Mitigating the financial risk stemming from unlimited liability: how to include some clauses from the statutes of Ilot De Spiegel

[Lee]

This post is about how to protect ourselves against the limited liability stemming from the société simple.

Overview:

1. Explanation of the problem and Mark’s hack using blocked accounts
2. Overview of interesting clauses in De Spiegel’s statutes
3. Possible ways forward
4. Proposal

1. Protecting ourselves from the société simple’s unlimited liability: the ‘locked accounts’ hack

Right from the beginning, Mark has told us about this “hack” that makes building a cohousing in self-managemend financially safe. The problem we are trying to solve is that of the unlimited liability of the société simple: as soon as we sign the contract with the building company, we will have a debt of about 3-4 million. If we don’t manage to pay that bill, the company is entitled to go after our personal assets.

This is a scenario that should be excluded. Mark’s solution to this problem is gathering all the money (all of it!) before the contract is signed. Because just transferring so much money is something banks and individuals are (rightfully) unlikely to do, the trick is to set up locked accounts, one for each household. These accounts can only be used by the société simple, and only to pay for the bills related to the building of the cohousing (construction and other).

For those who work with a mortgage, the legal agreements is with the bank, who will transfer the different tranches of the loan to the account, every time a bill is presented. For those who will pay their unit with their savings, the legal agreement is to always deposit 100.000 euro on the blocked account.

2. Turning these provisions into a legal agreement: the statutes of Ilot De Spiegel

What we didn’t know so far is that our sister cohousings have included these legal provisions in the statutes of their société simple.

I studied the copy of De Spiegel’s statutes (saved in the ‘Société simple’ folder | internal link). Below is a short summary of some key points for convenience.

1. Overall: very specific and operational clauses

Contrary to the statutes we received from the notary (which are very generic), the statutes of De Spiegel go into a lot of detail, e.g. on the powers of the Board (super large!), the conditions for excluding a member etc.

The advantage of this approach is that it brings much more clarity. The disadvantage is that it can be severely limiting the options to solve unexpected problems. The latter can be solved by getting the General Assembly (GA) to approve an exception (or whatever is needed), but this will inevitably cost more time.

2. Details: overview of relevant clauses

For the sake of clarity: this is just a list, we don’t need to include any clause that is not met with consent or consensus.

• Article 2: Objective - An increase of the price of the works by more than 10% needs the approval of the GA.

• Article 4.3: “Associates”

  • If the GA would decide on an increase beyond 10%, an Associate will be allowed to leave the société simple.

  • Exlcusion of an Associate: decision by the GA with a 2/3 majority (without the household in question participating to the vote)

  • Other reasons for exclusion:

    • When somebody goes bankrupt + a whole list of other potential troubles like serious debts, the mortgage being refused etc

    • When the financial means are not transferred within a month after the first warning

• Article 4.4: Consequences of exclusion => description of a list of conditions, like the sales price, the recuperation of registration rights etc

• Article 5.2. c and d: something about individual subsidies going to the common pot

• Article 5.3.1: “Distribution key” => costs are divided in function of the relative value of the different units (so not the number of square meters)

• Article 5.4: The blocked accounts clauses

  • Locked accounts: mortgages or 100.000 euro own means

  • Commitment to bring in additional financial means if the price unexpectedly would go up (<10%)

  • Money not spent will be reimbursed, idem for interest

  • Individual subsidies: consult the Board before requesting them

• Article 5.5: Guarantees

  • Different clauses on what happens if someone doesn’t pay in time (very precise, and in favour of protecting the rest of the group)

• Article 7: Management

  • 7.1 and 7.2: four people, appoint a president, decide by 50% (sic), no proxies, decision log to be published

  • 7.3: Powers of the Board

    • 7.3.1: Everything related to construction: ample list of competences

    • 7.3.2: Everything related to finance: list of competences (nothing one wouldn’t expect)

