Apartment Living and Recovery of Common Expenses

Introduction

Default in contribution to the common expenses is a very common phenomenon in apartment living. Tackling this issue is a major challenge faced by owners’ associations, managing the common properties. Defaults coupled with the substantial time and cost for recovery, would affect the very operation of these associations. There is no doubt that these bad debts would interfere with the apartment ownership and its value.

The maintenance of the common properties has a direct nexus to the determination of the value of individual apartments. The value includes the value upon sale or the rental value. While good maintenance enhances the value, the bad would depreciate it. When looking at apartment ownership as an investment, such a depreciation is the last thing that the owner wishes to hear.

Even though the State passed a special law[ii] to preserve the legal status of apartment ownership and for effective management of the common properties, it was not implemented, so far. The reasons for the non-implementation are not our topic of discussion, but its impact on apartment living.

A legal infrastructure for Apartment Ownership

Apartment living in the state started during the early 80’s. Even though there has been substantial progress in construction techniques ever since, the legal infrastructure however continues to be its primitive stage. Resultantly, disputes and discontent is rampant among stakeholders.

The current system of creating legal entities, in the nature of charitable societies, without any manner of right over the common properties, proved to be ineffective. A major concern continues to be the rising difficulties in recovery of share of common expenses in maintaining common properties. Default in the payment of the share is the rule, while prompt payment is an exception. The charitable societies often resort to steps including preventing the defaulter from using the common facilities like:

o Refusing admission to clubhouses, gym, swimming pool etc..

o Refusing waste disposal,

o Imposing penal interest for defaulted payments including application of compound interest, and such other measures

Most of such measures does not have any legal backing. The apartment owners, have superior rights when compared to the association of owners. It follows that the association's actions, restraining the enjoyment of the common properties and facilities, are often illegal.

Remedies of the Association in case of default

The legal consequences can include taking disciplinary actions, violating the terms of the byelaws, for the failure of the defaluting member to pay share of common expences may terminate him from primary membership. Any disciplinary action or even termination is not a substitute for an actual recovery.

Another option available for the Association, is to resort to a recovery suit invoking chapter V of the Contract Act 1872, even in the absence of a contract between the association and the members for providing common property maintenance. A defaulting apartment owner may be treated as someone enjoying the benefits of the association's non-gratuitous acts, which obliges him to compensate.

The association, in order to recover the compensation for providing maintenance to common properties, may have to institute independent suits against defaulters. However, enforcement of decisions to charge penal interest would be near impossible. Most of the time, this legal route may prove uneconomic due to the cost of litigation involved, when compared to the amounts to be recovered.

Read the article Undoing the Wrongs on the Apartment Owners after 40 years

Assessment, Charging, and Recovery of share of common expenses under Act 5 of 1984[iii]

Unlike in the case of an association formed under the laws relating to charitable societies, Act 5 of 1984, has made provision for assessment and to charge the assessed and unpaid share of common expenses over the defaulting apartment. Assessment may be made per the proportionate undivided interest in the common properties as specified in the declaration.

The Association of Apartment Owners is competent to assess the share of common expenses[iv]. Such an assessment can be made in accordance with the bylaws of the Association[v]. In case there is a provision for charging penal interest for delay in payment of common expenses, the Association may be justified in making an assessment, including penal interest, as well.

All sums assessed by the Association of Apartment Owners but unpaid for the share of the common expenses chargeable to any apartment shall constitute a charge on such apartment and shall have priority over all other charges[vi], except government dues and the sums unpaid on the first mortgage of the apartment. There is no fun in the provision, if such a charging does not lead to the actual recovery and a decrease in the bad debts of the association.

The application of the Act 5 of 1984 requires a registration of a prescribed declaration[vii]. The Kerala High Court has ordered that “the Inspector General of Registration, Kerala shall direct all Sub Registrars in the State of Kerala to file copy in Book-1 under Section 51 of the Registration Act, 1908 and follow the provisions in the Act/Rules for registration…”[viii]. The State Government appears to have issued necessary circulars in the regard, latter.

An entry in the encumbrance certificate, issued by the Sub Registry, regarding the submission of the property to Act 4 of 1984 is one of the consequences of registration of declaration. Consequently, the apartment owners may have to get a suitable certificate indicating no default from the owners’ association at the time of alienation or encumbering the apartment.

For the purpose of recovery, let us consult Chapter IV of the Transfer of Property Act 1882 to understand the consequences of the creation of a statutory charge. By operation of law, the apartment of the defaulting owner is made security for the payment of the common expenses and therefore the provisions of simple mortgage is appliable to a statutory charge also[ix]. Then the Owners’ Association will become entitled to sell the apartment of the defaulting owner through the process of court and to apply the proceeds of the sale towards the payments due[x]. These provisions operate as a deterrent against the default in the contribution of common expenses, bring the owners association some legitimacy in their actions, could ensure proper maintenance of the common properties.

Conclusion

There cannot be any doubt that the quality of apartment living would improve only by the application of Act 5 of 1984. The current system of charitable associations, rendering common property maintenance and attempting to recover dues has proved to be ineffective. On the other hand, Act 5 of 1984, offers a solid deterrence to the defaulting owners and would ensure effective recovery of dues.

Through effective implementation of the Act, the bad debts due to the association can not only be reduced but also improve the quality of common property maintenance of apartment buildings. Resultantly the quality of apartment living can be enhanced and the value of the apartment ownership would naturally appreciate.

[i] This Article has a contextual relevance, as the Kerala High Court has passed an interim order directing the State Government to implement the Kerala Apartment Ownership Act 1983. Read the blog for more information: https://advjohnsongomez.blogspot.com/2024/12/undoing-wrong-on-apartment-owners-in.html

[ii] Act 5 of 2024 - The kerala Apartment Ownership Act 1983

[iii] Act 5 of 1984 - The Kerala Apartment Ownership Act 1983

[iv] Section 19 of Act 5 of 1984

[v] Section16 (2) (k) of Act 5 of 1984

[vi] Section 19 of Act 5 of 1984

[vii] Section 2 of Act 5 of 1984

[viii] Judgment of the Kerala High Court dated 13.11.2014 in WP C No. 15790 of 2006 in JK Pearl Apartment Owners Association vs. State of Kerala

[ix] Section 100 of the Transfer of Property Act 1882

[x] Section 58(b) of the Transfer of Property Act 1882

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