The difference between a cooperative and a privately owned apartment

Quick overview

• In the case of personal ownership you buy a housing unit, in the case of a cooperative apartment you buy a cooperative share.
• Personal ownership is registered in the Land Registry, the transfer of a cooperative share is usually not.
• Co-operative flats can be cheaper but are harder to finance with a mortgage.
• For a co-operative flat, always check the by-laws, the co-operative’s debts, the annuity and the rules for renting.
• For both options, a secure contract and escrow for the purchase price are worthwhile.

Thinking of buying a co-op or freehold? Have your contract and the legal status of the property checked before you sign – you’ll avoid problems with conveyancing, financing and hidden restrictions.

The most important difference between cooperative and private ownership, and many cooperative owners do not fully realize this, is that in a cooperative apartment they are only tenants of the apartment, not owners. The co-operative owns the whole building and only the co-operative exercises the right of ownership. Under certain (albeit very exceptional) conditions, a member of the cooperative can even have his or her lease terminated and be expelled from the cooperative, thus losing his or her apartment.

The form of ownership is also related to the procedure for sale, because while in the case of a privately owned apartment the new owner acquires the apartment unit directly, in the case of a cooperative apartment the object of sale is the membership rights in the housing cooperative.

This is where most errors in contracts arise. In the case of a cooperative apartment, the contract must correctly describe the cooperative share being transferred, the right to rent, the conditions of transfer according to the statutes and the moment of effectiveness against the cooperative. If you are unsure, have the condominium transfer agreement reviewed by an attorney before signing.

There is also a rather pleasant advantage associated with this, as there is no need to change the ownership rights in the Land Registrywhen the owner of the unit itself does not change .

Example from law practice: the client, Mr. Hrouda from Prague 7, has been suing his cooperative for several years for wrongful exclusion. The cooperative tried to exclude him because he had rented an apartment, which he had consented to. Fortunately for him, however, membership is protected and the cooperative must follow a fairly bound procedure to successfully expel a member and give the member an opportunity to defend himself at a membership meeting. And if even that helps, he can go to court as in this case. A member who is finally expelled is entitled to a so-called settlement share.

Another extreme case is the bankruptcy of a cooperative caused by errors in its management. The consequence can be the loss of the entire cooperative’s assets and their sale at auction. However, it should be added here that the owners’ association can also end up in insolvency and the neighbours are actually liable for each other’s debts.

What are the advantages and disadvantages of a condominium?

Experts in the real estate market claim that cooperative flats are sold at a price that is up to units or even tens of percent lower than privately owned flats, so it is possible to get one cheaper.

In fact,the transfer of a cooperative flat is easier than a classic transfer of a privately owned flat. It happens between the buyer, the seller and the housing association. There is therefore no need for any registration in the Land Registry. It is not recorded anywhere, only in the cooperative’s database.

What we encounter with co-operative flats is that the buyer mainly deals with the price, but only finds out the restrictions in the statutes too late. In one of the cases audited, the buyer wanted to rent the flat out on a short-term basis after the purchase, but the cooperative’s statutes practically ruled this out without prior approval. A legal check before signing helped him to negotiate different terms and avoid a dispute with the cooperative.

On the other hand, the members of the cooperative have akind of hybrid status between the owner of the flat and a classic tenant. Compared to the owner, they have slightly fewer rights, but more rights compared to a regular tenant. It can also be complicated to acquire co-operative housing in co-ownership. It cannot be said that one type of ownership is universally preferable.

It is therefore not a bad idea to consult a solicitor before buying, ideally before signing a reservation contract. For a co-operative flat, we will check the statutes, the annuity, the debts of the co-operative, the conditions of transfer and whether the flat can be rented out or later transferred to personal ownership.

While under the legislation in force until the end of 2013 it was not possible for a cooperative share to be co-owned by more than one person, except for spouses, the new Corporations Act allows co-ownership. In practice, this means that two or more persons can acquire a cooperative share in joint ownership on the basis of a purchase agreement, or inherit or receive it as a gift.

All co-owners of such a share, and thus indirectly of the apartment, then become joint members in the housing cooperative. However, to make it less simple, the law gives individual housing associations the option to prohibit co-ownership of cooperative flats in their statutes.

While it may have appeared that co-operative ownership was on the wane, it may instead be making a comeback. From the West comes the fashion for so-called co-housing, a situation where a group of friends or acquaintances renovate an old house together and divide it into flats, while also sharing rooms or perhaps a swimming pool. Co-operative ownership can be used for just this purpose.

What to look out for before buying a condominium

Before buying a cooperative apartment, make sure you see not only the contract on the transfer of the cooperative share, but also the documents of the cooperative itself. A low price can be an advantage, but also a signal of risk.

