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05 March 2020
Do multi-apartment buildings need managing agents?
Competition law issues
Are unit owners being exploited?
Is there a national relevant market for managing multi-apartment buildings?
No competition law infringement (yet), but caution advised
Following media reports on the difficulties involved with replacing managing agents, who manage multi-apartment buildings, excessive management costs and ousting small managing agents from the market, the Competition Protection Agency (CPA) carried out market research on the management of multi-apartment buildings.
Such issues could indicate a restriction or distortion of competition in Slovenia (which is prohibited under Article 6 of the Competition Act(1) and Article 101 of the Treaty on the Functioning of the European Union (TFEU) or abuse of a dominant position of one or more managing agent companies (which is prohibited under Article 9 of the Competition Act and Article 102 of the TFEU).(2)
In multi-apartment buildings with more than two unit owners and more than eight individual parts or units, the unit owners must choose a managing agent and conclude a management service agreement pursuant to the Law of Property Code(3) and Housing Act.(4) A managing agent can be a legal or natural person, registered for real estate management, or a unit owner or community of owners.
A managing agent's tasks may include:
Managing agents receive a monthly payment for their services.
Unit owners may (with a majority vote) dismiss a managing agent at any time. The notice period must be at least three months.
In its research, the CPA considered the following issues allegedly present on the multi-apartment building management market:
The report is based on a survey which the CPA sent to 340 companies that have facility management registered as their (main) activity. The CPA received 129 responses, among which only 56 answers were relevant and complete.
The CPA found that companies concluded more than two-thirds of the management service agreements for a longer period (10 years or more), which indicates the market's considerable inflexibility.
According to the media, managing agents often offer low managing prices that are unrealistic because they make profit from charging additional managing costs (eg, reserve fund management and coordination) and by outsourcing works to contractors (eg, painting, carpentry, plumbing, electrical installations and lift maintenance), where the managing agents act as intermediaries. As a result, management service offers can be misleading, and unit owners often do not receive complete or sufficient information. The CPA agreed with this conclusion and emphasised that the indicated (low) price for management services costs can be misleading, as the additional services can significantly increase the final price and thus unit owners cannot evaluate the offers properly.
The CPA also assessed the effect of the trusted managing agent certificate, which can be obtained from the Chamber of Commerce and Industry of Slovenia. As this certificate is not a condition for providing management services and each managing agent or company decides freely if they want to obtain it, it does not restrict competition in the market, and it seems that for most managing agents the certificate is not an advantage.
Although the focus of the report was to discover competition law infringements present on the market for managing multi-apartment buildings, it also provides a definition of the potential relevant product and geographic market. This is important, as the CPA will likely consider this market definition in future antitrust cases and in notifications of concentrations.
The CPA estimates that the (financial) size of the market for managing multi-apartment buildings in Slovenia is approximately €47 million. However, almost one-third of companies operate multi-apartment buildings within 11km to 20km of the company's seat, whereby the vast majority of companies (77%) manage multi-apartment buildings located at a maximum distance of 40km from the company's seat.
The CPA stressed that this could indicate that there is no significant interregional competition and that the competition is present on narrower geographic market(s) only, which means that the relevant geographic market should be defined (significantly) narrower than the national market.
Consequently, the CPA did not single out a managing agent with an outstanding market position on the entire Slovenian market. Conversely, the CPA believes that smaller managing agents or companies are present on the market and represent an important source of competition to larger managing agents or companies.
The CPA concluded that while there are certain anomalies in the management of multi-apartment buildings, such issues do not (yet) indicate a breach of competition law. Some of these anomalies may qualify as unfair commercial practises (eg, low price for management services); however, the CPA is not the competent authority for such allegations.
Regardless of the above, the CPA believes that most of the issues could be resolved if the unit owners were more active, experienced, interested and coordinated when it comes to management and (everyday) business of multi-apartment buildings. As the unit owners are inexperienced and uninterested, they often appear to be the weaker party in relationship with the managing agent, despite their legal options. For example, the law gives unit owners the right to dismiss and appoint new managing agents; however, in practice, this right is not exercised often as the unit owners cannot reconcile and reach a decision with the required majority.
The CPA also concluded that the Trusted Managing Agent certificate does not raise competition law concerns, as it is obtained voluntarily and does not represent a significant competitive advantage on the respective market.
Nonetheless, all managing agent companies should take into account that the relevant geographic market for managing multi-apartment buildings will most likely be defined as narrower than national, which increases chances for market leaders to exceed a 40% market share and trigger the application of the dominant position assumption.
A high market share is not an issue in itself; however, it brings additional competition law limitations which managing agents must consider, such as:
If a company fails to comply with the above limitations and abuses its dominant position, a fine of up to 10% of its overall annual turnover can be imposed.
For further information on this topic please contact Eva Škufca or Urša Picelj at Schoenherr by telephone (+386 1 200 09 80) or email (email@example.com or firstname.lastname@example.org). The Schoenherr website can be accessed at www.schoenherr.eu.
(2) The report in Slovenian is available here.
The materials contained on this website are for general information purposes only and are subject to the disclaimer.
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