Circular on Rule Changes for Cooperative Housing

Circular Rule Changes for Cooperative Housing

CIRCULAR: 4/2011 DATE: 31.01.2011 THE CIRCULAR APPLIES TO: Real estate agencies Lawyers with real estate brokerage Persons licensed to conduct real estate brokerage

FINANS TILSYNET (The Norwegian Financial Supervisory Authority) P.O. Box 1187 Sentrum 0107 Oslo

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1 Introduction With effect from 1 January 2011, certain changes and new rules have been introduced that are relevant for the brokerage of cooperative housing. The changes cover the following laws:

The Financial Business Act (Act of 10 June 1988 No. 40) The Sales Act (Act of 3 July 1992 No. 93) The Leasehold Act (Act of 20 December 1996 No. 106) The New Dwellings Act (Act of 13 June 1997 No. 43) The Cooperative Housing Act (Act of 6 June 2003 No. 39) The Real Estate Brokerage Act (Act of 29 June 2007 No. 73)

Section 2 provides an overview of the rule changes. Section 3 provides an overview of the content of the broker's duty to investigate and provide information following the changes, with a main focus on the brokerage of cooperative housing.

2 Overview of Rule Changes

2.1 Establishment/Formation of Cooperative Housing and Duties of the Cooperative Housing (1) A requirement has been introduced for a maximum limit on the cooperative housing's joint debt, meaning that at the time of establishment, this debt must not exceed 75 percent of the total costs in the construction and financing plan. The loan agreement will be invalid for the part that exceeds this limit (Cooperative Housing Act § 2-14).

(2) A requirement has been introduced that all shares in the cooperative must have a proportional distribution between the share of joint debt and equity contributions, without this hindering individual repayment later (IN-arrangement) (Cooperative Housing Act § 2-15).

(3) A requirement has been introduced that the founder of the cooperative housing must inform the buyer of interest and repayment terms, duration, and other terms of significant importance for the repayment of the joint debt before the purchase agreement is concluded (Cooperative Housing Act § 2-16). In addition, this information must appear in the notes to the cooperative housing's annual accounts (Regulation of 30 June 2005 No. 745 § 5 second paragraph no. 9 – with effect from the accounting year 2011). The notes must also provide information on whether individual repayment of the joint debt has been made and an overview of the internal distribution of the joint debt. Furthermore, the cooperative housing has a duty to inform about how much the joint costs will increase for each cooperative share in cases where repayments of the joint debt according to the repayment plan will increase, for example, upon the end of a repayment-free period.

(4) In connection with the cooperative housing's construction and financing plan, authority has been introduced for the Ministry of Local Government and Regional Development to determine which costs and other assumptions must be included in the operating budget. 1 In the plan, it must also be stated how much each shareowner must repay of the joint debt through joint costs and how much each shareowner must finance themselves (Cooperative Housing Act § 2-6 second and fourth paragraphs).

1 The Ministry of Local Government and Regional Development sent out a draft regulation for consultation on 16 December 2010 with a consultation deadline of 15 February 2011.

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(5) It has been codified that the construction and financing plan can only be changed within the limits of the provisions on the maximum limit and distribution of joint debt in §§ 2-14 and 2-15. Changes to equity contributions and the distribution of joint costs can only occur with the consent of the affected shareowners (Cooperative Housing Act § 2-6 fifth paragraph).

(6) It is no longer permitted to establish leasehold relationships on built-up plots when the buildings are primarily to be used for residential purposes (Leasehold Act § 5a). This will in practice prevent leasehold constructions that involve placing the plot in a separate company and leasing it out to a cooperative housing or housing association in connection with the rehabilitation of tenement buildings, etc.

(7) Legal rules have been given regarding protection against loss of joint costs ("security scheme"). The provisions enter into force on 1 January 2013 (Cooperative Housing Act Chapter 5 Section VII), cf. section 2 below.

