Cooperative Building Associations
Condominiums in the form of associations appeared in Budapest and began to spread in the first decades of the 20th century. This new type of housing was set on its path by a public employee interest group, the Országos Tisztviselő Szövetség (National Association of Officials), in 1907, and the first condominiums were created as cooperative building associations in the wake of this between 1907 and 1914. The defining framework for the spread of condominium formation was cooperative association by public employees, but business enterprises appeared alongside this almost immediately. Already in 1909-1910, banks and corporations involved in building construction joined in the erection of condominiums, but the majority that were built before the First World War were the result of cooperative associations. This new form of ownership was called a condominium association, a building construction association, a condominium joint-ownership association, or simply a condominium.
The basis of cooperative building associations as ownership structures were shares in the business. People became members through the purchase of association shares and the signing of a deed of association. With the formation of the association, the first resolution of the board was established that determined the value of each apartment unit, as well as commercial and other areas, based on their size and location, and original business shares related to the given sections were distributed in proportion to this. The apartments were thus linked to a group of original shares and each apartment was distributed in return for possession of the given number of original shares. The link between the two remained stable in the case of a change of ownership, while the ownership rights could not be separated from membership in the association. If someone wanted to be an owner, they had to join the association. However, the owner of the building in the land registry became the association, which was registered as a corporation and operated in accordance with the provisions of commercial law. The members did not become owners in terms of the given apartment or the entire building and did not appear in the land registry.
Although it did not have a basis in ownership rights, the concept of the connection between the association member and the apartment that they possessed was imbued with the notion of ownership. A condominium unit, or a “perpetual apartment” was contrasted with rental apartments, which were fundamentally defined by the termination of leases and increasing rents. This form of residential ownership was propagated through the promise of permanence and security through having “one’s own home”. However, this was not backed up by clear, legally regulated ownership rights related to each apartment that were entered in the land registry, so the gap between the idea of a condominium and the lack of ownership rights created a gap in the definitional space. The lack of clarity on ownership rights caused uncertainty in understanding the relationship between the association member and the apartment, and led to a host of attempts to come to grips with the existence of this connection in the organization of building associations. This relationship could not be enumerated without a clear legal basis of ownership, and thus was characterized by a variety of interpretations.
Various legal formulas came into use one after another to provide a connection between the association shares purchased by the members and the given apartment, and these in time even existed in parallel alongside one another. The connections between the association members and their apartments were originally enumerated as lease relationships. The first condominium associations initiated by the National Association of Officials in 1907-1908 operated on the basis of the lease relationship. Their goals were to ensure apartment rents that were lower than market rates for their members and that the homes “would be assigned as residences to the members for a low lease amount based on the capital’s regulations on rents”. The apartment had to be utilized in accordance with the association’s rules and the capital’s ordinances on apartment leases.
Different designations existed in the condominiums of the Tűzhely Háztulajdont Szerzők Szövetkezete (Fireplace Home Ownership Acquisition Association), which was in 1909 the second group to join in establishing condominiums. In one of their buildings (32 Ilka Street in the 14th District [7th District at that time]), the relationship between the member and the apartment was enumerated as both a lease and ownership at once. The association assigned the registered apartment to the member for a payment, who then could utilize it according to the capital’s apartment lease ordinance. However, the phrases “the apartment comprising their property” and “the apartment assigned to their ownership” suggested a relationship between the association member and the apartment they were inhabiting that had a stronger character than a lease, while the building in its undivided whole was owned by the association without any kind of division of ownership. On the other hand, the basic rules of their other building (8 Várfok Street in the 1st District) avoided mentioning either a lease relationship or ownership. They only stated that the apartments registered to the association members are ensured as residences in proportion to their shares. In addition to the building rules, the use of the apartment had to follow the city’s apartment lease ordinance in this case as well.
