The right way of forming apartment owners' associations

FLAT OWNERS' CONUNDRUM

Apartment owners’ association registration has been one of the most debated subjects among home buyers in Bengaluru for the last two-three years. Many of them are working towards getting more clarity and directions from the Karnataka government.

As per a recent response from the legal department of the Karnataka government given under the Right to Information Act, apartment associations can be registered as either a co-operative society or as a company, as per section 10 of the Karnataka Ownership Flats Act 1972 (KOFA 1972) which says, “promoter (builder) to take steps for formation of co-operative society or company”.

This clarity was necessary. There are many apartment owners’ associations registered under Karnataka Societies Registrations Act 1960 which are not body corporate associations.

It means they are not a society that can hold the property, has the power to enter into contracts and can sue or to be sued in the name of the association in courts. The body corporate helps them in protecting the owners’ rights, better operations and efficient maintenance tracking. Some examples are members of managing committees personally being held responsible for lift accidents or sewage treatment plants mismanagement in the absence of body corporate associations or society.

So, what is the confusion that made associations go for the wrong laws?

Understanding the law

In Karnataka, three acts have been used to register apartment owner associations.

1. The Karnataka Societies Registration Act, 1960 (KSRA)

2. The Karnataka Co-operative Societies Act, 1959 (KCSA)

3. The Companies Act, 2013 (CA)

The Karnataka Societies Registration Act, 1960 (KSRA)

The main purpose of the act is to provide for the registration of literary, scientific, charitable, and other societies. The societies are established under this Act, to promote charity, education, science, literature, fine arts, instruction and diffusion of knowledge relating to commerce or industry or of any other useful knowledge, political education, libraries or reading rooms for public use, public museums and art galleries, conservation and use of natural resources and scarce infrastructural resources like land, power, water, forest and infrastructural facilities, the collection of natural history and many other purposes. The state government can also change these from time to time.

However, the act has been wrongly used to form societies that collect the maintenance and run apartment owners’ associations in Karnataka. The Registrar of co-operative Societies had ordered on November 30, 2018, that the apartment owners association should not be registered under the KSRA.

There is substantial money in the corpus fund collected, and there will be funds in the maintenance account. These cannot be shared among the flat owners in future if there is a situation where a portion of the property (land) gets acquired by the government for infrastructure-related issues, the compensation receivables cannot be distributed among owners or members if the money gets deposited in the association account. Section 23 of the KSRA bars members of the association from getting profits.

The Karnataka Co-operative Societies Act, 1959 (KCSA)

This act governs the voluntary formation, autonomous functioning, democratic control, and professional management of co-operative societies in Karnataka. Societies with the objective of promoting the economic interests or general welfare of their members or of the public in accordance with co-operative principles or a co-operative society can be registered under this act.

There are many apartment owners’ associations registered and operating as co-operative societies. The advantage of registering apartment owners’ associations under this act is, the society becomes a body corporate with a certificate of registration from the registrar of co-operative societies and the power to hold property, enter into contracts, file and defend legal proceedings and do everything necessary for the purposes for which the society was constituted.

Every apartment owner’s co-operative society should make its bylaws in accordance with the provisions of the co-operative Societies Act which can be amended as needed, as per the provisions of the Act.

The members of the apartment co-operative societies will have shares in the society in accordance with the undivided share of interest in the apartment. The shares will get transferred to new flat owners as and when the flat gets sold.

If the promoters create apartment owners’ co-operative societies, they will be compliant with section 10 of the KOFA 1972. It helps the promoters to comply with section 17 of the Real Estate Regulatory Authority (RERA) Act for the transfer of common areas to the association of allottees.

Members of the apartment owner’s co-operative societies will have access to the books, information and accounts of the co-operative society. They cannot exercise rights till due payment of maintenance is made to the society. This helps society in the effective management of maintenance collection and operations of the apartments.

However, there are some shortcomings of the act with respect to apartment owners’ co-operative society which requires policymakers to amend the act. They are:

1) Membership: If a person is found to be a member of two or more co-operative societies carrying similar business, it’s obligatory on his part to retain membership in any one society of his choice. This may be suitable for dairy and financial co-operative societies but not suitable for apartment owners’ co-operative societies as flat owners may own multiple flats in various apartments and will have to be a member of such apartment societies.