Check especially:

• the statutes of the housing association,
• whether there are any debts on the share or to the cooperative,
• the amount of the annuity and the conditions for its repayment,
• whether it is possible to transfer the flat to private ownership,
• the rules for renting or subletting the flat,
• the conditions for reconstruction,
• whether the cooperative restricts the transfer of the share,
• the management of the cooperative and any loans.

If you do not understand any of the points, do not sign the reservation agreement or the share transfer agreement without legal verification. In the case of a cooperative apartment, it is often not only the contract itself that decides, but also the statutes and internal rules of the cooperative.

What are the advantages of personal ownership?

Personal ownership as a legal concept does not exist. It is classic direct ownership and this term is used precisely to distinguish it from cooperative ‘ownership’. One of the reasons for the preference for such personal ownership is that the value of the apartment is higher than that of cooperative ownership. The reason for this is prosaic – the flat can be disposed of freely.

Its owner can rent out the flat to a third party without any restrictions, without the consent of the “representatives” in the building. He is also free to mortgage or otherwise encumber the apartment, for example to finance the purchase of another apartment with a mortgage or a large loan for his company. All this is virtually unattainable for a co-operative owner. It is up to the bylaws of the cooperative to determine what conditions it sets for pledging a share, or whether it should be excluded altogether.

Currently, this difference directly affects, for example, so-called short-term rentals, where owners make their apartments available to tourists and various travellers using modern applications such as Airbnb.

In addition, it should be noted that only the owner of the flat decides whether any structural alterations or renovations are to be carried out in the flat, so any major alterations in a cooperative flat are subject to the consent of the cooperative. If a person wants to have a non-traditional modern living, there are a few more obstacles in a cooperative apartment.

Always make use of storage

A solid condominium share transfer agreement always provides for the protection of both parties, so it is a good idea to pay the purchase price for a condominium share transfer out of escrow just as you would for a personally owned condo. The purchase price should be paid out of escrow only after the contract has entered into force, i.e. has legal effect.

However, this is not the moment of signing, as people often mistakenly think. It only takes effect when the co-operative is notified. This is best evidenced by the stamp and signature of the person responsible – usually two members of the cooperative’s board of directors. The ideal is if they not only acknowledge delivery but also agree to the transfer of the lease of the apartment.

Thus, everything can be done in one day and there is no need to wait for long weeks as for a change in the Land Registry, where registration takes at least 20 days according to the law. Still, it is worth not skipping the escrow. In case of a problem, it can save the funds intended for the purchase price.

Therefore, do not send the purchase price directly to the seller without clearly set conditions. Attorney escrow can protect both the buyer and the seller – the money is only paid when the pre-agreed legal conditions of transfer are met.

We recommend that both parties to the transfer keep the confirmed purchase agreement well in safe custody and also enter into a new lease for the apartment as soon as possible so that everything is set in stone.

Summary

A co-operative flat and a freehold flat differ mainly in what you buy and what rights you get to the flat. With freehold ownership, you are the owner of the unit registered in the Land Registry and can usually dispose of the flat more freely. With a co-operative flat, you are buying a co-operative share, with which the right to rent is attached, so you have to deal more with the co-operative’s statutes, consent to transfer, rules for renting, renovations, annuity and management of the co-operative. A co-operative flat may be cheaper and the transfer administratively easier, but it carries different legal and financial risks. For both options, it pays not to underestimate the checking of contracts, the legal status of the flat and the safe custody of the purchase price.

This article was prepared for Lidové noviny’s “Law & Housing” series. See also other articles from the series:

1. What to watch out for when buying a property
2. How to get a mortgage
3. What to check before buying a property
4. Who pays the property transfer tax and how?
5. What should be included in a property purchase contract
6. The most common mistakes when drafting a proposal to the Land Registry
7. Buying a property from a developer
8. Keeping the purchase price when buying a property
9. The difference between a condominium and a freehold
10. What is an annuity?
11. How to properly gift a property
12. What is the purpose of an easement or servitude?
13. Making a will and settling an estate
14. What is a collation
15. What shouldn’t be missing from a lease agreement
16. When rent increases can be made
17. Termination of the lease
18. Agreement to end the tenancy
19. How to draw up a work contract with a tradesman
20. Hidden defects and cancellation of a work contract
21. When do you need planning permission to renovate a property?
22. Home Rules
23. What does serving on a condominium board entail?
24. Why not underestimate the bylaws in a condominium
25. Common areas in a block of flats
26. What is involved in refurbishing a block of flats
27. Can a condominium or housing association go into debt?
28. How to renovate a house or cottage
29. What to watch out for when dealing with a construction “company”?
30. Building a house on a “green field”
31. How to remove land from the agricultural fund