Service charges in co-ownership: a mass debt even after judicial settlement

Imagine: you own a flat in Mont-de-Marsan, in a quiet development. One day, you learn that one of the co-owners, a commercial company, has been placed in judicial settlement (the predecessor of judicial reorganisation). Immediately, the managing agent tells you that the service charges owed by that company since the judgment may never be paid. You wonder: who is going to pay for the maintenance of the common parts, the lift, the garden? This question, crucial for hundreds of co-ownerships, found a clear answer in a decision of the French Supreme Court of 3 December 1996. In essence, the High Court affirmed that service charges arising after the opening judgment are mass debts, i.e., they must be paid by the collective proceedings, as they serve to preserve the common property.

In other words, even if a co-owner is in financial difficulty, the co-ownership must not suffer the deterioration of its common parts. Charges continue to accrue and must be honoured. This decision, handed down nearly thirty years ago, remains an absolute reference for all managing agents and co-owners faced with collective proceedings.

But what does this mean for you in practice? Should you fear that your syndicate will go unpaid? And how should you react if a co-owner is subject to compulsory liquidation? Let's delve into this case.

The facts: a story like many that happen every day

The case opposes two co-ownership syndicates (the legal representatives of two buildings) to the company SIP Industries, a business in difficulty. The company, owner of units in these co-ownerships, was placed in judicial settlement on 3 May 1984. Later, a concordat (reorganisation plan) was approved on 7 July 1986, but the company was then placed in compulsory liquidation (the predecessor of judicial liquidation) on 3 July 1987. During these periods, the service charges, although essential for the maintenance of the buildings, were not paid by SIP Industries.

The syndicates then demanded from the liquidator of the compulsory liquidation, Mr X, payment of the charges due for the period from 3 May 1984 to 7 July 1986 (the period of judicial settlement until the concordat) and for the period after 3 July 1987 (after the liquidation). The liquidator refused, arguing that these charges were not mass debts (i.e., debts arising after the opening of the proceedings, which must be paid by priority), but pre-existing debts, subject to the collective proceedings (and therefore often irrecoverable).

The Paris Court of Appeal, in a judgment of 15 December 1992, ruled in favour of the syndicates. The liquidator appealed to the Supreme Court. He argued that the Court of Appeal had held that these charges were mass debts without the syndicates having demonstrated that these charges were necessary for the preservation of the property. But the Supreme Court dismissed his appeal and upheld the judgment.

The reasoning of the court — analysed

In its decision of 3 December 1996, the Supreme Court relied on a simple and logical principle: service charges in co-ownership are by nature intended to preserve the common property. Without them, the building would deteriorate and lose value. However, once collective proceedings are opened (judicial settlement or compulsory liquidation), the debtor continues to use or hold its assets. The building, as an asset, must be maintained to avoid depreciation. The charges arising after the opening judgment are therefore mass debts, i.e., debts arising after the opening of the proceedings, which must be paid by priority over other claims (Article 40 of the Law of 13 July 1967, then in force, replaced since by Article L. 641-13 of the Commercial Code).

The judges' reasoning is as follows: "whereas, having held that service charges in co-ownership are by nature intended to preserve the common property, which would necessarily depreciate if they were not incurred, the Court of Appeal rightly deduced that the service charges due for the period after the pronouncement of the judicial settlement of the debtor and up to the judgment approving the concordat, as well as those due for the period after the judgment pronouncing the compulsory liquidation, were mass debts".

In clear terms, the judges did not require the syndicates to prove that each charge was essential. They considered that, by nature, all service charges (routine maintenance, works, insurance, etc.) contribute to the preservation of the building. This reasoning is a confirmation of previous case law: service charges in co-ownership are considered expenses necessary for the preservation of the property, and therefore priority in the context of collective proceedings.

Be careful, however: this solution only applies to charges arising after the opening judgment. Pre-existing charges remain subject to the regime of pre-existing debts, often irrecoverable in a liquidation. What few people know is that this principle has since been extended to service charges due after a judgment of safeguard or judicial reorganisation.

