Co-ownership of heirs and Continuation of the Deceased's Individual Business

Legal Insight

March 2024

Eleana Karanikola, Attorney at Law

Summary: The right to an object can be part of the property of multiple individuals, either by their own initiative or due to inheritance, leading to the establishment of the legal relationship of "co-ownership" among the parties. In this note, we will attempt a concise presentation of the main legal regulations of the right of co-ownership, and subsequently, we will focus our analysis on the co-ownership of heirs, delving deeper into the specific issue of continuing the deceased's individual business by the community of heirs through the establishment of a new company and the obligation to register it in the General Commercial Registry (G.E.MI.).

1. Introduction

The "right of co-ownership" essentially represents a legal situation created when a right is jointly owned by more than one person, natural or legal, as according to the provision of article 785 par. a' of the Civil Code: "If a right belongs to several people jointly, unless the law specifies otherwise, there is a community among them in ideal parts." In such cases, the individuals participate in the community in ideal parts and are connected with each other through a legal relationship, which has a dual legal nature, on the one hand, obligational, as it regulates the rights and obligations of the co-owners, and on the other hand, real, since each ideal share of the right becomes part of each co-owner's personal property. Of course, even if it is assumed that the causative reason for the community is a legal transaction (e.g., a sale and transfer contract of a property), the obligation among the co-owners, which regulates their relationships, will be created by law, consequently being characterized as an "extrajudicial" obligation.

Specifically, each co-owner acquires and incorporates into their property only an ideal share of the right, not the entire right. However, it should be emphasized that this ideal share does not concern only a distinct part of the object of the right but encompasses the entire object. In short, all participants in the community hold an ideal share (usually expressed as a fraction, e.g., ½, ¾, etc.) over the entire right, so that the sum of all co-owners' percentages equals a full right. For example, if it is assumed that A, B, and C become co-heirs of a property on equal terms, each will add to their property an ideal share (1/3 undivided) over the property's ownership, which percentage does not concern a part of the property (i.e., specific square meters of the property) but the entire property. Therefore, once all ideal shares of all co-heirs – co-owners are added together, the full right of ownership of the property will emerge.

Furthermore, regarding the object of the community, it can be any type of right belonging to either private or public law, with or without a proprietary character (indicatively, the object of the community can be ownership, usufruct, a real servitude, a right to an intellectual product or a patent, a corporate share, or a stock, etc.).

2. Regulatory Provisions Based on the Civil Code

Given that the creation of the legal situation of the community is often due to random and unpredictable events, such as the intestate succession of several heirs, the legislator anticipated a set of provisions of obligational and mandatory law (see articles 785 to 805 of the Civil Code), aiming to address the pathological element of conflicting interests among several co-owners and the more effective management of the common with the criterion of "the interest of the whole." Therefore, a brief overview of the main legal regulations regarding the right of co-ownership is deemed appropriate.

A) Rights and obligations of co-owners

More specifically, the rights that the co-owners have over the common object according to the law are as follows:

The right to the fruits of the common object (art. 786 Civil Code): According to the above provision, each co-owner acquires an individual obligational claim, with the content being the allocation to him of the percentage corresponding to him on the natural and civil fruits produced by the common object and generally all benefits derived from the use of the thing. The co-owner's participation in the benefits will be equal to the share with which the latter participates in the community of the right.

The right to use the common object (art. 787 Civil Code): Each co-owner has the right to use the common object and to exploit it at their discretion, even for their personal use only, under the restriction that such use does not prevent the co-use of the object by the remaining co-owners.

The right to dispose of the share and the entire common object (art. 793 Civil Code): Each co-owner has the right to dispose of their ideal share or even a part of it, and especially, they can transfer or assign it, and generally proceed with any type of alienating legal transaction (such as, for example, granting a mortgage), provided it does not affect the shares of the other co-owners. It is also accepted that the co-owner can proceed with promissory legal transactions regarding their ideal share, provided that it is not an indivisible object – for example, the co-owner cannot lease to a third party only their ideal share of an object, given that its use is indivisible by nature. Finally, it is noted that the alienation of the entire object only occurs with the cooperation of all co-owners.

Now, regarding the basic obligations that burden the parties of the right of co-ownership, the law defines the following:

Obligation to contribute to the expenses for the common object (art. 794 Civil Code): With this obligation, the co-owner is required to financially contribute to the maintenance, administration, and use expenses of the common object as well as to its burdens (e.g., taxes, fees, etc.). Naturally, the co-owner participates proportionally to their ideal share, just as in the benefits.

