administrator, the seller’s real estate agent, or the paying party’s buyer’s agent or lawyer.

If a change of creditor/debtor is to be made on the title deed, as well as an increase of collateral security, there will usually be a handling fee of DKK 3,000 including VAT and a fixed registration fee of DKK 1,825 to the state in accordance with new regulations as of 01 January, 2023. In addition, a variable fee must be paid of 1.45% of the amount by which the collateral is increased – rounded up to the nearest 100. For instance, if the collateral is to be increased by DKK 10,000, the variable fee will be DKK 200 while the fixed fee will be DKK 1,825. According to the standard terms of the purchase agreement, the seller usually pays all costs related to the increase in collateral. However, this may be waived by agreement. The increase in collateral security is often required on the basis of a decision at the homeowner association’s general meeting – usually in connection with an increase in common expenses. The homeowner association would therefore like to have greater security that any arrears will be repaid to the association on resale of the apartment, as described above.

The articles of the homeowner association usually state that collateral security must take priority over all other registered holders of rights. In other words, this security must take precedence over all other registered loans on the apartment. The collateral security is first priority, and the subsequent holder of rights must respect the security to the association.

If a collateral security is registered for the apartment, the mortgage loan, which must respect this security, will be reduced by the amount of the collateral. In this case, the buyer may need to refinance the full difference amount by taking out a bank loan/home loan at a significantly higher interest rate. In the sales listing, the real estate agent is obliged to state that standard financing cannot be expected to be obtained, as a collateral security has been registered on the apartment and which takes first priority.