2) RERA compliance: The minimum number of flat owners required to form an apartment owner’s co-operative society is 20. This needs to be amended to eight because RERA registration is applicable to apartments having eight flats. Accordingly, the managing committee members’ minimum number is to be reduced suitably (7 from 11).

3) Tenure: The tenure of the managing committee of a co-operative society is fixed at 5 years. This needs to be reduced appropriately (2-3 years) considering the number of floating population in apartments.

4) Election process: At present, the government appoints a person who has been an officer of the rank of Principal Secretary or Secretary to the state government to be a Co-operative Election Commissioner who will hold the office for a term of five years. The cost of conducting elections including the payment of travelling, living expenses and remuneration to the persons appointed to perform the election duties are mandated to be borne by the co-operative societies. This becomes an additional burden for them.

The policymakers need to amend this to enable co-operative societies to conduct the elections in-house without official intervention. In case of problems or escalations by members, Co-operative Election Commissioner or Registrar of Co-operative Societies can enable the election process within the societies.

5) Initial share capital: The Registrar of Co-operative Societies needs to release a model bylaw for registration of apartment owner’s co-operative society with simplified versions of rules and with an initial share capital of Rs 1,000 per flat so that all apartment owners get a standard bylaw that can be adopted for their apartment societies.

The Companies Act, 2013:

As per section 10 of Karnataka Ownership Flats Act 1972 (KOFA 1972), apartment owners’ associations can be registered as a co-operative society or as a company. A company can be formed under the Companies Act 2013 (CA) by seven or more persons (public company), or two or more persons (private company). Each flat owner is to become a member of the company and will own shares equivalent to his or her undivided share of interest in the apartment. The company registered under CA becomes a body corporate which can hold the title and represent its members legally.

Here also there is a problem. The maximum number of members in a private limited company is 200 which becomes a constraint for apartments where the number of flat owners is more than 200.

Also, the apartment owners’ company should not be registered under section 8 of the CA where the purpose is charitable in nature.

What next, after clarity?

Considering all three acts which are in use to register the associations, the flat owners need to exercise caution while choosing the right act for their associations. As explained earlier, as per an RTI reply from the Karnataka government’s legal department, flat owners can register the association under the Karnataka Co-operative Societies Act 1959 or under Company Act 2013 as per section 10 of KOFA 1972.

After RERA 2016 was enacted in Karnataka in 2017, every promoter is expected to enable the formation of an association of allottees to transfer the common areas as per section 17 of the RERA Act which says, “the promoter shall execute a registered conveyance deed in favour of the allottee along with the undivided proportionate title in the common areas to the association of the allottees.”

Unfortunately, RERA Karnataka or the Karnataka government have not released any gazette notifications, orders or circulars to give directions to the promoters who have registered their projects under RERA, declaring the competent authority to register the apartment owners association.

PEOPLE-SPEAK

Builders construct and sell the apartments, without transferring the property title to the apartment owners. Not transferring the title of the property has led to not knowing the actual status of the building and whether the builder has complied with all legal requirements or not. Obtaining all statutory clearances is the builder's obligation. Unless apartment owners obtain conveyance, they will not come to know the lacuna. There are numerous issues apartment owners face today: Ownership of the property, maintenance, mismanagement and accountability to various statutory authorities and accountability of the builders. To obtain the collective conveyance of the land and the building, the apartment owners need to have an association, which is a body corporate. A body corporate is a company under the Companies Act or a cooperative society under KSCA 1959. A special chapter or amendment in the Co-operative Society Act will remove all hindrances faced by apartment owners.

Anil Kalgi,

Founder member, Bangalore City Flat Owners Welfare Association

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To ensure proper conveyance of title and ownership to apartment owners, the following are some of the key issues to be addressed: 1) Karnataka registration rules should be modified to include registration of conveyance deed of individual apartment units too 2) Encumbrance records of apartment units should be properly recorded 3) Certificate of acceptance/registration to be issued to apartment buildings upon registration 4) Strict action to be taken against builders who do not register the association, architects who issue faulty completion certificates, officials who register conveyance deeds without completion/occupancy certificates.

Srikanth Narasimhan,

Founder member, Bangalore Apartment Federation