The most common mistakes in housing community resolutions related to pursuing claims for repairs of common property defects

In our litigation practice, which includes numerous lawsuits against developers in cases concerning defects in common areas of real estate, we have noticed that housing communities relatively often adopt resolutions that are significantly flawed in the context of the Act on Ownership of Premises. Unfortunately, these shortcomings often lead to the resolutions being overturned by the court, which is often preceded by an additional decision to secure the suspension of the resolution’s implementation. In practice, this means a significant obstacle for the housing community, and sometimes even prevents it from effectively bringing an action against the developer in a case concerning defects in common areas of the property.

In this article, we have attempted to present the most common errors that may appear in resolutions of housing communities concerning claims against developers for defects in common parts of the property. The main purpose of this publication is to draw the attention of community boards and property owners to these irregularities in order to avoid legal complications when drafting resolutions. Of course, it should be noted that the list of possible irregularities is broader than those described in the publication, but the cases described below are directly derived from our practice and, as it seems, are among the most common.

Assignment of claims of apartment owners against the developer to the housing community

First, however, it is necessary to outline the legal framework for the possibility of a housing community filing a lawsuit against a developer in connection with the existence of defects in the common parts of the property.

Claims for defects in the property are individually available to each of the owners of the premises, as they arise from the sale agreements concluded with the developer (and not from the Act on the Ownership of Premises regulating the functioning of housing communities). By concluding the agreement, the developer undertakes to provide the buyers with premises that comply with the agreement, i.e., free from physical and legal defects, in accordance with the design documentation and applicable building regulations and technical standards. This includes both the common areas of the building and the residential premises, as well as installations and equipment affecting the proper use of the property.

In practice, however, defects in premises and common areas of the property are quite common. The most common ones include:

• leaks, leaks, damage to roofs and ceilings,
• cracks, falling plaster, problems with thermal insulation or moisture,
• leaky pipes, pump failures, sewer blockages,
• failed wiring, lack of lighting in common areas,
• cracks, wear and tear of materials, lack of non-slip flooring in stairwells,
• blocked and malfunctioning ventilation in common areas,
• etc.

In this situation, each of the owners of the premises has the right to pursue their claims against the developer for the removal of defects in the common areas of the property. These claims primarily include the obligation to repair or remove defects, bring the property into a condition consistent with the contract, and cover the costs associated with restoring the building to its proper condition. Owners may also demand a reduction in the price of their share in the common property or compensation for losses incurred as a result of defects, such as increased utility consumption or repair costs.

Therefore, since each co-owner of common property may independently pursue claims against the developer for the removal of defects in the common property, they may also assign (transfer) such claims to the housing community. The conclusion of an assignment agreement gives the housing community the legal standing to pursue a claim against the developer. For property owners, this solution is a significant practical convenience, because:

• it allows all claims to be “consolidated” in a single legal entity, i.e. the housing community,
• it enables more efficient court and out-of-court proceedings against the developer,
• it simplifies the process of selecting a representative, eliminating the need for individual owners to conduct multiple parallel civil proceedings.

Thanks to this solution, the housing community can more effectively pursue claims related to physical defects in the common parts of the property from the developer, while minimizing costs and procedural complications for the owners of the premises.

• A practical example from case law:

“The owner of a premises may, on the basis of a transfer agreement, transfer to the housing community the rights to which he is entitled vis-à-vis the seller of the premises in connection with physical defects in the common property” (Resolution of 7 Judges of the Supreme Court of January 29, 2014, file ref. no. III CZP 84/13).

In practice, the process is as follows: the owners of the premises authorize the community’s management board by way of a resolution to conclude agreements for the assignment of claims, on the basis of which the community (plaintiff) assumes the right to pursue civil law claims against the developer (defendant). In the assignment agreements concluded between the community (plaintiff) and the owners of premises, the owners transfer all their claims in connection with defects in the common parts of the property to the community free of charge. In addition, the community obliges the management board to pursue claims against the developer in pre-trial and court proceedings and to use financial resources to cover the costs associated with pursuing claims. In practice, the housing community often authorizes the management board to conclude a legal services agreement, grant power of attorney to represent the community in pre-trial and court proceedings against the developer, and cover the costs of the law firm’s remuneration.

It is in these resolutions, which are intended to formalize the management board’s authorization and scope of activities, that the errors described in this article appear, which may affect the validity and effectiveness of the legal actions taken.

Authorization to pursue claims beyond the common areas (imprecise scope of housing community resolutions)

Article 3(2) of the Act on Ownership of Premises precisely defines what common property is. The provision states that it includes land and parts of the building and facilities that are not used exclusively by individual owners. Consequently, any part whose significance (function) extends beyond the sphere of a separate premises should be considered as belonging to the common property. In practice, common property will therefore include, for example, the foundations of the building, walls, roof, pipes, chimneys, elevator shafts, staircases, corridors, and all other passageways, installations (water, heating, electrical, gas), balconies, attics, and basements. It can therefore be considered that the main function of common property is to enable the owners of residential premises to have free access to the premises and to ensure the technical usability of the premises.

