Canada: Capital Reserve Fund Exists To Minimize Special Assessments

Last Updated: August 25 2016
Article by Robert Noce

Q: Due to mismanagement over the years, the monthly fee on a condo my sister purchased in 2005 increased from $350 to $436 to $644 per month following an assessment in January 2015. Is this allowed? The reserve fund was not kept up until recently. What is the required amount for a reserve fund?

A: Yes, the increases in condominium fees are legal. There is nothing in the Condominium Property Act that provides any direction with respect to the required size of a capital reserve fund. The amount in the reserve fund will vary from condominium building to condominium building. The amount is generally determined by an engineer who conducts a reserve fund study and provides that information to the board. In Alberta, you are required to conduct a reserve fund study every five years. The engineer would determine that in year one, for example, the condominium corporation should replace the shingles, and the amount to replace the shingles is X amount of dollars.

Armed with that information, the board, when setting its budget, not only will raise sufficient funds to pay for the operating expenses of the condominium corporation, but also put money aside in order to pay for the capital improvement that will occur in 2016. I appreciate that there is generally no appetite to increase condominium fees. However, the old saying is true: Pay me now or pay me later. If there are insufficient funds to pay for the capital improvement for that particular year, then the only way the condominium corporation will get that money is to issue a special assessment. That means people will be hit with a significant one-time fee to pay for a particular capital improvement.

Helpful Hint: The whole purpose of the reserve fund is to minimize special assessments. Use the reserve fund study and budget appropriately so that current and future owners will not be burdened with bad management decisions. This is worth repeating: There is no prize at the end of the year for having the lowest condo fees in Alberta.

Q: I am the secretary/treasurer of a 37-unit condo complex. We have stored all the paper records from the past 26 years in boxes. What documents must be kept?

A: The Condominium Property Act and the regulations do not provide any guidance on this issue. I am assuming that your bylaws provide no guidance either. Therefore, I would follow the general practice that many organizations follow with respect to document retention. You are not required to keep documents forever.

Obviously, you want to keep documents/agreements to provide information with respect to ongoing relationships to protect the condominium corporation in possible litigation and ensure compliance with the law. You may want to consider developing a document retention policy that divides the document retention periods into three easy categories: permanent retention, seven-to-10-year retention, and one-year retention. The policy should also provide for periodic review and disposal of documents.

Helpful Hint: Document retention is a huge, yet important, undertaking. As condominium corporations get older, the issue of document retention becomes ever more significant.

Q: Can a condominium board use reserve funds for an item not included in the reserve fund plan?

A: No. Once a condominium corporation has obtained the reserve fund study, the board is required to put together a reserve fund study plan. It is this plan that will govern the condominium corporation with respect to capital expenditures. If a capital expenditure is outside of the reserve fund plan, then it would be inappropriate for the board to use reserve fund money to pay for an unexpected capital expense. The reserve fund money is not a slush fund to be used at any time. Rather, this money must be used in accordance with the reserve fund plan that was adopted by the corporation.

Helpful Hint: When in doubt, the board should seek a legal opinion to determine whether or not funds can be used for a particular purpose.

Q: I live in a complex that is a mixed property. The townhouses are billed directly by the utility company for their natural gas. Last year, my condo board over-budgeted the natural gas expenditures for the apartment-style condos (124) by approximately $22,000. This year, the apartment fees went down, while the townhouse fees went up by over 12 per cent. I empathize with the apartment-style condo owners, and I realize the corporation cannot reimburse them for the over-calculation of the natural gas costs, but does the board have the authority to decrease the monthly contributions for one property type and significantly increase another property type in the next budget?

A: The Condominium Property Act states that condo fees are to be determined by levying contributions on the owners in proportion to the unit factors of the owners' respective units. Or, if provided for in the bylaws, on a basis other than in proportion to the unit factors of the owners' respective units. In other words, if your bylaws allow you to calculate condo fees in a different way, other than unit factors, then you are permitted to do so. If your bylaws are silent in this regard, then it would require an amendment to your bylaws to give the board the authority to calculate condo fees on some other basis. To change bylaws, you require 75 per cent of the owners and unit factors to support that change.

Helpful Hint: I am aware of several condominium corporations that assess condominium fees on a different basis than unit factors. However, they do so because their bylaws give them that authority. Check your bylaws.

Q: If the sale of a condo falls through because of a flaw discovered at the time of an inspection request made by a potential buyer, and that flaw might be common to other units, i.e. the roof or installation of windows, do owners have the right to know why the sale fell through if the seller has notified the board? Similarly, if a sale falls through because the buyer's lawyer has recommend that their client not buy the property because the reserve funds are unacceptably low, do the owners have the right to know (again, assuming the seller has notified the board) since any failed sale attributed to these two circumstances will also negatively affect the other owner's property values?

A: If the seller wants to share this information with other owners within the complex, then it would be up to them to decide what information they would like their fellow owners to know. These kinds of building flaws and reserve fund concerns are items best raised at the AGM, when all owners in attendance have an opportunity to contribute to the discussion. As well, it gives the board an opportunity to respond to owners' concerns.

Helpful Hint: There are aspects of home inspections that are subjective, and one prospective buyer may accept a known flaw, whereas another may not. The same can be said with respect to a reserve fund, since a lower purchase price can sometimes offset a future special assessment. While the board should hear and talk about legitimate concerns, you don't want to create a mass panic situation where none is warranted.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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