Multi-Unit Developments
If you live or aspire to live in a multi-unit development; if you audit one; if you
audit or advise a company that has build one; if you trade from a commercial
unit or child care unit in a mixed multi-unit development; or most importantly if
you want to sell or buy a unit in a multi unit development, estate or apartment
block: read on, this affects you. The new legislation is called the Multi-Unit
Development Act 2011 and it will regulate the, so called, Owner Management
Companies (OMC) that own the common areas in a multi-unit development.
The new requirements are onerous and all of the provisions have been
commenced since 1 April 2011.
There are different rules for 2-5 and 5 plus residential facilities. Mixed
commercial and residential units have some additional requirements although
childcare facilities are considered to be “residential. There is no restriction on
having more than one OMC managing a development and anything with an
exclusive own use bathroom and kitchen can be counted as a unit. The Act
also allows for ownership of the common area by way of a co-operative,
unincorporated body or group or partnership etc… and imposes a similar
requirement on these as well.
Multi Unit Developments are defined as 5+ units, but the Act also has
requirements in respect of developments with between 2 and 5 units as well.
Mixed, commercial and residential developments are required to have a “fair
and equitable” split of common costs over the different classes of unit with
“fair and equitable” voting rights attaching to each type of unit.
Sale or purchase of units after the commencement of the Act
No sale of a new unit may take place in a multi-unit development until the
OMC has been established and the tiled to the common area transferred and
the development has been certified as compliant with planning and building
regulations and the developer has contractually agreed to complete the
development. There are other requirements on the builder as well. For
existing and 80% complete developments, the developer must transfer the
common area to an OMC by 1 October 2011. The sale of second hand units
is not affected by the legislation and newly completed or 80% (number of units
sold as a % of the total number of units) complete multi-unit development
have to have a OMC in place within 6 month. The OMC will then have a duty
to assist in the transfer of title to the units to the respective purchasers and
transfer of the ownership of the common areas to an OMC will not relieve the
developer of the responsibility to finish the development.
Membership and administration of OMC’s
The Act allows for automatic transfer of membership of the OMC when
ownership of a unit changes hands and imposes a duty for OMC’s to issue
share certificates etc… and to cooperate with the transfer of ownership. A
unit owner is under an obligation to provide the OMC with their details to
facilitate the transfer.
Transfer of common areas
After transfer of the title to the common areas, the developer will still have
right of access to the site to facilitate completion of the development and the
developer will have to provide an indemnity on completion of the
development and maintain adequate insurance in respect of all risks
associated with the completion of the development. The developer will also
have to minimise the disturbance of unit owners and allow reasonable access
to the common areas, which must be kept clean and safe, during construction.
Unit owners may not restrict assess by the developer to the site during the
construction phase. If a part of the common area is actually owned by a unit
owner, the Act facilitates the transfer of this to the OMC as well.
The completion of the development
Once the development stage of the multi-unit development is completed, the
original owner or developer must make a statutory declaration to the effect
that the beneficial ownership of the common areas and residual interest in any
long leased vests with the OMC and this effectively merges the beneficial
interest and legal title to the common areas with the OMC. Where the
development is incomplete, the owners of 60% or more of the residential units
in the development can require the transfer of title be affected unless the
developer can show good cause not to do so and even then the residents can
apply to court to direct the transfer.
Rights of the OMC
In certain circumstances the OMC may make repairs to an area of a multi-unit
development which it not under their control if it is necessary to ensure safe
enjoyment of the development. The OMC have rights of access to carry out
this work and may recover the costs of such essential work from the
developer or owner of the property.
Rights owners of units in multi-unit developments
In a new development (before any sale happens) each unit owner will be
entitled to one equal voting share in the OMC, however that OMC is
structured. No other person will be entitled to a share in the OMC. Existing
residential multi-unit developments have similar rights; however where an
existing arrangement allows a non-resident to vote, the non-resident will be
barred from exercising that vote unless they apply to the Circuit Court for
permission.
Administration and governance of OMC’s
No director may be appointed “for life” or for a term exceeding 3 years and
any existing director, who was a life director or had a term exceeding 3 years
was deemed as of 1 April to have vacated that office. An interesting legal
issue arises when this happens, who signs the financial statements and in
some cases, where there are issues with the development, there may not be
anybody foolish enough to accept an appointment as a replacement director.
Annual financial statements have to be prepared and an AGM will have to be
convened annually. The financial statements will have to present a statement
of assets and liabilities, a statement of income and expenditure, and details of
a sinking fund, if they are required to have one. It must also include a
statement of:
 the annual service charge and the basis of that charge;
 the projected service charge for the current period;
 a statement of planned expenditure on refurbishment or of a nonrecurring nature;
 A statement of the insured value of the development, the insurance
premium, the name of the insurance company and a summary of the
insured risks;
 Details of the fire safety equipment and arrangement for maintenance
of this equipment;
 Details of any related party transactions with directors of the OMC.
The AGM must he convened with 21 days notice , annual financial statements
are required to be presented 10 days before the meeting. The meeting must
be held in reasonable proximity to the development and at a reasonable time,
unless an alternative is agreed by a 75% majority. These obligations are in
addition to any normal companies Act requirements.
Annual Service Charge
The Act requires that a service charge be established to cover the costs of the
OMC. The proposed service charge must be considered at the AGM or a
special meeting convened for the purpose. The proposed charge may be
amended at the meeting by a vote of 60% of those present. Where 75% or
more disapprove a proposed service charge, then the OMC will revert to the
previous year’s service charge until an agreed service charge is adopted.