Obligations arising from good faith (art. 288 – 788 par. 2 Civil Code): Finally, the legislator, wanting to enhance the good cooperation of the co-owners and the protection of the common object, defined as an obligation, the taking of the necessary actions for the maintenance of the thing in case of danger, without requiring waiting for the approval of the other co-owners.

B) Administration of the common object

In this case, the legislator deemed it appropriate to establish the "principle of collective administration" regarding the decision-making process that concerns the administration of the object of the community. Initially, according to the provision of article 788 par.1 subpar. a' Civil Code: "The administration of the common belongs to all the co-owners together". Thus, the adoption of any measure, whether it concerns the general determination of the method of management and administration of the common object or a specific act of management (such as indicatively leasing a property) is taken unanimously by all co-owners. Each co-owner has an individual right to vote and, consequently, the right to object to any vote regarding the management method of the common object.

However, according to the provision of article 789 Civil Code, it was specified that on certain issues concerning matters of routine administration and exploitation of the common object, a valid decision can be taken by the majority of the co-owners, unless it entails a substantial change or disproportionately expensive addition to the object. It is noted that the majority is formed based on the size of each co-owner's share, therefore, if a co-owner has more than ½ of the community, they can make decisions regarding the method of routine management of the object. Of course, if it is not feasible to make decisions neither through unanimity nor through absolute majority, then according to the provision of article 790 Civil Code, each of the co-owners has the right to request from the court to regulate the most suitable and advantageous way of administration of the object. Finally, both the court and the majority or the entirety of the co-owners have the ability to appoint an administrator, who will have in his competence the proper management of the thing always within the framework of the powers that were assigned to him.

C) Dissolution and distribution of co-ownership

One of the most significant rights of the co-owners is that of the dissolution of the co-ownership. Specifically, each co-owner can request the dissolution of the co-ownership, by addressing a relevant extrajudicial declaration to the other co-owners. In case this proposal is accepted by the entirety of the other co-owners, then they can proceed with the distribution of the common object, which entails the definitive dissolution of the co-ownership. Within the context of this extrajudicial distribution, essentially, each co-owner undertakes the obligation to dispose of a percentage of their share to another co-owner until each co-owner acquires full ownership (the entire right) over a part of the common object. Of course, in case unanimity cannot be achieved, the distribution can be ordered by a court decision following a lawsuit filed by one of the co-owners. It is noted that the distribution can be done either in kind, i.e., to divide the common object into more parts according to the shares of the co-owners, or by auctioning the object and distributing the proceeds, in case the object is indivisible. Finally, it is worth mentioning that, according to the provision of article 795 par. 2 Civil Code, the co-owners can exclude the dissolution of the co-ownership through a legal transaction with a maximum limit of ten years, while, based on article 805 Civil Code, the claim for the dissolution of the co-ownership is imprescriptible, meaning that any co-owner has the right to request the dissolution of the co-ownership at any time and without any time limitation.

3. The co-ownership of heirs

Undoubtedly, the most common cause of establishing co-ownership over objects is inheritance. More specifically, a frequent phenomenon is the intestate succession, which occurs by law in cases where the deceased has not made a will, or alternatively when the will is annulled or revoked, as well as when the testator does not exhaust the entirety of their property with the will. In this case, if there is an intestate succession according to the rules of the Civil Code, of more persons, then the law establishes a relationship of co-ownership among them, always provided that they have accepted the inheritance, either by declaration or presumptively.

The co-ownership created due to inheritance is characterized as "co-inheritance" because, in this case, it is established over the entirety of the objects of the hereditary estate, in which the co-heirs participate in ideal parts, reflecting their hereditary share (art. 1884 Civil Code). In simple terms, the number of communities that are established among the co-heirs equals the number of objects included in the inheritance, resulting in all heirs acquiring an ideal share in each object, unless specified otherwise. However, it is worth emphasizing that, according to article 1885 Civil Code, the debts and claims of the inheritance are automatically divided among the co-heirs based on their hereditary share, consequently not constituting the object of the co-heirs' community.

4. The special case of the inheritance of the deceased's individual business by several co-heirs – Obligation to register in the G.E.MI.

