Way owners’ association may take out high loan

It may also be consistent with proper management for the homeowners association to take out a long-term, large loan.

This clarification was made by the Federal Court of Justice (BGH) in the case of a homeowners' association consisting of 201 units. This had decided in an owners' meeting to renovate the facade with eligible thermal insulation. The cost was approx. 2 mio. EUR. This should include a KfW subsidized loan of approx. 1.3 million. EUR to be taken out with a term of 10 years. The remaining amount should be financed through the maintenance reserve fund. A condominium owner filed an action to challenge the resolution.

The Federal Court of Justice (BGH) has ruled that even the taking out of a long-term, large loan by the homeowners' association can be in accordance with proper management practice. However, whether this is the case cannot be determined in general, but only on the basis of the specific circumstances of the individual case. The interests of all parties must be weighed up. In this case, the decision to borrow had not been proper.

The Condominium Act does not prohibit borrowing by the condominium owners' association. However, the special liability risk must be taken into account. In the case of payment defaults, the deficits would have to be compensated for by higher contributions from the other apartment owners or by a special levy. If a project is financed by a special assessment, it is usually known with reasonable certainty whether a default is likely to occur. In the case of a loan, on the other hand, the risk of default can only be estimated to a very limited extent. Reliable predictions about the creditworthiness of apartment owners are not possible, if only because of the usually long term of the loan. There may also be changes in ownership. Because of this liability risk, you should exercise caution when deciding whether to finance an operation with a large long-term loan. Whether it complies with proper management can only be determined after careful consideration of all relevant circumstances of the individual case and taking into account the all-round interests of the condominium owners concerned.

The following points of view are particularly important:

  • It depends essentially on the purpose of the loan. This should primarily be thought of as maintenance or. Thinking about modernization measures. The more urgent an action, the more likely other disadvantages of loan financing would recede in the weighing process.
  • Also of importance is the possibility of raising the necessary funds by drawing on the maintenance reserve and charging a special levy. Borrowing and special assessment would have to be weighed against each other.
  • A loan financing comes in particular into consideration, if the special contribution the individual apartment owners financially strongly burdened or even the ability of lower-income apartment owners overtaxed.
  • Also relevant, he said, is the amount of the loan in relation to the number of homeowners, the terms of the loan, the term of the loan and the repayment terms.

Finally, the decision to take out a loan would also have to meet certain requirements. He would have to provide information about the measure to be financed, the amount of the loan, its term, the amount of the interest rate or. Of the interest rate not to exceed included. He would also have to show whether the repayment installments are set up so that the loan is paid off at the end of the term. Furthermore, because the risk of insolvency of individual condominium owners is shifted into the future, the condominium owners' obligation to make additional contributions in the internal relationship must have been discussed in the condominium owners' meeting. This should be documented in the minutes of the owners' meeting.

On this point, the disputed resolution does not comply with proper management practices. It cannot be inferred from the minutes of the owners' meeting that information was provided about the risk of additional funding liability. Therefore, let the decision be rescinded.

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