As indicated in more detail in point 1) above, a housing community may effectively pursue claims against a developer for physical defects in the common parts of the property, provided, of course, that these claims are effectively transferred by the owners to the housing community. Therefore, resolutions of the housing community that include claims relating to separate premises (residential or commercial) exceed the statutory powers of the community.

Our experience shows that in many cases, resolutions adopted by housing communities are too general, imprecise, and do not refer strictly to defects in the common parts of the property. For example, resolutions contain phrases such as:

• “The resolution was adopted in order to grant the management board of the housing community consent to conclude, on behalf of the housing community, agreements for the assignment of claims to which the owners of premises are entitled against the developer under the warranty and claims for damages in connection with physical defects in the property.”

• “Numerous defects and faults were found in the common areas and residential premises of the building (…)”.

• “The owners of premises forming the housing community agree and authorize the management board of the housing community to conclude agreements with the owners of premises for the assignment of rights and claims on the basis of which the housing community will acquire the rights and claims of the owners of premises against XYZ sp. z o.o. related to defects and physical faults of separate premises and common property,”

The above examples of resolutions authorize the management board to conclude agreements for the assignment of rights and claims also in relation to separate residential premises, and not only in relation to common parts of the property. Meanwhile, the housing community may only pursue claims in relation to the common parts of the property, while claims relating to residential premises are vested in their individual owners. Such errors lead to a conflict between the resolution and Article 3(2) of the Act on the Ownership of Premises and may constitute grounds for its invalidation.

• A practical example from case law:

“Since part of the claim concerned not the common property but a garage constituting the separate property of the persons indicated, there are no grounds for assuming that the co-owners could effectively transfer their warranty (and compensation) claims to the community, whose legal capacity is limited, and therefore can only be the subject of rights and obligations related to the common property” (Supreme Court judgment of March 14, 2013, ref. no. I CSK 379/12, LEX no. 1350237).

“A housing community, even by way of resolutions, may not interfere with the rights of individual owners. Resolutions may only concern common property, and the community is not entitled to adopt resolutions that interfere with the exercise of ownership rights in relation to a separate premises. Interference with the owner’s property rights therefore means that the resolution is contrary to the law” (judgment of the Court of Appeal in Warsaw, 1st Civil Division, of April 26, 2019, file ref. no. I ACa 725/18).

Imposing on owners of premises who do not assign their claims an obligation to compensate the housing community for the amount corresponding to the value of the claims which the community could not pursue due to their failure to transfer them

It is understandable that housing communities are, as a rule, interested in obtaining as many assignments of claims as possible from individual owners of premises to the community, as this increases the value of the claims that the community can enforce against the developer in court proceedings.

In practice, however, it happens that housing communities adopt resolutions imposing on owners of premises who do not assign their claims an obligation to compensate the community for the amount corresponding to the value of claims which the community could not pursue due to their non-transfer. For example:

“The owners of premises forming a housing community decide that in the event of a lawsuit for payment against developer XYZ sp. z o.o. and a ruling in favor of the housing community, the owners of premises who failed or refused to assign their claims to the community will be obliged to supplement the community with the difference between the amount that the community would have obtained if the above-mentioned owners had made the assignment within a time limit enabling the community to obtain the amount corresponding to the value of their claims, which they did not transfer to the community.”

Resolutions formulated in this way appear to be flawed. First of all, they are highly repressive towards apartment owners and violate the basic principles of the functioning of a housing community, in particular the principle of voluntary decision-making by apartment owners regarding the disposal of their property rights.

The main purpose of a housing community is to jointly manage the property and protect the interests of the owners of premises, while maintaining a balance between the rights of individual members and the interests of the community as a whole. Resolutions imposing a financial compensation obligation on owners who have not assigned their claims to the housing community interfere with this balance, transforming a voluntary decision to dispose of property rights into a specific obligation, under penalty of financial sanctions.

It also seems that the adoption of this type of resolution constitutes a form of economic pressure aimed at forcing certain behavior from community members. The mechanism of the resolution boils down to making the absence of negative financial consequences dependent on the owner fulfilling a specific obligation—in this case, assigning claims to the housing community. In practice, this means that the owners of the premises, despite having the full legal right to dispose of their claims, are de facto placed in a situation where failure to assign their claims entails direct financial consequences, in a manner reminiscent of economic coercion.

A resolution formulated in this way may be assessed by the court as contrary to the Act on Ownership of Premises, the principle of autonomy of owners in the disposal of their property rights, and the principle of proportionality of the community’s actions towards individual members. Consequently, it seems that there is a significant likelihood that a resolution formulated in this way is contrary to the law, which may lead to its repeal by the court.