    • 7.3.3: Powers of the GA: the Board needs the approval of the GA to sue the construction company, to raise the budget by more than 10% (by unanimity - see 8.2.4)

    • 7.3.5: Representation: double signature required

• Article 8: GA

  • 8.1: Residual competences, i.e. everything that is not within the Board’s competences
  • 8.2: Governance

    • 8.2.1: Meetings: every 2 months, this is where the Board reports about the state-of-play

    • 8.2.2: Proxies: Maximum two proxies per unit

    • 8.2.3: Voting: one vote per unit

    • 8.2.4: Majority: decisions by consent / consensus as much as possible; votes: 2/3 majority, except for the budget increase > 10%: unanimity minus 2 votes (to be noted that they only have 12 units)

• Article 9: Control => The GA can appoint a “commissioner” to “control” / hold the Board accountable

• Article 12: Conflict management => talking first, then with an accredited mediator, then going to court

3. Possible ways forward

Not having any legal agreement on the clause on the locked accounts to protect ourselves against the risk of unlimited liability to me is a must have. It’s something we’ve always said we would do, we just weren’t aware yet of how it could be done in practice.

I see several options on how to move forward:

• 1. Include an additional clause in our statutes, to guarantee financial safety, along the lines of Articles 5.4 and 5.5 on the blocked accounts.
• 2. Move the clauses that guarantee financial safety to a separate contract.
• 3. Make some minor adjustments, like e.g. needing an absolute majority for a > 10% budget increase, a double signature from the Board members etc.

Combinations are equally possible: option 1 + 3 or option 2 + 3

4. Proposal

@reef-finance, as dreadful as it may be, my proposal would be to go with options 2 and 3.

Option 2, a separate contract, has the advantage of offering us more flexibility. It also makes it easier to incorporate the société simple within the next few weeks.

Option 3, making minor amendments to the statutes, comes with a lot of teeth grinding, because we have already spent a crazy amount of time on this, and it may thus be difficult to find motivation to spend a little more time and mental energy on this. The reason why I would go for it nevertheless is that I believe it bring will more emotional safety, if only because we would legally establish that the budget cannot increase by more than 10% unless there is relative unanimity in the GA.

If need be I could take care of both. I sort of know both statutes by heart now, so it shouldn’t take me too much time. The contract I would outsource to the lawyer - just highlighting the clauses that we want - which I could also follow up on if there are no other volunteers.

[alberto]

Wow, great work! Thank you so much for doing this. Your post gives me hope that we are seeing the end of this.

In general, I think this the way to go is: we give this stuff to the lawyer and get comprehensive advice on the best way to secure the cohousing. She will the suggest either 1 or 2 +3, and we will do that.

Couple of specific reflections:

@Lee

Article 5.3.1: “Distribution key” => costs are divided in function of the relative value of the different units (so not the number of square meters)

Makes sense, but poses a problem: the SoSim should be incoporated before the final plan is ready and we know the values of apartments. I suppose we can still pre-finance it with some money, and then, once the values are known, re-balance.

@Lee

Commitment to bring in additional financial means if the price unexpectedly would go up (<10%)

So that means Spiegel did NOT have to put up the 10% up front.

Also, while we are at it, I propose two additions.

1. If someone withdraws mid-construction, they do not recover 100% of the money they put in, but 80 or 90%. This is a suggestion by Mark (what he calls “fermer la porte”), in order to reduce fickleness and instability. Exception, in the interest of fairness: the people that paid for the site, upon finding a new buyer, will receive 100% of the money they used to pay for the site.
2. I would also ask the lawyer to consider how we can shelter the SoSim from the consequences of FATCA. I

@marij_e

The banks pass on the information of the société simple account in its entirety to other countries; the tax authorities of those other countries levy on the whole and not on the part (amount of shares) of the person concerned. From my point of view, it seems important that the société simple foresees any possible issues for this complex matter in its statutes by stipulating that each person concerned must be responsible for the costs associated with or as a result of FATCA and CRS (common reporting standards) and for the taxes that would be levied on the société simple if these are the result of an action by the person concerned (residency abroad, eg.) or a result of legislation imposed by a country of which the person concerned is a citizen.