In the context of inheritance, it may include the individual business of the deceased, resulting in a "business co-ownership," as defined in article 483 of the Code of Civil Procedure. In this particular case, the following question arises: If it is assumed that the co-heirs continue the joint exploitation of the deceased's business, then the legal relationship regulating the entirety of the co-owners' relationships will remain the "co-ownership," or, given that the pursuit of a common corporate purpose will be added, the legal situation connecting the co-owners is that of a "company," as regulated in articles 741 et seq. of the Civil Code?

To resolve the above question, various positions have been formulated, while the most consistent opinion is according to which, the continuation of the business activity by the co-heirs, resulting either from their relevant declaration or from the de facto continuation of the pursuit of the commercial purpose, should be regulated based on corporate law. In this direction, the legislator moved, enacting the provision of article 86 par. 2 subpar. c' of Law 4635/2019 (now repealed), according to which it was specified for the first time: "In the G.E.MI., the following must be registered compulsorily: […] c. upon the inheritance of natural persons, there is an obligation to register in the G.E.MI. for the heir of a natural person who was registered in the G.E.MI. provided that the heir continues the activity of the deceased and meets the conditions of the preceding paragraphs. If the universal successors are more than one person (co-ownership of heirs) and they continue jointly the commercial business of the deceased, they must submit an application within an exclusive deadline (12) twelve months from the joint conduct of actions indicating the continuation, to the competent G.E.MI. This is accompanied by a founding document applying the corresponding provisions for the specific corporate type that will be chosen."

The same obligation was maintained in the current Law 4919/2022 for the G.E.MI., as according to article 16 par. 2 of the aforementioned law: "In case of death of the natural person who is the carrier of an individual business, the heirs can choose to continue it by establishing a new legal form." Therefore, according to the current legislative framework, the co-heirs who continue the business activity of the deceased, must establish a new company registered in the G.E.MI., of any corporate structure, in which they will participate based on their hereditary shares and will contribute the property of the community as capital. Furthermore, they must be deregistered from the competent Tax Office in which they had established the business community. Until the establishment of the new company, the community of heirs practicing the business will be governed by the provisions for the "undisclosed general partnership," while it is emphasized that the company will not constitute a transformation of the community, as it is not recognized as a corporate type. Finally, it is noted that non-compliance with the provisions of the law entails the administrative sanctions of article 50 of Law 4919/2022, while simultaneously, the participation of the communities of heirs in public works is not accepted.

The above have been adjudicated with decision no. 114/2022 of the Court of Audit as follows: "From the combined interpretation of the aforementioned provisions and according to the explanatory statement on article 86 of Law 4635/2019 according to which «regarding the already existing communities of heirs, they are obligated within one year from the law's entry into force […] to choose the legal type they wish to take and to proceed with the establishment of a company...» it is inferred that after the update, attempted with this law, regarding the operation of the G.E.MI. and the detailed recording of those obligated to register in it, the community of heirs practicing commercial activity and existing before the law's entry into force is obligated within one year (i.e., until 30.1.2021) to have acquired legal personality by establishing any form of company and to be compulsorily registered in the G.E.MI.. This is because the legislator, for reasons of public interest related to the security of transactions, does not allow the conduct of commercial transactions by natural or legal persons, which are not subject to the publicity rules entailed by the compulsory registration in the G.E.MI., regarding their establishment and their constitutional changes. In this context, by explicit provision of the law, if the existing communities of heirs at the time of its publication do not proceed with the above actions within a year and continue to conduct commercial activity in practice, they cannot participate in public contract award processes. Consequently, for a community of heirs to legally participate in a competitive procedure, it is no longer sufficient to be registered in the competent Chamber of Commerce as a simple member according to the sense of Law 4497/2017." It is noted that a similar judgment was reached by decision no. 961/2022 of the Court of Audit.

5. In lieu of a conclusion

In conclusion, with the establishment of co-ownership over a right, the co-owners acquire a set of rights, such as the use of the common object, the receipt of fruits, participation in its administration, but also a set of obligations, such as participation in the expenses of the object, thereby harmonizing their conflicting interests. The legislator, thus, specified a general framework of provisions in the Civil Code, according to which the relations of the co-owners are regulated, while also resolving more specific issues that arose from the business activity of a community (see art. 86 par. 2 subpar. c' of Law 4635/2019 and article 16 par. 2 of Law 4919/2022).