In recent years, Ukraine has been consistently adopting the legislative acts for bringing the housing and communal services market in Ukraine into a civilized state, for promoting energy saving, and hence – energy independence of this country.

On 14 May 2015, the Law of Ukraine "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings" was adopted, it has improved the legislative regulation of the homeowners association (HOA) activities and promoted their establishment, introduced the modern concept of multi-apartment building management and simplified adoption of joint decisions by the co-owners of multi-apartment buildings without HOA established in them.

On 22 June 2017, the Law of Ukraine "On Commercial Metering of Heat Energy and Water Supply" was adopted, its objective is to ensure 100% equipment of the buildings with the metering units for heat energy, hot and cold (drinking) water, and to provide incentives for the consumers to consume these resources economically.

Finally, on 9 November 2017, the Verkhovna Rada of Ukraine adopted in the second reading and the President of Ukraine signed on December 5 the new Law of Ukraine "On Housing and Communal Services". If the first two laws are completely new, the Law of Ukraine "On Housing and Communal Services" existed since 2004.

Why then do you need a new law? What it envisages? What will change after it is enacted? 

New Law “On Housing and Communal Services”: Why and What Changes

Objective of New Law of Ukraine “On Housing and Communal Services”

The general logics in reforming relations in the housing and communal services sector provides for: 

• supply demonopolization – opening of the market for new subjects willing to provide proper quality housing and communal services on the competitive basis;
• demand demonopolization – providing the consumers with the effective mechanisms for independent choice and replacement of the providers of housing and communal services, selection of the models of contractual relations;
• refusal from the state regulation of tariffs where price for a service can be contractual;
• transparency of tariff setting where the price remains regulated – also through “deduction” of certain components from tariff for a service; and
• transparency and fairness in accrual of fee for a service – also through ensuring 100% metering of services and consumer access to the metering information. 

As a result, the consumers need to receive proper quality services at a fair price, and to have incentives and opportunities to save energy and reduce their expenses.

The Law of Ukraine "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings" has largely solved the problem of demand demonopolization, as well as, in part – the problem of supply demonopolization and refusal from state regulation of tariffs (in terms of management and maintenance of the multi-apartment buildings).

The Law of Ukraine "On Commercial Metering of Heat Energy and Water Supply" largely solves the problem of transparent and fair accrual of fees for services.

However, the provisions of these laws cannot be fully applied without amendments to the effective Law of Ukraine "On Housing and Communal Services" – because it defines the rights and obligations of the consumer and the provider of housing and communal services, the very list of services, and the procedure for payment for these services. Therefore, the real supply demonopolization and transparency of tariff formation could not be ensured without changing this Law.

So, speaking briefly, there existed an urgent need to "update" the Law of Ukraine "On Housing and Communal Services" so that it would incorporate new approaches and would be coordinated with the previously adopted new legislative acts.

What’s New: New Classification of Housing and Communal Services

The first and obvious change in the new Law is the new list of housing and communal services. The names and structure have changed.

LET US COMPARE: 

List of services according to the Law of Ukraine “On Housing and Communal Services” of 06/24/2004	List of services according to the Law of Ukraine “On Housing and Communal Services” of 11/09/2017
Communal services	Communal services
district cold water supply	on district water supply
district hot water supply	on hot water supply
sewage (with use of internal building systems)	on district sewage
gas supply	on supply and distribution of natural gas
district heating	on heat energy supply
domestic waste removal	on domestic waste management
-	on supply and distribution of electricity
“Housing”* services	Housing service
services on maintenance of the buildings, structures and building territories (cleaning of indoor premises and building territory, sanitary maintenance, servicing of internal building networks, elevator maintenance, lighting of common areas, routine repairs, domestic waste removal etc.);	service on multi-apartment building management, including: ·                    maintenance of common property of a multi-apartment building, such as  cleaning of indoor premises and building territory, fulfillment of sanitary and technical works, servicing of internal building networks (except for servicing of those internal building networks which are used for providing the relevant communal service in case of conclusion of the individual contracts on providing this service, according to which servicing of such systems is conducted by the provider), elevator maintenance etc.; ·                    procurement of electricity to ensure functioning of common property in a multi-apartment building; ·                    routine repairs of common property in a multi-apartment building.
services on maintenance of the building, structure or group of buildings (holding on books, conclusion of contracts on service providing, control over fulfillment of contract etc.);
services on repair of premises, buildings, structures (replacement and reinforcement of  the structure and network elements, their reconstruction, recovery of bearing force of the structure bearing elements etc.).