Finally, we have a non-statute related question to the lawyer, could you ask that too? It relates to:

@LuciaM

He highlights that the work related to the common parts of the building will need to be handled separately (via the syndic of the Owners’ Association, which will come into existence when we divide the plot). See the information available in this document: 240628_Notaire_Questions étapes achat terrain . When I asked if we could deviate from this provision of the co-ownership law during the construction phase (as other groups have done in the past, based on reading their statutes, but these are over 10 years old, and I believe the law has changed since then), he said it is not possible.

I took the question to Mark, he said he has never seen this. So:

@alberto

@RichardB to approach our lawyer with a request to explain to us how this would work in practice. Does the construction company bill each person twice, once for the private units and once for the commons? Also we could maybe ask Habitat participation and/or Samenhuizen. Could this be the first task for @Hannah in team finance?

As far as I know, Richard has not talked to the lawyer yet, so grateful if you can bring her this question too.

[RichardB]

Thanks for bringing this analysis up Lie!
I wonder what the difference between Mark’s solution and Triodos’ blocked account is. The latter employ this by default as a security package in their co-housing offering, to ensure that amounts deposited are not being misused and the way I understand it is that this is not a choice but we are mandated to use blocked accounts. As such I am not sure we need to reference it any further in our statutes or accord préalable but no issue if we actually do in which case I would say the best way is to evolve our accord préalable which we’ll update a few more times in any case. 100 k per cash call seems problematic to me as the very last cash call will be likely overpaying what we are due and would result in unnecessary cash transfers.

Injecting cash following our current statutes follows below logic :
-the management board makes a cash call, given their powers in paragraph 6.11.
-the board are the only members of the SoSim that can access the blocked accounts.
-Associates comply as laid out in 7.1., else they can get excluded from the group by judgement of the board within 8 days (7.2). Given we have invested a lot of time in group building and working methods, I would however think that an associate who is struggling to pay the next tranche will always come forward to the board in case of a liquidity issue; solidarity is a key value of our project (3.1)
Admittedly, this mechanism gives a lot of power to the management board and should work very efficiently if there is basic trust in the group and the board represents our different work groups. As a power balance the GA can replace members of the board at any time upon calling an assembly. If we now decide to give budgetary powers to the GA then we should be very precise to avoid confusion of competencies, e.g. 10% budget overshoot of the architect’s FS or a 10% increase in a bill of the enterprise generale?

@alberto

If someone withdraws mid-construction, they do not recover 100% of the money they put in, but 80 or 90%. This is a suggestion by Mark (what he calls “fermer la porte”), in order to reduce fickleness and instability

We have a similar clause, see discussion here: Société simple: figuring out the statutes - #58 by Sarah

[Lee]

Hi @RichardB, thanks a lot for these reflections.

The contrat préalable concerns the purchase of the site and nothing else. The contract we are speaking of here would cover the construction phase.

The clauses in De Spiegel’s statutes (also used in Brutopia btw), are very precise, and cover all sorts of scenarios to ensure financial stability. To me personally this is very important, as I am not willing to sign a 4 million euro contract with unlimited liability without financial-legal guarantees that are as watertight as possible. Solidarity, trust and working methods are not sufficient to me in this case

[Lee]

I have now gone through the list of clauses in the first post, and sorted them in three categories:

1. Include in the statutes?
2. Include in a contract?
3. Unclear what to do

It is saved in the ‘Société simple’ folder > ’ Contract on financial security’: internal link.

@reef-finance, are we good to send this to the lawyer and ask her for her opinion (plus a call), and if positive to proceed with this?

