Housing Construction Cooperative as a Construction Scheme: What Legal Risks Are Most Often Ignored by Developers and Shareholders?

What is a housing construction cooperative?

A housing construction cooperative (HCC) is a legal entity whose main purpose is to unite small investors for the implementation of a large construction project. The advantage of a cooperative compared with other legal forms (for example, an LLC) is the simplified accounting of participants. Only information about the first three founders is entered into the state register, while all further decisions — admission of new shareholders, exclusion of participants from the cooperative — are formalized through internal documents. This simplifies and reduces the cost of HCC operations.

Why do developers use HCC as a construction mechanism?

The HCC mechanism provides a certain opportunity for tax optimization. When housing is constructed and share contributions are accepted, they are treated as corporate rights. That is, a person does not purchase real estate or ownership rights to it but makes contributions to the cooperative’s charter capital. Such contributions are not considered property disposal transactions and are not subject to value-added tax (VAT). Therefore, the HCC does not need to register as a VAT payer and include the VAT amount in the cost of the share contribution. Under certain conditions provided by the Tax Code of Ukraine, the transfer of an apartment is also not subject to VAT. Thus, by applying the housing construction cooperative scheme from the beginning to the completion of the project, the developer legally avoids paying VAT.

The use of the HCC scheme is most appropriate for small real estate projects. For large-scale projects (construction of residential blocks consisting of dozens of buildings), it is necessary to create multiple cooperatives, which requires complex manual administration. If large developers still want to use the cooperative scheme, it is recommended to obtain legal advice in advance, since large projects require the settlement of many details. In particular, VAT does not apply to residential premises, but if a building includes non-residential premises (parking spaces, storage rooms), VAT becomes applicable. To properly formalize and synchronize different facilities, as well as correctly maintain legal and accounting records, it is necessary to define the obligations and responsibilities of all parties in detail at the very beginning of the project.

Sometimes a cooperative is used as an additional entity to simplify interaction. For example, there is an LLC that owns the land plot, but the developer does not want to interact with it directly due to the risk of legal disputes. In this case, an agreement is concluded with a third party — the cooperative, which handles the distribution of apartments and interaction during the construction process. The cooperative independently attracts investors and transfers the received funds for construction. If investors have questions or disputes, they interact directly with the cooperative, while the actual landowner and developer minimize their risks. This mechanism is beneficial for the developer and is used quite often; however, it is more risky for investors because they do not actually interact with the owner of the land plot.

How does participation in an HCC differ from purchasing an apartment?

Participation in an HCC is not a purchase and sale agreement for an apartment or ownership rights to it. It is joining the cooperative, making a share contribution, and obtaining the right to receive an apartment in the future. Thus, within the HCC scheme, the issue concerns not property rights to real estate, but corporate rights.

What documents should a housing construction cooperative have?

A housing construction cooperative must be registered in accordance with the established procedure and have a charter defining the rights and obligations of shareholders. If an agreement is concluded with an HCC and a share contribution is made, it is advisable to request a certificate confirming admission as a member of the cooperative. This information is also reflected in the minutes of the general meeting, and a copy of this document may also be requested.

What Legal Risks Do Shareholders Most Often Ignore?

Shareholders often underestimate the risks associated with a housing construction cooperative: how the agreement is drafted, what conditions it contains, construction deadlines, the responsibility of the parties, and penalties for breaches of obligations. Therefore, before signing, the agreement should be provided to a lawyer for a thorough review and assessment of possible risks.

Another important point that shareholders often overlook is the different types of contributions in a cooperative. There is a share contribution, which is refundable (most often in the form of an apartment; however, if the agreement is terminated and the person leaves the housing construction cooperative, it may be returned in monetary form), as well as non-refundable contributions — an entrance fee and periodic membership payments made at certain intervals. Non-refundable contributions are used for the maintenance of the cooperative, and this is where abuses may occur. It should be understood that returning such payments will be extremely difficult or even impossible. Therefore, a shareholder must clearly distinguish between the types of contributions. If the amount of the entrance fee or regular payments is excessively high, it is better to refuse to conclude the agreement or demand changes to its terms.