The shift from customary lease relationships is also reflected in the differing determination of the expenses that were to be paid by the members. While existence of a lease payment was not specifically determined in the condominiums of the National Association of Officials, the definition in the buildings of the Fireplace group was included in the substance of the later communal expenses. The association assigned the registered apartments for a lease payment in accordance with the annual costs affecting them. In place of the market rent that would ensure a profit for the building owner, only a fee covering the expense of building maintenance needed to be paid, in consideration of the fact that the building association did not operate on the principle of commercial profit. They even took a further step away from a lease relationship in their building on Várfok Street by referring to the expenses to be paid related to the apartment as being “lease-type fees paid for building maintenance and expenses”.
This relationship took shape in a variety of ways in the building associations of the 1910s as well. For example, the condominium at 8 Ostrom Street in the 1st District was definitely formed on the basis of the principle of leases in 1914, as it talks of the “permanent leases” for the units in its charter. However, interpretation as a lease relationship was not at all exclusive. There were many cases where there was no explicit mention of either a lease or ownership, but instead the units were allocated for a lease amount in accordance with the annual expenses of the apartments and the common rights over them were included in the charter. On the other hand, the charter of the (Alkotás utcai Társasház Szövetkezet) Alkotás Street Condominium Association avoided the concepts of lease and rent, and talked of allocating units as residences in return for an amount paid by the members in accordance with the annual expenses of the apartment. However, when the association decided to lease the apartments to outside parties in 1913 due to the unsuccessful sale of the business shares, they employed a designation of a “simple lease relationship” for this, differentiating it from the legal relationship of the members, which was also enumerated as a lease. In other cases, the clear idea of ownership also appeared. For example, the building association created in 1912 for the property at 8 Tölgyfa Street conceived of the allocation of the units as residences expressly in terms of ownership, and spoke of the member’s “apartment that comprises their property” in the charter. The concept of ownership characterized the charters of the building associations at 65-67 Lenke Road and 5 Fadrusz Street drafted in 1917 and 1918, respectively. The intertwining of the ownership and lease relationships also appeared in the recruitment drives for building associations where ownership of the unit as well as inclusion in the land registry was promised for the purchase of a business share.
This variability continued into the 1920s as well. In those cases where the rights of the association member to the given apartment were not enumerated as ownership, a type that can be stated as being relatively rare, the understanding of the relationship between the member and the apartment continued to exist within a rather broad spectrum. The Új Otthon Társasház Szövetkezet (New Home Condominium Association) at the end of the decade did not particularly deal with the issue, simply just speaking of “ensuring the rights to the defined apartment”. The charter of a building association formed in 1926 on Budafoki Road defined this relationship as the right of usufruct. At the same time, there was no reference to lease relationships in the draft charters from 1923 for the building associations formed from two apartment houses, although these projects were not implemented in the end within the framework of an association. The association shares that had been purchased would have been linked to the ownership rights for a “permanent residential unit” while the association itself would have been the owner entered into the land registry in terms of the entire property. The Öröklakás (Perpetual Apartment) Co. that established building associations in the middle of the 1920s through the subdivision of apartment buildings used a boilerplate charter that was no longer based on lease relationships. The association sold the apartments under advantageous terms to the members, and the members were able to request entry of their incorporeal proportional share in the land registry at their own expense. In addition, these charters provided a far more precise and detailed definition than previous examples on the ownership acquired by the members, as they also touched upon the jointly utilized ownership shares. The actual rights of the association member to the apartment were defined as possession “in-kind”, and the incorporeal proportion of the ownership share was linked to the apartment of the member with the concept of rights “in kind”. In this construct, the unit was not leased from the association, but the incorporeal portion of ownership was projected onto an actual apartment as a kind of right of possession that was connected through the group of business shares.
All of these definitional experiments and the range of terminology suggested that it was not only a basis in ownership rights that was missing, but also a firm, everyday legal framework for interpretation. Starting from the appearance of the designation “perpetual apartment” around 1910, it contained the sense of permanence characteristic of ownership in contrast to the temporary nature of a lease. At the same time, the lack of a single existing legal form of apartment ownership besides lease relationships before the appearance of building associations had a powerful effect on definitional experiments in connection with this. However, it was clearly apparent in these efforts that the interpretation of the connection between the association member and the apartment was moving away from the concept of a lease and towards integration into the idea of ownership.