(8) It is no longer permitted to stipulate in the bylaws that the cooperative housing shall not have a property manager as long as the person establishing the cooperative housing owns more than one-third of the shares in the cooperative housing (Cooperative Housing Act § 8-10).

2.2 Sale of Cooperative Housing Shares

(1) A prohibition has been introduced against selling shares from a professional to someone who cannot own shares according to the rules in the Cooperative Housing Act §§ 4-1 and 4-2. For example, this means that the same person cannot buy two or more shares in the same cooperative housing. Nor can a legal person buy one or more apartments to resell before moving in. In case of violation of the prohibition, the professional seller and/or buyer are liable for damages for the cooperative housing's or shareowner's economic loss (Cooperative Housing Act §§ 2-12a and 12-1).

(2) The requirement for financial business authorization to provide seller credit when selling cooperative housing from a seller who is not a consumer has been clarified (Financial Business Act § 1-2 second paragraph). This means, for example, that a developer without such authorization cannot offer credit in connection with the sale of shares.

(3) Where the purchase agreement is concluded as part of the seller's business activity, the cash consideration and share of joint debt, as well as the sum of these, must appear in the agreement (Sales Act § 1-1a second paragraph and New Dwellings Act § 1a).

(4) Information in the broker's sales prospectus regarding total costs must also include the share of joint debt (Real Estate Brokerage Act § 6-7 second paragraph nos. 12 and 13).

(5) Certain changes have been made to the broker's duty to investigate and provide information in the Real Estate Brokerage Act § 6-7 third and fourth paragraphs (cf. section 3 below).

(6) Forced sale of cooperative housing shares must be conducted through auction sale according to the Enforcement Act Chapter 11 Section III unless the cooperative housing requests sale through an assistant (Cooperative Housing Act § 5-21 third paragraph).

Beyond what follows below, reference is made to the preparatory works2 for the background and more detailed description of the individual changes.

2 Prop. 115 L (2009-2010), Innst. 326 L(2009-2010), lovvedtak 64 (2009-2010).

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3 Broker's Duty to Investigate and Provide Information (Real Estate Brokerage Act § 6-7)

3.1 Brokerage of Shares in Housing Companies The real estate broker's duty to investigate and provide information, including what must appear in the sales prospectus, when brokering shares in housing companies, cf. Real Estate Brokerage Act § 1-2 second paragraph no. 3, covers the following:

JOINT DEBT (third paragraph nos. 1 and 5) Information must be provided about the debt's principal amount, interest conditions, debt duration, and the size of repayments, as well as the duration (time of termination) of any repayment-free period. Furthermore, information must be provided on how the joint debt is distributed among the different shares and whether individual repayment has been made. This information must appear in the cooperative housing's annual accounts, cf. section 2.1 no. (3).

JOINT COSTS (third paragraph nos. 1 and 2) The joint costs allocated to the individual share must be stated as a monthly amount, regardless of whether payment is made, for example, quarterly. Furthermore, information must be provided about other fixed costs associated with this. This can include both one-time costs and ongoing costs billed separately from the ordinary joint costs.

If repayments on the joint debt are not being paid at the time of sale, a calculation must be made indicating monthly joint costs when repayments begin to run. Reference is made in this connection to the change in the regulation on annual accounts, etc., for cooperative housing, cf. section 2.1 no. (3) above. The broker can generally rely on the information and calculations that follow from the notes to the cooperative housing's latest annual accounts, but must investigate whether there are changed assumptions for the calculation at the time of sale, and adjust the calculation accordingly if necessary. The calculation can assume that other cost elements and the interest rate remain unchanged, unless there is information about approved investments and maintenance that result in increased costs for the company, or notice of interest rate increases, etc.

RIGHTS AND OBLIGATIONS OF THE HOUSING COMPANY (third paragraph no. 5) This concerns other rights and obligations beyond what must be reported regarding joint expenses, joint debt, and other fixed costs, cf. the section above. It is assumed that the broker reviews and evaluates the housing company's bylaws, general meeting minutes, board minutes, and any other agreements. An excerpt of matters that may have significance for the transaction must be presented in a clear manner in the sales prospectus. Reference can additionally be made to relevant parts of the housing company's documents attached to the sales prospectus.

