About 40% of all apartments in Sweden are tenant-owned by tenant owners' associations. When buying a tenant-owned apartment, the buyer becomes a member of, and entitled to a share in, the association, which means they obtain a right to use one of the association's tenant-owned apartments.
Agreements known as prior agreements, relating to newly built tenant-owned apartments, have been the focus of some interest in Sweden recently. A prior agreement is normally signed before the building is even constructed and is followed by a grant agreement under which ownership of the apartment is transferred to the buyer. The discussions regard the validity of the prior agreement and the circumstances in which the pre-signatory buyer may withdraw from it. These issues are topical at the moment because of price reductions on the housing market, but also because of regulatory changes making it more difficult for buyers of tenant-owned apartments to finance such purchases.
This article discusses some of the issues surrounding prior agreements, which have recently been the subject of court proceedings. It does not attempt to provide an exhaustive account of the regulations governing prior agreements.
Regulation of prior agreements
A prior agreement is a form of contract regulated by law, where the tenant owners' association and the future holder of a tenant-owned apartment agree on a future acquisition of a tenant-owned apartment. The relevant regulation is found in Chapter 5 of the Swedish Tenant Owner Act (BrL; Sw. Bostadsrattslagen (1991:614)). The prior agreement is binding on both the association and the pre-signatory buyer. The association is obliged to grant the pre-signatory buyer membership in the association and transfer the tenant-owner rights of the apartment to the buyer. The pre-signatory buyer, on the other hand, is obliged to acquire the apartment and assume the tenant-owner rights (5:1 BrL). From the association's point of view, one advantage of the prior agreement is the possibility of tying housing applicants in at an early stage and financing the project through the advance payments. The prior agreement allows the buyer to purchase a particular apartment and, where applicable, order supplementary fittings and have a say in the design of the apartment.
There are few formal requirements for a prior agreement but they are not entirely uncomplicated. 5:3 BrL states that a prior agreement must be executed in writing. The contract must include: the name of the parties, the apartment, estimated date on which the grant agreement will be signed, the estimated fees and, where applicable, the amount to be paid in advance. The estimated fees are based on a cost calculation drafted by the board and reviewed by two certifiers. This cost calculation shall be available to the pre-signatory buyers before the prior agreement is signed. A prior agreement which does not meet the requirements laid out in 5:3 BrL is invalid.
In certain cases, the pre-signatory buyer is entitled to withdraw from the prior agreement after submitting a notice of termination (5:8 BrL), as follows:
- if the buyer does not obtain the tenant-owner right to the apartment on the day they should be able to move in to the apartment (at the latest);
- if, due to the association's negligence, the buyer does not obtain the tenant-owner right to the apartment within a reasonable time from the estimated date the buyer was due to have obtained the tenant-owner right; and
- if, on the day the buyer obtains the tenant-owner right, the fees are substantially higher than the amount stated in the prior agreement and the pre-signatory buyer terminates the contract within a specified time.
Points to note
Time for entering into a grant agreement
One of the formal requirements in 5:3 BrL is the obligation to state the estimated point in time at which the grant agreement shall be entered into. Before this happens, the pre-signatory buyer is granted membership in the association. The grant agreement governs the payment of the price of the tenant-owned apartment. Normally a proportion of the total amount is paid when the grant agreement is signed and the rest when the buyer is given access to the apartment.
The meaning and consequences of this formal requirement have been hotly debated. When the current regulations came into force in 1991, no particular discussions of how the estimated point in time should be expressed in the prior agreement took place. However, it was clear that the information is important in relation to the pre-signatory buyer's right to terminate the contract, if the association is tardy in granting possession of the apartment.
In a case from March 7, 2019, regarding a dispute between two pre-signatory buyers and the tenant owners' association HSB Brf Tollare Strand, the District Court of Stockholm examined whether the preliminary point in time for granting of the apartment, which was stated to be “from quarter two, 2019 until quarter three, 2019” met the formal requirements. In the preparatory work for BrL the terms “estimated point in time” and “estimated time” were both used. When considering common practice regarding the interpretation of other statutory formal requirements, the District Court came to the conclusion that the objective of the formal requirement is of great importance. According to the District Court, one of the objectives of the current regulation in 5:8 BrL is to establish the starting point when assessing any delay. The District Court found that even if one interprets the regulation very widely, the above mentioned objective is deemed to have been reached. The District Court also considered whether the phrase used was reasonable, and concluded that an estimated point in time, which covers a longer time frame than one day or a couple of weeks, does not make the prior agreement invalid. Furthermore, the District Court determined that not even the fact that the point in time is preliminary will invalidate the agreement. This decision is currently under appeal.