* Unofficial term, not used in the Law

 
The first thing that attracts attention in these changes is combining within the framework of one service on management of a multi-apartment building of also maintenance and routine repairs of the common property in a multi-apartment building, as well as procurement of electricity for the general building needs. This is a logical continuation of the approach laid down in the Law of Ukraine "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings".

We will provide more details on management of a multi-apartment building below, and now let's focus on one more aspect: a service on domestic waste management (domestic waste removal – in the old law "On Housing and Communal Services") is now a separate communal service and cannot be part of service on maintenance of a multi-apartment building, as this was allowed by the old Law. This should not affect the total cost of housing and communal services. Simply, those consumers who previously paid for waste removal as part of their building maintenance fee will eventually receive a separate bill for the waste management service (or will see a separate line in the bill from their manager).

In general, the change in names of the communal services is a consequence of a new understanding of what is a communal service, new models of contractual relations and a new approach to payment for communal services. We will talk about this further.

What’s New: Why Communal Services Were “Renamed”?

If you read the new names of communal services, it immediately strikes the eye that they are as much as possible consistent with the terminology of the relevant laws: "On Drinking Water, Drinking Water Supply and Sewage," "On Heat Supply," "On Waste," "On Electricity Market," "On Natural Gas Market".

The new Law "On Housing and Communal Services" proceeds from the logics that communal services are "produced" outside the premises/building of the consumer, and not in it, and they "come" to the consumer in the finished form. After all, if we talk about a multi-apartment building, the co-owners will not be able to do anything with the communal service which entered the building, they can only distribute it and consume it. Accordingly, there are no grounds for giving different names to the same service when it is "in the building" and when it is still "before the building". And therefore, there are no grounds for establishing separate tariffs for communal services “in the building”, and in fact - "surcharges" to the tariff for the service "before the building". In other words, if 1 m3 of drinking water costs UAH 16.00 "at the inlet" to a multi-apartment building, then it should cost the same also "at the tap exit" of the consumer.

Here is an example. The old Law "On Housing and Communal Services" contained a district heating service. Its quality was evaluated by the temperature in the consumer's premises. But how can a heat supply utility affect indoor temperature if the consumer opens or closes the windows and doors himself/herself, and he/she decides whether to insulate the apartment or not? Also, the price (tariff) for such a service was higher than just the price (tariff) for heat energy entering the multi-apartment building. But what has the provider of this service done in the building of what was not done in the phase of production, transportation and supply of heat energy? Maybe just printed a bill for payment! Thus, we used to have a double-deception: the consumers were entitled to demand from the provider a certain indoor temperature (and not the heat carrier temperature!), which the provider could hardly affect, and the provider charged the consumers a higher fee for the "service in the building", although cost of heat energy did not change from the fact that it was now in the building networks.

With enactment of the new Law "On Housing and Communal Services," the situation should become more transparent: the price per unit of service will be the same both "before the building" and "in the building". And "additional expenses" in the building (if any) will be paid separately, as discussed below.

 

What’s New: Service on Management of Multi-Apartment Building 

A service on management of a building, structure or group of buildings was envisaged by the old Law "On Housing and Communal Services". However, according to that Law, this service was "additional" to the service on maintenance of the buildings, structures and building territories, the content of it was unclear for the consumers (and often – for the potential managers themselves), and also privileges and subsidies did not apply to payment for this service. Therefore, conclusion of the contracts on provision of this service has not become widespread – the consumers and providers concluded only the contracts on service on maintenance of the buildings, structures and building territories.

The basis for a new understanding of the concept of multi-apartment building management in general and a service on its management in particular was laid down by the Law of Ukraine "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings" of 05/14/2015. First of all, it provided the notion of managing the multi-apartment building in general ("taking actions by the co-owners of a multi-apartment building for exercising of rights and fulfilling of obligations of the co-owners associated with the possession, use and disposal of the common property of a multi-apartment building") and identified three forms of such management: directly by the co-owners, by the homeowners association (association of homeowners associations), by the manager. And in the case of management of a multi-apartment building by a third-party manager, there exists the service on management. But Law "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings" did not envisage detailed regulation of the management service, since it was not the subject of its regulation.

And so, in 2017, with adoption of the new Law "On Housing and Communal Services", the service on management of a multi-apartment building received a detailed new regulation. What has changed?

Firstly, the new Law eliminates the artificial division of services on maintenance and management of a multi-apartment building: maintenance is defined as an integral part of management.

Secondly, the price of management services is defined as a free (contractual) price. The Law has allowed the co-owners of multi-apartment buildings and potential managers to negotiate independently the price of this service. In combination with possibility of the co-owners to independently choose and replace the managers that was envisaged by the Law "On Peculiarities of Exercising Ownership Rights in Multi-Apartment Buildings" and was additionally regulated by the new Law, this creates the preconditions for real competition in the housing management market.