Why Does a Share in an HCC Not Equal Ownership Rights to an Apartment?

A share is a contribution to the charter capital of a housing construction cooperative, which relates to corporate rights. Ownership rights to an apartment, in turn, are property rights. This may refer either to ownership rights to an existing apartment or to rights to a future real estate property.

What Risks Are Associated with the Land Plot?

Risks related to the land plot are general and do not depend on the chosen investment attraction scheme.

The land plot intended for construction must correspond to its designated purpose — construction of a residential building. The ownership right or the right to use the land plot must be properly registered for the relevant person. If the land is leased, the lease agreement must specify the purpose of its use and ensure that it corresponds to the designated purpose of the land plot. If all documents are properly executed, the owner or user has the right to obtain urban planning conditions and restrictions, a construction permit, and implement the project.

However, in practice, disputes may arise. Sometimes the designated purpose of the land plot or existing restrictions are not taken into account, despite issued permits. As a result, after some time, the right to carry out construction may be challenged in court, and construction may be suspended. Therefore, before concluding an agreement with a cooperative or another developer, it is recommended to conduct a legal review of the land plot and all permitting documentation in order not to lose the future apartment before even receiving it.

What Risks Arise Due to the HCC Charter?

To minimize the risks associated with the charter of a housing construction cooperative, it is necessary to carefully check what rights and obligations are provided for cooperative members, how decisions are made, and what the procedure is for admitting new participants.

It is necessary to require compliance with the established procedure for joining the cooperative: timely adoption of a decision on admission, issuance of confirmation of membership, as well as provision of a copy of the minutes of the general meeting at which the shareholder was accepted into the HCC.

A person must clearly understand their status in the cooperative and the scope of their rights, including the ability to demand the fulfillment of obligations by the cooperative. At the same time, even if a shareholder was not formally registered as a member of the cooperative for any reason, this alone does not mean that they will not be able to receive an apartment.

How Does the Return of a Share Contribution Take Place When Leaving the Cooperative?

Most often, the return of funds from a share contribution is carried out by signing an apartment acceptance and transfer act or an act of transfer of the share contribution. Sometimes a shareholder is asked to write an application for the return of the share by transferring the apartment, after which the registration is carried out. Next, the buyer must contact the BTI and obtain a technical passport.

It also happens that, after the completion of the construction of a new building, ownership rights to the apartments are registered in the name of the HCC, and the subsequent transfer of ownership rights to cooperative members is formalized notarially by concluding a barter (exchange) agreement. In this case, the shareholder, having a certificate confirming full payment of the share, exchanges the share in the HCC for an apartment owned by the cooperative. This scheme is slightly more complicated, as it requires a visit to a notary, preparation of documents, and payment for services. However, the shareholder immediately receives ownership rights to the apartment.

What Judicial Disputes Most Often Arise Regarding HCCs?

Under agreements concluded before 2022, judicial disputes mainly concerned termination of the agreement and the return of funds. At that time, shareholders were associated members who had no rights, so courts ruled in their favor. In disputes regarding the recognition of rights to an apartment, courts indicated that a fully paid share was an equivalent of payment for an apartment. Accordingly, registration of ownership rights was carried out.

Currently, new judicial practice is being formed. Since October 2022, a shareholder has all corporate rights, can vote and manage, therefore it is more difficult to interpret their share contributions as an investment in an apartment. They cannot claim that they interacted with the cooperative as an investor who wanted to purchase an apartment through an HCC, because they could influence key decisions. For example, if the cooperative adopts a decision to increase the share contribution and the majority votes “for”, the rest must comply and make additional payments for the share or leave the cooperative and return their share.

The relationship between the shareholder and the cooperative goes beyond the agreement; therefore, the shareholder receives more rights, obligations, and more complex relations with the HCC.