What this means for you — in practice

For co-owners and managing agents: If a co-owner is placed in judicial reorganisation or liquidation, the service charges that arise after the opening judgment are mass debts. This means that the liquidator or administrator of the collective proceedings must pay them by priority. In practice, the co-ownership managing agent must declare these claims in the liabilities of the collective proceedings, but for post-judgment charges, he or she can also claim them directly from the judicial representative or liquidator as mass debts. If the liquidator does not pay them, the syndicate can apply to the supervising judge to obtain payment.

Concrete example: In Capbreton, a co-ownership of 20 units has a corporate co-owner who is put into compulsory liquidation in January 2023. The annual charges for this flat are €3,000. If the syndicate cannot recover the charges for 2023 and 2024, that would represent €6,000, a significant sum for a small co-ownership. Thanks to this case law, the syndicate can require the liquidator to pay these charges, because they arose after the liquidation. The liquidator must pay them from the available funds of the liquidation, before satisfying unsecured creditors (non-priority).

For landlord owners: If you are a tenant of a building in co-ownership, you are not directly concerned with the payment of service charges (the owner pays them). But if your landlord is subject to collective proceedings, note that the service charges continue to be due and the syndicate can take action against the mass. Your rent, on the other hand, remains due to the landlord (or the representative).

For buyers: When you buy a unit in a co-ownership, you must check whether the seller has unpaid charges. If the seller is in collective proceedings, post-judgment charges are priority and will not be wiped out by the liquidation. You can therefore, after the purchase, claim from the liquidator the payment of the charges due for the period after the judgment.

Four tips to avoid this type of dispute

• Declare charge claims to the collective proceedings promptly. As soon as you become aware of the opening of collective proceedings (reorganisation or liquidation) against a co-owner, the managing agent must declare all charge claims, including those falling due. Post-judgment charges will be treated as mass debts, but they must be claimed.
• Demand payment of post-judgment charges from the liquidator. Do not wait for the closure of the proceedings. Send a formal notice to the judicial representative or liquidator, referring to the decision of 3 December 1996. If refused, apply to the supervising judge.
• Check the legal status of each co-owner. When preparing the statement of charges, the managing agent should regularly inquire about the situation of corporate co-owners (companies). A check via the Trade and Companies Register (RCS) may reveal ongoing collective proceedings.
• Provide for a contingency fund in the co-ownership budget. To deal with arrears, even temporary ones, it is prudent to set up a contingency fund (e.g., 5% of the annual budget) that will allow payment of suppliers while awaiting recovery of charges from the mass.

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Further exploration: related case law and developments

This 1996 decision is part of a consistent line of authority from the Supreme Court. Already, in a decision of 3 February 1993 (No. 91-10.029), the Court had held that service charges in co-ownership arising after the opening of collective proceedings are mass debts. The 1996 decision merely confirms this principle by justifying it by the very nature of the charges: preserving the property. Since then, the law has evolved: the Law of 13 July 1967 has been replaced by the Commercial Code, but the principle is taken up in Article L. 641-13 of the Commercial Code (for liquidations) and Article L. 622-17 (for safeguard and reorganisation proceedings). The courts still apply the same solution.

However, there is a nuance: for service charges arising before the opening judgment, they are not mass debts and must be declared in the liabilities. They will be paid in the order of creditors, often with a low dividend (sometimes nothing). Hence the importance of distinguishing charges according to their due date.

undefined, I have encountered cases where the liquidator contested the mass debt character for charges for major works (for example, roof renovation). However, case law considers that even improvement works, if necessary for the preservation of the building, can be qualified as mass debts. The current trend is therefore broad: any charge that helps to avoid depreciation of the property is priority.

What you must absolutely remember

1. Service charges in co-ownership arising after the opening of collective proceedings are mass debts. They must be paid by the liquidator or administrator.
2. You must actively claim them. Do not be content with the declaration of claim: send a request for payment to the representative relying on this case law.
3. If refused, apply to the supervising judge. He or she can order payment under penalty.
4. For pre-existing charges, declare them in the liabilities. They will be treated as ordinary claims, often irrecoverable in liquidation.
5. Anticipate arrears. A contingency fund in the co-ownership budget allows you to cope with delays in payment from the mass.

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