In another decision from the District Court of Stockholm, handed down on May 21, 2019, regarding a dispute between two pre-signatory buyers and the tenant owners' association Brf West Side Solna, the District Court ruled that the use of the terms "time" and "time point" in the preparatory work to BrL, indicates that there is no formal requirement for an exact date. However, the time must be sufficiently specified so that the pre-signatory buyer is able to establish whether or not the association is acting timeously. The District Court also noted that the regulations governing prior agreements are, to a certain degree, classified as consumer law, which should be taken into consideration when making the assessment.
Has the granting of the apartment been made within a reasonable time?
A pre-signatory buyer is, as stated above, in certain situations listed in the Tenant Owner Act, entitled to withdraw from the prior agreement after giving notice of termination. One of these situations is if the granting of the apartment is not made within a reasonable time from the estimated point in time for granting of the apartment and the reason for the delay is attributable to the association.
In the decision regarding the dispute between the two pre-signatory buyers and HSB Brf Tollare Strand mentioned above, the District Court of Stockholm noted, in its evaluation of the formal requirements regarding the prior agreement and the establishment of a starting point for the delay assessment in terms of 5:8 BrL, that the last day in a time interval must be considered to be the starting point for the delay assessment.
In its decision of April 29, 2019, the District Court of Nacka, in a dispute between two pre-signatory buyers and the tenant owners' association Brf Sodra Hallmarken argued that the pre-signatory buyers were entitled to withdraw from the prior agreement, since the granting of the apartment was delayed by several months and the access date was delayed by at least ten weeks. This was not considered to be a reasonable delay when comparing the dates with the estimated point in time for granting of the apartment stated in the prior agreement. In the same decision the District Court determined that the expression “reasonable time” is intended to be interpreted fairly restrictively.
It should be noted that 5:8 BrL only applies when the date for granting of the apartment is delayed. In our opinion, a pre-signatory buyer cannot withdraw from the prior agreement in terms of the above mentioned regulation due to a delayed access date. If the parties in the prior agreement have agreed an access date, although this is not a formal requirement, any delays regarding the possession date should meet the requirements of the general contractual regulations, and not those in 5:8 BrL. In the decision between two pre-signatory buyers and the association Brf West Side Solna, as mentioned above, the District Court of Stockholm also looked at the issue of delay. The court found that if the apartment is granted within one month from the estimated point in time for granting of the apartment this should be deemed reasonable, especially considering that the time point is preliminary.
Similarly, in a decision of May 27, 2019, the District Court of Solna considered approximately eight weeks' delay to be within reasonable time.
Negligence attributable the association
In order for the pre-signatory buyer to be entitled to withdraw from the prior agreement under 5:8 BrL, the delay must be a consequence of negligence attributable to the association. In the preparatory work it is stated only that the reason for the delay is of a minor importance as long as the delay is not attributable to the pre-signatory buyer. In our opinion, the preparatory work and the wording in BrL contradict each other. Negligence is an established concept, which does not correspond with the information given in the preparatory work. This issue must be clarified through legal practice. The District Court of Nacka, in the decision referred to above, concluded that the reason given by the association for the delay was not significant when assessing negligence and further, that in this case, the association was negligent and caused the delay in granting the apartment.
Possession is not regulated in BrL
A tenant-owner right may only be granted to a member. A member is entitled to obtain information about the association and has the potential to affect its decision-making, as well as the right to use the apartment. One issue that has become important in connection with the prior agreement is whether the calculated point in time for signing the grant agreement also includes the right to take possession of the designated apartment on the same day the grant agreement is entered into; that is, should the apartment be habitable on the day the grant agreement is signed. Regarding this issue, it was stated in the Act of 1930 that granting and access are two separate concepts.
In BrL there are no regulations regarding access. There is nothing in the preparatory work to indicate why the legislator has chosen not to regulate the issue of possession, that is, when can the holder of a tenant-owned apartment access the apartment. For the majority of buyers, this is of greater importance than the time point for entering into a grant agreement.
Some of the issues referred to in this article have been known for some time to lawyers working in this area. However, since they have not been taken up by the legislator, affected parties have no choice but to litigate. What is required is an overall review of the regulations in this area by the legislator. Pending such a review, and the consequent passing of more stringent legislation, we must await further court decisions, at first instance and appeal, regarding these issues.