Common Law Companies
Alongside building associations, a new form of organizing condominiums began to spread at the beginning of the 1920s with the conversion of apartment houses into condominiums. This was in the form of a common law company as an ownership structure that avoided registration with the corporate registry court. Their prevalence is not known either in quantity or over time, but it is certain that there were examples of this before and during the First World War. They differed from the cooperative association form in terms of their ownership and operational frameworks. The associations counted as corporations under the scope of commercial law and the provisions of these laws regulated their operation. Their charters had to comply with the regulations of the law and their establishment had to be entered in the corporate register. In contrast with this, common law companies did not count as corporations, and there was no resulting need to register them with the corporate registry court. In addition, their internal relationships could be defined freely within the context of the company charter with no regulatory requirements.
In terms of ownership rights, a common law company represented a different path from a building association based on the possession of association business shares. The basis for the possession of the apartments was provided by the law on co-ownership, namely, the members of the common law company obtained ownership rights in the land registry as well. As co-owners of the building, they were entered in the land registry by name to the extent of their determined share, and thus appeared as partial owners of the entire property. To do so, the entire building was divided into shares in accordance with the size and quality of the units, similarly to how this was done to determine the proportion of shares in a cooperative association. However, the ownership shares were not sold in the form of association business shares, but as incorporeal proportional shares. The purchasers of the determined incorporeal proportional shares, the apartment owners, genuinely possessed the apartment, in other words the property unit, that was actually designated in the sales contract, while having collective possession of the other parts of the building together with the other owners, employing the concept of undivided joint ownership (“the actual possession of the property represented by undivided joint ownership is shared”). Although this concept of ownership rights is reminiscent of the associational form, entry into the land registry was different. While the association comprised a legal entity as a corporation and could be registered as an owner, a common law company, which was not a corporation, did not count as a legal entity and thus the joint owners, the members of the company, were entered into the land registry records by name as partial owners. However, due to the legal non-existence of individual apartment ownership, the interpretation of ownership had to follow the example of the cooperative association here as well, in the form of incorporeal proportional shares. The ownership rights were not connected to a given apartment, but as theoretical partial shares in the entire building. The relationship to the apartment had to be defined in a manner distinct from legal ownership, as well as ownership as entered in the land register.
The lack of organization as a corporation also had an effect on the operation of the company. In contrast to the cooperative associations, there were no legal regulations for the form of a general assembly, board of directors, or supervisory board as a corporate management body, and so they could manage their affairs according to their agreement. It is known that a few of the apartment houses converted into condominiums at the beginning of the 1920s administered the maintenance and management of the building through a joint building owners’ meeting, a three-member building management committee chosen from amongst the community, and an overseer commissioned by the community.
The efforts to define unit ownership in a similar manner to the cooperative building associations fed on existing concepts in this case as well. The deeds of association with identical wording for the buildings at 81 Budafoki Road and 1 Ferenc Square show the elements of lease relationships that were definitive in the early condominiums. Thus, the utilization of the apartments was only partially based on the rules established by the building management committee, and also had to comply with the apartment lease ordinance of the capital. The community of owners could take action against joint owners that did not pay the common charges in the same manner as a landlord against tenants with unpaid rent. According to the deed of association, the building management committee had the right to terminate the building share of a joint owner such as this with the obligation to move out and then could rent out or sell the apartment to someone else. The amount thereby brought in could then be used to settle the debt in a similar manner to the procedure established in cooperative association buildings.
The following of existing models was also reflected in the use of terminology as identical phrasing recurred. The term “perpetual residential share” tied to the associations and the concept of “incorporeal joint share” connected to the common law companies represented the crystalized forms of the two diverging paths, but the concept of building share was used identically in both the cooperative association and common law company forms. The phrase “perpetual apartment building share” or individually the use of “perpetual apartment” and “building share” as synonyms as well as the equivalence of concepts of “business shares” and “building shares” accompanied reorganization into condominiums in the case of three apartment houses that were planned to be in the form of a cooperative associations but were finally made into common law companies.
