To improve the functioning of apartment owners' associations, a bill passed by the lower house (Tweede Kamer) of the Dutch Parliament in February aims to tighten the rules on payments to an association's reserve fund.

What does this mean for landlords (lessors) and institutional investors with apartment rights (appartementsrechten) in their portfolios?

Since 1 May 2008 all apartment owners' associations have been required to establish a reserve fund to cover maintenance costs. In practice, however, compliance with this obligation has left much to be desired. According to Stef Blok, the former Minister for Housing and the Central Government Sector, one out of three owners' associations functions poorly or not at all and more than half of them set aside too little. The government hopes to change this by setting mandatory minimum payments to the reserve fund.

Under the bill, the meeting of owners can set the mandatory reserve payments based on the projected upkeep costs according to the association's long-term maintenance plan. If there is no such plan or it is more than five years old, the association must set aside at least a half percent of the building's reconstruction value each year. This can result in large mandatory reserve payments.

A commercially interesting question is whether a mere undertaking to provide financing will be sufficient to comply with the new obligation. This is the current practice of some landlords and institutional investors. The original bill was silent on this question but an amendment has since been added under which the obligation to pay the funds into a separate bank account of the owners' association is laid down as the general rule. However, deviation from this rule is permitted if so provided in the applicable property division regulations (splitsingsreglement), if approved by a four-fifths majority of the meeting of owners or if a bank guarantee is given.

According to the legislative history, this escape possibility was added in particular for small owners' associations and professional lessors/investors. For such parties, the obligation to make actual payments to the reserve fund is considered an unnecessary burden.

Under the new legislation it will therefore remain possible, subject to the above conditions, to postpone making actual payments until they are needed. In our opinion, the retention of this option is desirable as it will enable commercial parties to use or continue using their liquid assets for business purposes.

Landlords and institutional investors in apartment rights should therefore carefully consider whether the applicable property division regulations should contain a clause deviating from the obligation to make actual payments.

The bill will now go to the upper house of Parliament, where preliminary committee hearings are scheduled for 28 March 2017.