FINANCIALS OF THE HOUSING COMPANY (third paragraph no. 6) Information must be provided about significant matters related to the housing company's finances. This presupposes that the broker must obtain and review the company's latest approved budget, latest approved annual accounts, the board's annual report, and the audit report. Matters that may lead to an increase in joint costs will, in the view of Finanstilsynet, always be significant information. It must also appear in the sales prospectus that the buyer can receive the company's budget and accounts from the broker upon request. Alternatively, the documents can follow as attachments to the sales prospectus.

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GENERAL ABOUT THE FORM OF OWNERSHIP: (third paragraph nos. 3 and 5) Information must be provided about the main features of the legal regulation for the current form of ownership. The most common example is the cooperative housing model, regulated by the Cooperative Housing Act.3 The central point is to highlight the main differences from forms of ownership with direct ownership, such as condominiums and housing associations. For example, the cooperative housing model means that the cooperative housing owns the property, while the shareowners own shares in the cooperative housing, which gives the shareowner the right to occupy a specific apartment.

According to the wording of third paragraph no. 3, information must be provided that "the buyer can be held liable for lack of coverage of joint costs and unsold units belonging to the project." This primarily concerns the general risk of the cooperative housing model. The purpose of the provision is to inform the buyer that shareowners do not have personal liability for the company's joint debt, but that the housing company's ongoing expenses must be covered by the shareowners. Lack of payment of joint expenses due to other shareowners' default, or where the housing company holds vacated and unsold shares, must be covered by the other shareowners. In the preparatory works, it is assumed that this information can be included as standard text in real estate brokers' sales prospectuses.4 Additionally, in specific cases, there may be special risk factors related to shareowners' liability for others' joint expenses. In such cases, this must be reported separately in the sales prospectus.

3.2 Special Regarding Security Schemes for Cooperative Housing

The provision in the Real Estate Brokerage Act § 6-7 third paragraph no. 4 is new and is connected to new rules on protection against loss of joint costs in the Cooperative Housing Act Chapter 5 Section VII. The provisions in the Cooperative Housing Act enter into force on 1 January 2013.5 This is due to existing providers' need to adapt to the minimum requirements.6 Since only security schemes that meet the requirements in the Cooperative Housing Act fall under the duty to provide information in the Real Estate Brokerage Act, this provision does not take effect until the provisions in the Cooperative Housing Act with accompanying regulations have entered into force. With the limitations that follow below, this is however not a hindrance to providing information that the cooperative housing has a scheme for protection against loss of joint costs.

A security scheme for cooperative housing according to the Cooperative Housing Act involves taking over the risk the cooperative housing has for lack of coverage of joint costs.7 Today, there are different providers of schemes with this purpose. The fundamental purpose of the adopted regulation is to ensure that each scheme offered involves real security for the cooperative housing and the shareowner.8 The legislator has therefore emphasized that the cooperative housing has a minimum of rights and that the provider has a minimum of capital that enables the provider to cover losses.

The capital requirements are met in that only companies that operate damage insurance or financial businesses can offer security schemes, cf. Cooperative Housing Act § 5-27. The material requirements for the product are given in the regulation9 pursuant to Cooperative Housing Act § 5-28. Among other things, the provider must at least cover the loss a single share causes the cooperative housing in two years.

