This article looks closely at the various forms of liability written into the articles of owner associations, and how these forms of liability affect you as a buyer.

Owner association as a legal person

While a owner association is essentially an administrative community, it is considered a legal person that can enter into legal transactions – that is, buy, sell, obtain loans etc. For this reason, the owner association can take out loans to, for instance, renovate the facade or roof of the property. This is colloquially termed joint loans. If a owner association needs to borrow money for a new roof, for instance, the bank will require the owner association and its members to be liable for the joint loan.

Procedure when obtaining joint loans

A joint loan must be approved at the general meeting of the owner association. When the association takes out a loan, it is usually liable. However, the loan is repaid by its members through the payment of shared expenses. Before a forthcoming joint loan, it is common procedure for the financing to be decided in a way that allows owners to repay their share of the loan through a cash payment before the joint loan is taken out, or at a later date after the joint loan has been taken out. When opting to redeem your apartment’s share of the joint loan after it has been taken out, there will usually be added repayment costs. However, there may also be an agreement that the joint loan cannot be redeemed.

Where can I find information about an owner association’s liability?

If you want to know more about what type of liability that applies to your owner association, you must read the articles of the owner’s association

Most rules will state that the member is personally liable, pro rata and in the alternative. If nothing is stated in the rules, this will also be the case according to the Standard Rules for owner Association’s.

What is the difference between principal liability and subsidiary liability?

In the case of principal (direct) liability, the creditor is able to go directly after individual members of the owner association to collect outstanding payments. The creditor will not be obliged to go after the association first to recover any claim.

In the case of subsidiary liability, the creditor must first go after the owner association and can only go after its members if it appears that the claim against the association cannot be redeemed.

What is the difference between personal liability (personal responsibility) and limited liability (limited responsibility)?

In the case of personal responsibility, the paying member is personally and directly liable, with all this means, to the creditor, whereas limited liability makes the paying member liable only for a restricted portion of their assets – e.g., corresponding to the apartment distribution ratio. The member is thus not liable for the rest of their assets. The distribution ratio is stated in the title deed. In the case of personal responsibility, the paying member of the owner association may end up paying a larger part of the debt than the apartment distribution ratio would otherwise dictate, if the member is unable to recover their claim (recourse claim) against the other members.

What is the difference between joint liability and pro rata liability?

In the case of joint liability, the member is liable for the entire debt. In other words, the bank or creditor can direct its entire claim against a member if the owner association fails to pay. The member is obliged to pay, if possible, and must then direct their claim (recourse claim) against the members of the association for their individual share as a result of the mutual pro rata liability (the apartment distribution number). If there is, on the other hand, pro rata liability, the member is liable only for a part of the debt – e.g., corresponding to the apartment distribution ratio.

Example of pro rata liability

The owner association has taken out a joint loan of DKK 3,000,000.

The apartment distribution is 1/12.

The apartment should only pay DKK 250,000 of the total debt of DKK 3,000,000.

What is common practice for liability?

If there is a loss, this will have to be covered by the members of the association by charging additional shared expenses. However, the bank or creditor can also make a claim directly against the individual owners with reference to the liability arrangement described above. If an owner defaults on one or more instalments of their share of the joint loan, and legal actions are taken against this member, the association’s loss will usually be limited. If the apartment ends up in a compulsory sale order (foreclosure), the new owner of the apartment will be liable for payments due after the auction, and the association’s risk is thus limited to the short period between the owner defaulting on payment obligations and the apartment being sold by foreclosure. In addition, each apartment will usually have a collateral registered to cover all, or part of, any loss in the event of an owner defaulting on payment obligations.

Conclusion

A joint loan is a “collective loan”, which entails risk of loss among the owners. The risk is limited to the ongoing payments, however, and the loss will therefore usually be limited as described above. The practice of owner associations to take out loans with joint liability for major modernizations should therefore not give rise to any concerns. However, it should be stated in the rules of the association.

Professional buyer counseling

You should always make use of buyer counselling when purchasing a home. At Minkøbermægler.dk, we look after your interests throughout the entire buying process as your personal adviser. Contact us today to learn more about how we can help you get through your real estate purchase safely.

Note, the real estate agent is hired by the seller and represents the seller’s interests throughout the whole process, while the buyer’s agent exclusively represents the interests of the buyer.

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