Reserve Funds

More Questions And Some Answers by Donald J. Kramer, Q.C. Melnyk & Company

I recently had an opportunity to peruse a Newsletter published by one of Canada's major law firms. While the Newsletter is from Ontario, one of the topics addressed was the issue of Contingency Reserve Funds and whether or not a corporation is obliged to spend the money in the year for which it has been earmarked. The Article concluded that generally the answer is `not'. For example, if the Depreciation Report has the roof being repaired in 2005, it does not mean that if in 2005 the roof is still in good shape that you need to spend the funds. Conversely, let's say in 2005, while you have the money set aside for the roof, you now discover that the sewer system needs substantial repairs, and then the question is can you use the monies that were budgeted for the roof to repair the sewers? Again, the Newsletter article concludes that the Corporation is free to do so.

Obviously if the corporation has a good preventative maintenance program that extends the life expectancy of some of the components, then it is hard to see where a corporation would go wrong in forestalling any repairs until they became necessary. Note the reference to `necessary'. Any corporation that delays to the point where the replacement become urgent, runs the risk that the cost to replace would be greater than it would have been had the corporation been pro-active and acted in a timely fashion. This in turn may lead to potential liability issues for the increased costs.

The whole point of the Article was to demonstrate that a Depreciation Report is merely a guideline that the council is expected to follow as long as they do so in a reasonable fashion. While it is open for owners to challenge the decisions of the council, in doing so those who make the challenge may, in effect, have to put their money where their mouth is. If those owners can do a better job than the current administration (council and management company) and can do it for less, then one would think any owner would be prepared to vote those individuals onto the council. It should also be noted that most council members are subject to the same condominium fee assessments that owners are, and as such do not willingly tax themselves. This is the most obvious safeguard built into assessments — those who levy also have to pay. Any owners who want to challenge the decisions of the current council and its administration, should arm themselves with the appropriate information before embarking on a council challenge. In turn, councils should be more transparent in making sure that the appropriate information is made available to owners.

So remember, while slavish adherence to a Depreciation Report is laudable, it is not always prudent. Indeed, it may find the corporation making unnecessary assessments when a little juggling will accomplish the job without compromising the obligations of the corporation and its council.

Finally, the issue of whether or not a council has the authority to improve aspects of the common property is a frequent topic of controversy. A corporation looking to update its rather dated lobby raised a recent example. While the lobby had been mentioned in the Depreciation Report, and was the subject of replacement funding, some of the owners and the council felt that a little sprucing up would clearly enhance the impression one received when walking into the building. The collateral benefit (and one of the arguments used to support the upgrade) was that it would be more inviting for potential purchasers (and thus enhance sales). What do you think? Should the corporation be allowed to spend modest amounts to improve aspects of the common property?

In the meantime, do not be afraid to contact your condominium professionals for guidance on these issues, as no council should have to go it alone.

This article was adapted from The Canadian Condominium Institute, North Alberta Chapter's newsletter `The Voice of Condominium'