Over the course of 2013 it came to the attention of the Real Estate Council of British Columbia ("RECBC") that the legislative requirements related to the management of strata corporation sections were not fully understood by much of the strata management industry. RECBC began a campaign to educate licensees and established a 'phase-in' period of 18 months in which brokerages and individual licences providing strata management services to strata corporation sections are expected to bring their business practices into compliance with the legislative requirements. The compliance 'phase-in' period commenced with the publication of a Special Report from Council in March 2013 and ends December 31, 2014.
Background
RECBC is a regulatory agency responsible for: (a) licensing individuals and brokerages engaged in trading services, rental property management services and strata management services; and (b) enforcing the licensing and licensee conduct requirements of the Real Estate Services Act(BC) ("RESA") and the rules established by RECBC pursuant to RESA (the "Council Rules"). Licensees that provide strata management services are required to comply with RESA and the Council Rules. RECBC does not enforce the Strata Property Act (BC) (the "SPA").
The SPA permits the creation of sections so that the different interests of owners to different types of strata lots can be represented. Usually the sections divide the residential strata lots and the commercial or non-residential strata lots; however sections can be established for other types of strata lots as set out in the SPA (i.e. apartments vs townhouses). The sections are created by the strata corporation's bylaws established by the developer at the time the strata plan is filed, or subsequently by an amendment to the strata corporation's bylaws approved by a 3/4 vote of each of the groups intending to form a section and a 3/4 vote of the whole strata corporation. The strata corporation continues to exist and must function in the same manner as any other strata corporation with respect to meetings, a council, and budget and strata fees for expenses that are common to all of the strata lots.
Once created, a section is also a corporation and has the same powers and duties as the strata corporation but in respect of matters that related solely to the section. Each section identified in the bylaws of the strata corporation is a separate legal entity, and the SPA contemplates that each will operate independently of the strata corporation. Sections must establish a budget for expenses the section authorizes, must establish their own operating fund and contingency reserve fund for common expenses of the section, and have the power and duty to (a) require owners of strata lots in the section to pay strata fees and special levies for expenditures the section authorizes, (b) sue or arbitrate in the name of the section, (c) enter into contracts in the name of the section, (d) acquire and dispose of land in the name of the section; and (e) enforce bylaws and rules. The SPA further provides that each section must elect an executive with the same powers and duties as the strata council in respect of the strata corporation but in respect of the section, and hold (or waive) an AGM to elect the executive and approve a budget.
Strata corporations often hold one AGM during which the budget which is approved contains the expenses of the sections, and separate AGMs are not held. This practice does not conform to the SPA. Each of the strata corporation and the sections must hold (or waive) the AGM at which the strata council or executive, as applicable, must be elected and the relevant budget approved.
RESA and Strata Management Services
The definition of 'strata corporation' in the RESA includes a section as defined in the SPA. Thus, a section is considered to be the same as a strata corporation under the RESA and as a result (a) the RESA and the Council Rules relating to strata management services apply to services provided to a strata corporation and its sections, and (b) the strata corporation and each of its sections constitute 'clients' of the licensee providing the strata management services.
The result of this is that a strata management company must treat the strata corporation and each of its sections as independent entities/clients, and must comply with the following:
(a) enter into a separate written services agreement (unless waived) with the strata corporation and each of the sections (section 5-1 of the Council Rules), and each such agreement must include certain information set out in section 5-1(5.1) of the Council Rules. It is suggested that where a strata management company acts for the strata corporation and one or more of its sections, the written services agreements should also address matters which could present conflicts of interest for the strata management company;
(b) maintain separate trust accounts for the strata corporation and each of its sections on behalf of which it holds or receives money (section 7-9 of the Council Rules) and comply with the reporting requirements for each trust account as set out in section 7-9(7) of the Council Rules. If the strata management company was permitted to hold the strata corporation's and one or more section's funds in the same account, the account would be in one legal entity's name and the source and ownership of the funds would be difficult to track. However, it was recognized that many strata lot owners may wish to make one blended payment of fees owing to the strata corporation and to their section. The RECBC amended the Council Rules to add section 7-9.1, which permits a strata management company to receive such blended payments so long the strata management company complies with this new rule, including, but not limited to, the requirement that the portion of funds belonging to each legal entity is transferred to such legal entity within 7 days of receipt of the funds by the strata management company. The compliance 'phase-in' period ending December 31, 2014 applies to compliance with section 7-9.1;
(c) maintain separate books, accounts and other records for the strata corporation and each of its sections on behalf of which it provides services (section 8-7.1 of the Council Rules); and
(d) the rules set out in section 3-3 of the Council Rules with respect to conflicts of interest between the strata corporation and each of its sections, unless the strata management company and the clients (ie. both the strata corporation and the sections) agree to modify or make inapplicable one or more of those duties pursuant to section 3-3.1 of the Council Rules.
Sections add a layer of complexity and additional administrative burdens to strata corporations, only some of which have been covered herein; however they are a useful vehicle for allocating costs between different types of strata lots with different interests. Strata corporations should not instruct strata management companies, and strata management companies should not take instructions, such that the strata management company would contravene the requirements of RESA and the Council Rules. Strata managers should turn their mind to these requirements and should review their current practices for compliance.
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