What Risks Can HCC Developers Ignore?

According to current legislation, all HCC participants have equal rights, in particular the right to vote — they can vote to remove the founders, independently manage the cooperative, and carry out construction. This is a risk for the developer, and a new scheme is used to avoid it. People sign a share participation agreement, contribute money, and submit an application to join the cooperative. However, such a participant is not immediately accepted into the HCC, and the charter states that the decision regarding approval of the application for membership or refusal is made within 2–3 years. Then construction is completed, and at the last moment, when the apartment is already to be transferred, a decision is made to accept the shareholder as a cooperative member, the apartment is immediately transferred to them, and they are immediately excluded.

Thus, throughout the entire construction period, shareholders have no voting rights.

Another situation is also possible: a shareholder is accepted into the HCC, but they are required to issue a power of attorney to another person regarding voting at cooperative members’ meetings. The person provides the power of attorney and does not know what issues are discussed and what decisions are voted on. That is, the difficulty is that, on the one hand, the legislator seems to grant additional rights and protect shareholders, but on the other hand, developers do not want to assume additional risks and invent certain schemes to deprive shareholders of the right to influence decision-making or to limit their influence in the HCC as much as possible.

How to Check a Housing Construction Cooperative Before Investing?

It is not enough to check the housing construction cooperative itself — it is necessary to check the role it plays in the construction scheme. We analyze an HCC in the same way as all other legal entities, including:

• the presence of court disputes and restrictions;
• the charter;
• the powers of the HCC;
• guarantees for shareholders;
• legal documents regarding the distribution of rights and obligations of participants;
• the participation of the cooperative in the construction scheme, because it is not always the customer. If the HCC is an involved party that receives funds from investors, it must have an agreement with the developer (development agreement);
• whether it has the rights to dispose of apartments and other rights.

If the cooperative is the customer, the land plot, construction permit, and urban planning conditions are also checked. In any case, it is worth checking the customer in the same way as the HCC.

It is not necessary to check the land plot when reconstruction is carried out on the same foundation, for example, after a missile strike. Sometimes a hotel or building is reconstructed and several additional floors are added if the condition of the supporting structures and foundation allows it. However, modern regulations require the arrangement of the adjacent territory (parking areas, substations, playgrounds, and other infrastructure facilities). Therefore, most likely, the land will still need to be checked.

Can Money Be Recovered from an HCC Through Court?

It is possible to attempt to enter into a legal dispute with an HCC if there are certain property relations, but for this it is necessary to prove a violation by the cooperative. If the issue concerns making payments and a violation of the construction deadline, then it is possible to go to court regarding the return of funds. However, it is necessary to examine the grounds and wording of the agreement terms. For example, if the agreement states that construction will last two years, but it was not completed within this period, this constitutes a violation of the investor’s rights. However, if the agreement states that the construction period is approximately two years subject to compliance with a number of conditions, then there are no grounds for a court dispute.

When Should You Contact a Lawyer Before Joining an HCC?

Before making a decision to purchase an apartment, you should contact a lawyer in order to analyze possible investment schemes and receive practical advice. To safely purchase an apartment through an HCC, it is worth ordering a legal review from “DE-JURE” to identify possible risks and pitfalls.

Frequently Asked Questions

What is better: an HCC or a purchase and sale agreement?

Joining an HCC is no worse than a purchase and sale agreement for an apartment, provided that all rights established by law that reduce the risks for the shareholder are observed. Sometimes an apartment through an HCC costs slightly less.

What should be done if an HCC building was not completed?

If the building was not completed within the period specified in the agreement, it is necessary to terminate relations with the HCC and recover funds through court proceedings.

Can a cooperative decision be challenged?

If a shareholder is a full member of the cooperative, they can vote at meetings. A decision that does not satisfy them can be challenged in the commercial court.

How to check HCC documents?

HCC documents can be requested directly from the cooperative or reviewed through paid extracts from the register. However, it is best to seek professional analysis from a lawyer.