However, it is possible to see an understanding of the issue from a new perspective in the case of the apartment house converted into a condominium in the form of a common law company at present-day 21 Rippl-Rónai Street. The deed of association and the sales contracts for the apartments placed emphasis on the ownership relationship between the individual and the community. According to this, the real estate itself represented undivided joint property, and the joint owners (property partners) only divided the actual ownership in the form of incorporeal partial shares. Which part of the property – that is, which apartment – was possessed by the given joint owner – the possessor of the designated incorporeal partial share – was set down in the sales contract. In other words, they differentiated between the ownership right and actual possession, and while the ownership right was directed towards the entire property, possession of the incorporeal portion equated to the actual apartment. The understanding of the duality of ownership rights and actual possession in this manner was quite similar to the text of the association charters employed by the Öröklakas (Perpetual Apartment) Co. starting in 1926. A step forward took place in both cases towards the concept of a perpetual lease by placing the focus on the relationship between the joint, undivided ownership of the building and the individual possession of the separate apartments.
The Condominium Unit as a Sub-Entry in the Land Register: “Institutional Condominiums”
The parallel existence of condominiums organized in differing ways in the middle of the 1920s had an effect on the legal terminology. The basis of the differentiation was provided by differences in ownership. The housing ordinances that governed the regulated housing industry after the First World War and were still in effect ignored the use of the term condominium, which was ambiguous from a legal standpoint, although the expression was generally accepted independent of which type it referred to. However, the term perpetual apartment (condominium unit) was present in the housing ordinances, but only in connection with the apartments in buildings owned by associations or corporations, excluding condominiums that existed as common law companies. Only cooperative association members were affected as owners of perpetual apartments in court rulings, while the joint building owner designation was employed in connection with condominiums existing as common law companies. The restrictions on use were rooted in the two types of ownership forms. While the designation employed in the case of common law companies focused on ownership (that could be entered in the land register), the term perpetual apartment used in connection with cooperative building associations held a meaning in relation to apartment leases and the stability as well as protection from termination of leases and increases in rents that cooperative apartments provided in comparison with rental apartments.
However, a societal demand appeared for ownership rights limited to a single apartment as opposed to an entire building. This was a consequence of the restrictions on capital that could be invested in real estate and the increase in negative experiences related to rental apartments from the regulated housing market during the war. There was an effort to fill the void sensed in terms of ownership rights through the practice of establishing condominiums through existing legal and practical systems. The common law company form in terms of ownership seemingly usually existed in conjunction with joint ownership of lots or apartment houses. However, the essence was provided by the joint owner’s link to the apartment, a connection that was outlined on the model of the cooperative building associations. In this way, the common law company form combined the group of joint building owners with the form of a cooperative association. However, it could not act as a legal entity in contrast with the latter, which represented a serious shortcoming in terms of legal matters concerning ownership or issues of credit. The common law company form, which combined land registry ownership status and the form of an association, was not able to eliminate the fundamental gap in ownership rights. An answer from a higher level than individual practice came in the spring of 1924 with the drafting of the condominium act. The legal concept of apartment ownership thus arrived at the legislative level as a new ownership rights structure.
Act XII of 1924 on condominium ownership created a new form of ownership through apartment ownership that could be entered in the land register. It made it possible to separately enter different free-standing buildings on one lot or the units of one single building – in other words individual apartments – in the land register in the same manner as independent lots. The entry of joint ownership features in the land register took place as sub-entries under the land register entry for the common lot that remained in the land register. The creation of the apartment as an independent land registry category made it possible for apartment ownership to be separately encumbered. The law stipulated that the relationship between the joint owners must be defined in the founding charter, and this must precisely indicate the separate ownership attributes. In other words, it must indicate the owners, their joint ownership shares, and the portion of the building related to the ownership right, as well as the jointly utilized building sections, equipment, and machinery. The condominium was required to appoint a common representative and decide matters through a general meeting operating according to the principle of majority rule. The new ownership rights structure of a condominium fundamentally differed from the accepted cooperative association form, which was reflected in the use of legal terminology. The condominiums formed on the basis of the 1924 law were considered “condominiums in the true sense”, and were also called “institutional condominiums”.
Ágnes Nagy (Translation from Hungarian: Charles Horton)