You Asked Us – Reserve Fund Study Questions

You Asked Us – Reserve Fund Study Questions

Many condominium corporations are now receiving their first Reserve Fund Study. With the requirements outlined in the Condominium Act, Boards of Directors have an increased responsibility to the owners in ensuring the common elements are kept in good repair and that the necessary funds for these repairs are available when the time comes.

Once a condominium board receives a reserve fund study (or a draft study), there are often a host of questions that arise. Below are some common questions.

Question:

Can we borrow money to pay for repairs that would normally be paid from the reserves?

Answer

Yes; many condominiums incorporate a loan into their reserve fund planning although usually only when faced with major repairs that must be dealt with more or less immediately . One of the principal benefits is that it allows them to undertake multiple major repair/replacement programs that they may otherwise be unable to afford for many years. Equally important is that it reduces the immediate financial impact on the unit owners by spreading the cost out over a period of up to ten years, (such loans are typically for five year terms and amortized over ten years) . Before borrowing money a condominium must have a borrowing by-law approved by the owners, (51% of all of the units). This is not to say that a condominium can dispense with its reserve fund and borrow money every time it needs to undertake a major repair. From a practical perspective most banks won’t give more than one loan to a condominium at any given time. More importantly that type of "planning" does not, in this writer’s opinion, meet the requirements of the Act which requires that the condominium collect sufficient funds to ensure the reserves are "adequate" to meet the needs of the corporation at any given time.

Question

The majority of our residents are elderly and many do not understand why we have to pay now for something we may never receive the benefit of. What would happen if we decide to only put a minimal amount of money into the reserves?

Answer

There are no ‘condo cops" or any other government agency whose job it is to chase down curmudgeonly condominiums. However, what will happen includes any one or more of the following:

An owner or mortgagee may sue the condominium and its board of directors for breach of the Condominium Act 1998;

The auditor will report the non-compliance and breach of the Act in the audited financial statements which will in turn alert owners and new buyers (through the Status Certificate) of the inadequacy of the reserve fund and the breach of the Act;

The building(s) and other common amenities will degrade faster due to insufficient funds for maintenance and repair them;

The corporation’s insurer may increase premiums and eventually refuse coverage, if the state of repair of the common areas begins to pose a safety risk;

The insurer may also cancel the Director’s and Officer’s liability coverage or at least remove coverage for claims that relate to the board’s breach of its duties to fund the reserves adequately under the Act;

For the above reasons unit values will decline and Owners, (or their estates!) will find it increasingly difficult and eventually impossible to sell or mortgage their units and they will be angry;

A new board will eventually take over to "cure" the problem, which will likely include large special assessments; and

The board members who knowingly participated in this process will be sued; will very definitely be found liable and will likely have no D&O coverage to back them up.

The fact that this process may take a number of years to play through actually compounds the problem, as the corporation falls further and further behind, meaning larger and larger amounts of money will be needed to resurrect the reserve fund. Not adequately funding the reserves is definitely not a good idea.

Question

If a corporation had a Reserve Fund Study completed during 2001 but has yet to approve it is there any requirement to have another comprehensive study undertaken in 2004 or is an update sufficient? If, in this same corporation, two out of the three Board members have listed their units for sale, do they have any liability for not fulfilling their obligation given that the content of the study indicated a substantial shortage in the reserve?

Answer

If not approved in the three year time span the information is outdated therefore a full comprehensive study should be undertaken. If prior to the three year term the study is approved and the Form 15 issued, only an update is required as per the Act.

The Board members really assume no liability since the corporation has until 2004 to complete a comprehensive study however information provided in the status certificate should reflect the reserve fund study being completed, not approved and indicate the possibility of a special assessment.

Question

What happens to those corporations who elect not to have the study completed prior to May 2004 or if they do not complete the study after May 2004?

Answer

Corporations who elect not to undertake a reserve fund study open the door for possible legal action from unit owners who inherit the increased financial burden as a result of the delay. Further the information will be disclosed in the annual audit exposing the Board to possible legal action.

By refusing to undertake a study after May 2004 the corporation is in violation of the Act which ultimately will jeopardize their officer’s and director’s insurance coverage and such action will be reported in the audited statements, again, jeopardizing resale values of units.

Question

Upon receiving a draft reserve fund study, the Board disputes the inclusion of certain building components since in the declaration it indicates the unit owner is responsible for repair and maintenance of these items (windows are often an example). Should they be considered a common element?

Answer

The boundaries of the unit are shown both in the declaration as well as the description drawings, both of which the consultant would review. With the window example if the boundaries of the unit stop on the inside surface of the window and frame, then the windows are a common element regardless of the maintenance and repair provision and must be included in the study. The Regulations to the Act requires that any common element with a major repair or replacement value over $500 must be included. The repair provision is included in most declarations in the event that the windows are damaged through an accident in which case the unit owner is indeed responsible.

Question

Is the schedule for repairs/replacements of the common elements fixed?

Answer

The Reserve Fund study is just an aid to determine expected expenditures over the study period for the Corporation. The schedule included in the study is generated from the information that is gathered during the site inspection. Observations regarding the current condition of each common element are made and the adjudged age of the elements will establish the expected life.

The overall life expectancies are gathered by the Consultants from various sources including published materials, manufacturer’s warranties, on-going projects being undertaken by the Consultants, etc.

Site inspections are critical to determine if the work is warranted. If the element appears to be in better condition than anticipated, the expected work can be delayed. Since the Reserve Fund study is updated every 3 years, new information obtained during the updates will be incorporated into the new report.

There are still more questions. It is recommended that if a Board is unsure of its responsibilities or the direction necessary in implementing or following through on the Reserve Fund Study, that the appropriate professional advice be obtained.

Contributors:

Ron Danks, Simpson Wigle LLP, Karen Reynolds & Ray Wilson, Wilson Blanchard Management Inc., Kim Coulter & Melody Wong, Coulter Building Consultants Ltd.

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Last Updated by Steve Warner on Sept 13, 2003