Thirdly, a state social norm "marginal rate of expenses for housing management" is introduced. This means that the existing system of privileges and subsidies for payment of the housing and communal services in Ukraine will also apply to expenses for management of the multi-apartment buildings in general and to the management fee in particular. 

How the manager, according to the new Law, will differ from the provider of service on building maintenance (well known "ZhEK") from the old Law? The answer to this question depends on the co-owners of the multi-apartment buildings themselves. For a manager, just like previously for the provider of maintenance services, the main task determined by the Law is maintenance of the building and building territory. But the Law now makes it possible to charge the manager with additional functions in the contract with this manager.

In particular, the co-owners may charge the manager with: 

• conclusion of the collective agreements on providing certain communal services with their provider, on behalf of the co-owners of a multi-apartment building;
• renting out common property on instruction from the co-owners; and
• organizing and acting as a customer for capital repairs of common property. 

And this is only part of the list. Clearly, the manager will charge higher fee for performing more functions – and the new Law allows the parties to negotiate its amount, and guarantees that privileges and subsidies will apply to it (within the limits of the abovementioned marginal rate of expenses for housing management).

Therefore, will the manager remain the same old ZhEK under a new name, or it will really provide the co-owners with new service of better quality – this depends on the co-owners themselves and on the functions that they will decide to delegate to the manager. Those who will not want any changes – will have no changes. 

What’s New: Models for Organization of Contractual Relations on Providing Communal Services

New Law “On Housing and Communal Services” envisages three basic models of contractual relations for providing communal services in a multi-apartment building: 

• individual contract;
• collective contract; and
• contract with HOA as a collective consumer. 

The Law leaves the choice of a specific model to the co-owners of a multi-apartment building (except for services on supply and distribution of natural gas, supply and distribution of electricity which are provided exclusively on the basis of individual contracts). The providers of communal services are obliged to conclude contracts in the specific multi-apartment building according to the model(s) of contractual relations organization selected by the co-owners. Initially, one year from the moment of Law enactment is given to the co-owners of a multi-apartment building to select the model of contractual relations organization. Later, the co-owners will be able to change the model they selected.

Should the co-owners not decide themselves about the model of contractual relations organization, the Law envisage the model “by default”. It is the model based on the individual contracts but with certain peculiarities, in fact – a “sub-version” of the basic model. Thus, we can talk in fact about four models of contractual relations with respect to communal services. Let us look at each of them.

Individual contract

The model of contractual relations organization on the basis of individual contracts envisages that the contract with the communal service provider is concluded by each co-owner of a multi-apartment building independently.

The provider shall: 

• receive payments directly from the co-owners (and, accordingly, ensure printing of bills, receiving payments, claim administration, etc.);
• be responsible for communal service quality in the consumer’s premises (so called provider’s liability “to the tap”); and
• conduct maintenance and current repairs of the internal building systems in a multi-apartment building which ensure providing of the relevant communal service.

Naturally, expenses for the customer service to work with each separate customer, as well as  maintenance and current repairs of the internal building systems in a multi-apartment building require additional expenses of the provider. Therefore, with this model of contractual relations organization, payment to the communal service provider consists of:

• payment for service which is calculated based on the amount of approved prices (tariffs) for the relevant communal service and amount of consumed communal services;
• payment for customer servicing maximum amount of which is determined by the Cabinet of Ministers of Ukraine; and
• payment for maintenance, current repairs of the internal building systems in a multi-apartment building which ensure providing of such service, which is determined by the contract between the provider and co-owners.

Summing up, when individual contracts are concluded, each co-owner has a “separate” contract with the communal service provider, the provider is liable for quality separately to each consumer, but the co-owners in addition to price (tariff) for a unit of service also pay to the provider the payment for customer servicing and payment for maintenance and current repairs of the internal building systems. Clearly, the contract with the manager should be changed in such case: the manager’s obligation to maintain the relevant internal building systems should be deleted from it, and the manager’s fee should be reduced accordingly.

In case of non-payment by some of the co-owners to the provider, the latter files a claim to such debtor.

Should the co-owners be unable to reach consent regarding selection of the model of contractual relations organization (or with the provider regarding payment for maintenance and current repairs of the internal building systems), the Law envisages the model “by default”. It is a “sub-version” of the model based on the individual contract, with the following peculiarities: 

• the co-owners do not pay to the provider the payment for maintenance and current repairs of the internal building systems;
• the provider does not conduct maintenance and current repairs of the internal building systems; and
• the provider is liable for service quality only “at the building inlet”, not in the customer’s premises. 