[RichardB]

@Lee

The contrat préalable concerns the purchase of the site and nothing else

I disagree with you on this point - the contrat préalable goes further, it obliges its signees to build a habitat groupé in solidarity. The exposé préalable - D is a references to our current distribution key. Objet III specifies what we have to undertake after the purchase. I would argue that we can update the current distribution key with our results from Le Programme 3 (when they arrive) and extend its application to anything pre-construction related.
Regarding the statutes, I do very much understand the need for clarity and am not objecting to amend where it makes sense Looking forward to hear what the lawyer says. At the same time I think that a financial-legal garanty will be impossible to obtain and I think this is the message that we should send to everyone. As you rightly mentioned, provisioning for different scenarios comes at the price of flexibility of the board’s possibilities and could result in the opposite of the desired effect.

[Lee]

Hi Richard,

I think we’re missing a shared understanding here, so I’d rather have a call whenever you have the time to go into more detail.

[RichardB]

Hello Lie, yes happy to have a call. I have now also gone through your xls where you compare Spiegel and our statutes and have added a few comments, thanks for having set that up. Please feel free to delete comments before sending to the lawyer. Lastly, I can also run the statutes past Triodos before incorporation, so we make sure they see no red lines.

[alberto]

@RichardB

I wonder what the difference between Mark’s solution and Triodos’ blocked account is.

No difference!

@RichardB

The latter employ this by default as a security package in their co-housing offering, to ensure that amounts deposited are not being misused and the way I understand it is that this is not a choice but we are mandated to use blocked accounts.

Even better. However, heads up: in @ugne’s report of the latest meeting with Triodos, this did not emerge: TRIODOS bank: collecting questions - #14 by ugne

@RichardB

the board are the only members of the SoSim that can access the blocked accounts

Conceptually right. Technically, it is only the bank account’s users that can use the bank account: it could even be a third party (in companies it is often an employee), and it will not be the case that every member of the board has access. According to the minutes from Ugne’s meeting above, we will get 2 bank account users max.

@RichardB

Associates comply

Is it not the case, then, that the bank releases the next tranche of the loan, and it credits directly the SoSim’s account? In this way, associates do not need to do anything at all. This is how I understand it: the construction company sends invoices to the SoSim, which sends them to bank, which releases the funds, which go directly on the account of the SoSim, which pays the invoices. Is it correct?

@RichardB

Lastly, I can also run the statutes past Triodos before incorporation, so we make sure they see no red lines.

Nice!

[Lee]

The difference with just going with the Triodos blocked accounts is that there are no further legal guarantees, like how much money needs to be deposited by people who don’t use a mortgage, what happens if people miss a payment etc.

To me this brings an essential legal safety to mitigate the unlimited liability to the max. Signing up for a 4-5 million contract is not a joke. We need to do everything that we can to make sure that we will be able to pay the bills.

These clauses are very detailed and have already been used at least twice (Brutopia and Spiegel), so I don’t worry about compatibility.

[Lee]

Thanks for all the comments. I have replied to them and integrated them.

@alberto, no offense, but due to the ambiguous file naming, I again commented on the wrong version (in the original file, with Richard’s comments only), and so I had to transfer them afterwards one by one when I realised that the file named “Alberto’s comments” also included those of Richard.

Can I please ask to use clear file names à la “Richard and Alberto’s comments”, or else to archive files that are no longer current? It would avoid losing time due to using the wrong file. I have taken care of it now. The clean file is ready to go.

[Lee]

@reef-finance, for those who would like to attend, there will be a first meeting with the lawyer tomorrow at 14:30. @alberto and I will be there, and we’ll report back, so no pressure if you can’t make it. Link is in the calendar.

[Lee]

Short update on the meeting with Madeleine on 10/09:

Madeleine thinks it is easier to include everything in the statutes, and not create a separate contract.

We then went through the different articles listed in the document linked above, and concluded on virtually all of them that she will propose an amendment or an addition.

Madeleine said she would send us the revised document by the end of the week. I will only be back on 01/10 from my break, so I won’t be able to work on it until then, though happy to continue to take the lead on this. As an overall deadline I think we should aim for 15/10 to wrap it all up and incorporate the société simple.