The loss coverage (security sum) in each accounting year must be at least 15 percent of

3 The provision covers all forms of ownership within the wording of Real Estate Brokerage Act § 1-2 second paragraph no. 3, for example also the share company model and "bond apartments". 4 Cf. Prop 115 L (2009-2010) section 12.12.1 5 Cf. Regulation of 17 December 2010 No. 1661 on entry into force of changes in the Cooperative Housing Act, etc. 6 Cf. note 4 section 12.10.3 7 Cf. Regulation of 15 December 2010 No. 1694 on minimum requirements for security schemes in cooperative housing § 1 8 Cf. note 4 section 12.3.4 9 Cf. note 4. The regulation enters into force on 1 January 2013

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the cooperative housing's total annual joint costs for the previous accounting year and in any case not be lower than four times the National Insurance Scheme's basic amount at the time of the agreement. A deductible can be required up to 1/10 of the National Insurance Scheme's basic amount for each share, limited upwards to 10 percent of the loss coverage.10

In Finanstilsynet's view, a sales statement that the cooperative housing is affiliated with a security scheme could be misleading to the buyer if the specific security scheme does not meet the statutory and regulatory minimum requirements, even if these have not entered into force at the time of sale.

On this basis, it is Finanstilsynet's opinion that if the broker, before the entry into force of the regulation in the Cooperative Housing Act Chapter 5 Section VII – 1 January 2013 – provides information that the cooperative housing is affiliated with a security scheme, Finanstilsynet considers it to follow from the broker's general duty to investigate and provide information,11 as well as the requirements for good brokerage practice, that the broker must also investigate and provide more detailed information about the specific security scheme. In other words, it will not be sufficient for the broker to merely state that the cooperative housing has a security scheme. This must be a scheme that in reality and to a sufficient extent secures the cooperative housing and the individual shareowner against losses due to lack of payment of joint costs.

Finanstilsynet considers it natural that the provisions in the Cooperative Housing Act Chapter 5 Section VII form the basis for evaluating the specific security scheme, even though the provisions have not entered into force. Central in this connection will be information about whether the provider has insurance or financial authorization, any limitations in coverage, and the termination conditions.

Finanstilsynet assumes it would be appropriate if various potential providers of security schemes, in cooperation with the industry associations for real estate brokers, prepare standard information for use in brokers' sales prospectuses during this transition period.

After the entry into force of the regulation in the Cooperative Housing Act Chapter 5 Section VII – 1 January 2013, information must be provided in the sales prospectus about whether the cooperative housing has a security scheme. If so, the information must cover who the provider is, the duration of the agreement, and the termination conditions.

In Finanstilsynet's assessment, it will normally be sufficient for fulfilling the duty to investigate if the broker ensures that the provider of the security scheme has permission to conduct damage insurance or financial business. Fulfillment of the regulatory minimum requirements will, after this point in time, be the responsibility of the insurance company/financial company.

3.3 Brokerage of Condominiums and Co-ownership Shares

According to the Real Estate Brokerage Act § 6-7 fourth paragraph, information must be provided when brokering condominiums and co-ownership shares about:

Monthly joint expenses, as well as joint debt if relevant (third paragraph no. 1). Rights and obligations of the co-ownership (third paragraph no. 5)

10 The product requirements are described in more detail in NOU 2009:17 section 8 11 Cf. Real Estate Brokerage Act §§ 6-7 first paragraph and 6-3 first and second paragraphs

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General about the form of ownership (third paragraph no. 5). Significant information about the co-ownership's budget and accounts (third paragraph no. 6).

Reference is made to the review of the relevant matters above in section 3.1 which applies correspondingly.

3.4 Brokerage of Company Shares

When brokering company shares according to the Real Estate Brokerage Act § 1-2 second paragraph no. 4, the sales prospectus must contain significant information about the company's budget and accounts as well as information that these documents are available with the broker.

Eirik Bunæs Wilhelm Mohn Grøstad

Contact Persons: Senior Advisor Eva Marie Hansen, tel. 22 93 97 75, email: eva.marie.hansen@finanstilsynet.no Supervisory Advisor Anne-Kari Tuv, tel. 22 93 98 04, email: anne-kari.tuv@finanstilsynet.no

Attachment: ACT 2010-09-03 No 54: Act on Changes in the Cooperative Housing Act, etc.

FINANS TILSYNET P.O. Box 1187 Sentrum 0107 Oslo POST@FINANSTILSYNET.NO WWW.FINANSTILSYNET.NO