Payment to the provider in this case includes accordingly only:

• payment for service based on the amount of approved prices (tariffs) for the relevant communal service and amount of consumed communal services; and
• payment for customer servicing.
  
  

Collective contract

The model of contractual relations organization on the basis of collective contract envisages that the contract with the communal service provider is concluded by the person authorized to do so by the co-owners, on behalf and at expense of all co-owners of a multi-apartment building.

This authorized person may be anyone authorized by the meeting of co-owners of a multi-apartment building or HOA general meeting: anyone of co-owners of a multi-apartment building, manager of a multi-apartment building, HOA management board or any other natural person or legal entity.

Under this model of contractual relations organization, the provider: 

• is liable for service quality only “at the building inlet”;
• does not collect payments directly or work with the consumers; and
• does not conduct maintenance and current repairs of the internal building systems. 

Accordingly, payment to the provider consists only of payment for communal service which is calculated proceeding from the amount of approved prices (tariffs) for the relevant communal service and amount of consumed communal services. There are no payments to the provider for customer servicing and for maintenance of the internal building systems.

Collection of payments (with subsequent transfer to the provider) is done by the person authorized by the co-owners. This person’s task is to form the consumer bills and to monitor timely payment by each consumer. The authorized person opens a separate bank account for receiving payments, with a special use mode and on each type of communal services. The funds on this account belong to the co-owners of a multi-apartment building.

It is important that in case of consumer debt, it is not the authorized person but the communal service provider itself who files a claim with the consumer.

What is the purpose of this model? The matter is that work on distribution between the co-owners of the amount of consumed communal services for the purpose of forming the bills, formation and printing of these bills, work on collection of payments all have their cost. And having a “customer service” for one subject (for instance, the manager) is usually less expensive than having several customer services for several communal services providers. Because ultimately it is the consumer who pays for everything!

In addition, this model allows not to single out the element on maintenance and current repair of the internal building systems from the general building maintenance – which is important for the case when the co-owners are not willing to delegate this function to the communal service provider (or it is not willing to perform it).

Contract with collective consumer

The model on organization of contractual relations on the basis of contract with the HOA as a collective consumer envisages that the contract with the communal service provider is concluded by the HOA as a legal entity on its own behalf.

This model is very similar to the model based on the collective contract. But unlike the previous one, the HOA as a legal entity is liable on debts for communal service – the provider has no right to file a claim directly with the specific co-owner. And internal relations between the HOA and co-owners are regulated by the HOA charter and decisions of its management bodies, and not by the law or the contract.

Otherwise, everything is like in the previous model. The communal service provider is paid only for the communal service, based on the price (tariff) and amount of consumption, without payment for customer servicing and without payment for maintenance and current repair of the internal building systems.

What does this model of contractual relations organization give to the co-owners? Firstly, like in the model based on the collective contract, – savings on payment for customer servicing. Secondly, keeping maintenance and current repair of the internal building systems to the HOA (or a contractor selected by it) – which often is a significant argument for the co-owners of multi-apartment buildings that have for example, the modern/modernized individual heat substations. Thirdly, elimination of external interference in the internal HOA affairs: the co-owners and the HOA will sort out themselves the amount of fees for communal services, and the payment discipline as well.

The co-owners will have to decide which of the models envisaged by the Law they will select. Each of them has strengths and weaknesses. The co-owners will decide on their choice only after weighing all the pros” and “contras” for their specific multi-apartment building. To make this choice easier, we provide below the generalized comparative table on the models of contractual relations organization.

Comparison of models of contractual relations organization with respect to providing communal services
	Individual contract	Individual contract (sub-version)	Collective contract	Contract with collective consumer
Provider’s responsibility for service quality	“To the apartment tap”	“To the building inlet”	“To the building inlet”	“To the building inlet”
Payment for customer servicing	Collected by the provider	Collected by the provider	Not collected by the provider *	Not collected by the provider **
Payment for maintenance and current repair of the internal building systems	Collected by the provider	Not collected by the provider ***	Not collected by the provider ***	Not collected by the provider ***
Settlements for the service	Direct, between the consumer and provider	Direct, between the consumer and provider	Consumer – authorized person - provider	Consumer – authorized person - provider
Claims to the debtor	By the provider	By the provider	By the provider	By HOA (internal rules)

* The relevant expenses are included in payment to the manager or another subject concluding the contract on behalf of the co-owners

** The relevant expenses are included in HOA budget (accountant’s salary, expenses for printing of the bills, etc.)

*** The relevant expenses are part of expenses for management of a multi-apartment building conducted by another subject (manager, HOA). 

USAID Municipal Energy Reform Project in Ukraine