When formulating resolutions concerning claims against developers for the removal of physical defects in a building, housing communities should completely avoid any legal mechanisms that would in any way impose sanctions or financial consequences on owners of premises who have not transferred their claims to the community.

Financing court costs and the costs of legal proceedings against the developer from the housing community’s renovation fund

Another problem may be the method of financing court costs in cases against the developer concerning defects in common areas, which typically include the filing fee, expert witness expenses, and, as is often the case in practice, the remuneration of the attorney handling the case.

A number of court rulings have expressed the legal opinion that the expenses of a housing community related to pursuing a claim against a developer for the removal of physical defects in a building cannot constitute either renovation costs or building maintenance costs. The courts refer to the definition of the term “renovation,” which, according to Article 3(8) of the Construction Law, means “the performance of construction works in an existing building consisting in restoring it to its original condition, not constituting ongoing maintenance, whereby the use of construction products other than those used in the original condition is permitted.”

Consequently, the funds collected by the housing community in the renovation fund should only be used in connection with the performance of such works. The costs associated with pursuing claims against the developer cannot therefore constitute funds to cover “renovation.” In other words, the establishment of a separate fund for renovation purposes within the community, to which members pay advances in the amount determined by the community, is treated in such a way that the funds accumulated therein cannot be disposed of by the community in any other way than in accordance with their intended purpose (e.g., judgment of the Court of Appeal in Szczecin of June 18, 2008, file ref. no. I ACa 119/08).

• A practical example from case law:

“Expenses related to pursuing claims against a developer for the removal of physical defects in a building cannot be treated as costs of renovation or maintenance of the building. For this reason, there are no grounds for financing the court fee referred to in the contested resolution from the funds allocated to the renovation fund, even if their payment would result in a reduction in future building renovation expenses, given that the contractor has removed all identified physical defects in the building.” (judgment of the Court of Appeal in Gdańsk of May 8, 2014, file ref. no. V ACa 837).

However, it should be borne in mind that this issue is not uniformly perceived in case law, and therefore the use of funds from the renovation fund by the housing community for the purposes of conducting proceedings against the developer may not always result in the resolution being repealed. There is also a more “liberal” view in case law, according to which there are no grounds for formulating the thesis that the funds accumulated in the renovation fund may be used exclusively for the “statutory purpose,” i.e., renovations and ongoing maintenance.

The courts recognize that the Act on Ownership of Premises does not impose an obligation to create a renovation fund and does not regulate how the funds accumulated in it are to be spent. As a rule, money from the fund should be spent on renovations and maintenance, but the list of costs of managing common property (Article 14 of the Act on Ownership of Premises) is not exhaustive. In practice, expenses often combine different purposes – they may be related to renovation, modernization, or investment, with the aim of ensuring and maintaining the current condition and improving the functioning of the common property. Therefore, each case requires an individual assessment of whether the allocation of funds is lawful. It is also pointed out that owners may also adopt a broader understanding of the fund (e.g., renovation and modernization), and the funds do not have to be “frozen” exclusively for narrowly understood renovations under the Construction Law.

• A practical example from case law:

“Even if the name of the fund indicated a different purpose (at the time of its creation), ultimately, however, the owners were not restricted by the legislator in terms of the freedom to dispose of the funds entrusted to the community for management. (…) The creation of a renovation and modernization fund by a housing community does not mean that these funds are completely “frozen” for the purposes indicated in the name of the fund and cannot be used for other purposes falling within the scope of Articles 14 and 12 (related to the management and maintenance of common property). The limits of the provisions may be, in principle, proper management and the prohibition of harming a member of the community.” (judgment of the Court of Appeal in Warsaw, 1st Civil Division, of November 16, 2012, file ref. no. I ACa 663/12).

In summary, due to discrepancies in case law, financing court costs from the renovation fund involves a certain risk of the resolution being challenged. It seems that for a housing community, in a situation where it decides to take legal action, a safer solution may be, as suggested in case law, to cover the costs from a special-purpose fund, separate from the renovation or maintenance fund. This solution will reduce the risk of challenging the community’s resolution enabling claims against the developer.

Summary

In the practice of housing communities, there are numerous shortcomings in resolutions concerning claims against developers for defects in common parts of the property. The most common errors include: lack of precision in the scope of the authorization granted to the management board, inclusion of claims extending beyond the common parts, imposing on owners the obligation to compensate for the value of claims in the event of refusal to assign them, and improper financing of court costs from the renovation fund. Resolutions adopted with the above defects may lead to their invalidation by the court and, as a consequence, prevent or hinder the effective pursuit of claims against the developer. Therefore, it is important that when formulating resolutions concerning the pursuit of claims against developers, housing communities precisely define the scope of the management board’s powers, avoid mechanisms imposing financial sanctions on apartment owners, and consistently refer only to the common parts of the property, in accordance with the Act on Ownership of Apartments and the principles of proper community management.