Where there is disapproval of the charge and there was no previous service
charge, a temporary 4 month scheme may be adopted by the OMC without
the approval of the members. The estimate of service charge presented at
the AGM must include the following breakdown: insurance, maintenance,
repairs, waste management, cleaning, gardening, concierge and security,
legal and accounting, and other. Prior to the sale of the first unit, the
developer is entitled to set the first years service charge. The Act confirms
that each unit owner, including a developer who owns a unit, has a legal
obligation to pay the service charge. The developer is deemed to own a unit
and be subject to a service charge once the first sale of another residential
unit in the development is closed. The Act allows, by agreement, a tenant to
be responsible for the service charge.
The annual service charge may not be used to defray expenses of the
developer unless agreed by 75% of the owners and the annual service charge
must be considered at the AGM prior to being levied and 65% or more of the
units have been transferred or sold to persons not connected with the
developer and at least 3 years has elapsed after the common area has been
transferred to the OMC. The OMC is entitled to recover these expenses from
the developer directly afterwards.
The service charge must be equitable and transparent. It must be based on
projected expenditure, an excess or deficit in the service charge from one
year is to be set against, or added to, the following year or used to build up a
sinking fund. The OMC is obliged to maintain “sufficient and proper records of
expenditure” to allow verification and audits to be undertaken. The minister
has also been given the power to amend some of the requirements in respect
of service charges by way of Regulation.
Unpaid service charge and sinking fund contribution may be collected by an
OMC as a simple contract debt through the courts.
OMCs may not enter into a long term service agreement exceeding 3 years or
a contract with a penalty clause for termination after three years.
Sinking Fund
The OMC will be obliged to establish a building investment fund or sinking
fund to cover the cost of non-recurring items such as refurbishment or
improvements. Each unit owner will be obliged to contribute to this fund and
the contribution is set at €200 per year or any amount agreed to at the AGM.
The fund must be established by the earlier of the 3rd anniversary of the first
sale of a unit in the development or 1 September 2012. The sinking fund
must be held in a separate account, accounted for separately and only used
for non-recurring items. There are dispute resolution procedures for
arguments over whether something is non-recurring or an ordinary expense
and the Minister has the power to specify matter as being non-recurring by
Regulation. In accounting terms this will be recorded as a separate “Sinking
Fund” income and expenditure account, separate from the main income and
expenditure account with its own separate “Sinking fund retained surplus” in
the capital section of the balance sheet. For administrative purposes an OMC
may issue one composite bill for the normal expenditure and the sinking fund
contribution.
House rules
An OMC may make house rules for the development relating to the effective
operation and maintenance of the development and to allow the quiet and
peaceful occupation of the units. The OMC house rules will be binding on unit
owners and tenants. The house rules must be consistent with existing
covenants and conditions in existing documents of title. All house rules must
be considered at an AGM or special meeting, notice for which was not less
than 21 days and the notice must include a copy of the proposed rules. Each
unit owner must be provided with a copy of any rules that are agreed. The
house rules may be amended using the same procedure as above. It will be
a term of every lease on a property that the tenant be bound by any house
rules equally with owners. The OMC may recover costs for the remediation of
any material breach of house rules from the unit owner. The Minister also has
the power to issue Regulation to clarify any issues in respect to house rules.
Dispute Resolution
Section 24 of the Act contains a whole section on dispute resolution. An
application to court can determine that for example, legal documentation be
amended, how to deal with multi block developments and an issue with just
one block, the merging or demerging of multiple OMC in one development,
the use of funds in a sinking fund, directing a developer to perform certain
works and other matters. The court may also direct the parties in dispute to
use mediation and the Act has rules and procedure attaching to any
mediation.
Restoration of OMC to the Register of companies
OMCs only have a legal persona while they are on the Register of companies.
If annual returns are not made to Company Registration Office they will be
struck off the Registrar and cease to exist and their assets transfer to the
Minister for Finance. A struck off OMC would not be entitled to operate a
bank account and unit holders may not be able to sell their properties. The
Act provides that an OMC that has been struck off the register may now be
restored administratively within 6 years of dissolution. An OMC that is within
12 months of its dissolution may file Form H1, provided that the application is
being made by an officer of the company. Form H1-OMC, a more onerous
process, is used to restore the company if it is more than 12 months since
dissolution and requires a certified copy deed of transfer of common areas
and a certificate of an accountant/solicitor. Outstanding annual returns and
accounts are required in the case of the H1 and the H1-OMC. An OMC that is
struck off for more than 6 years will need to apply to the courts for restoration,
a process that can cost in excess of €5,000.
Audit costs
While not an issue dealt with in the legislation, OMC’s are usually formed as
companies limited by guarantee and are therefore barred from availing of
audit exemption. Occasionally they are formed as companies limited by
shares and with some care in their formation, as companies limited by shares
they can usually avail of audit exemption. There is no company law
procedure to convert from a company limited by guarantee to a company
limited by shares, however, a company limited by guarantee could dispose of
their title to the common area to a new company limited by shares and the
company limited by guarantee could then be dissolved.
The company secretarial cost of this procedure will be about €1,000, to
dissolve the old and create a new company. The common areas will be
transferred at nil cost but may have a cost for stamp duty purposes and there
will be a conveyance fee from a solicitor which will vary from solicitor to
solicitor. Audit exemption should shave up to €1,000 off most OMC annual
running costs compared to entities subject to audit.