Ensuring the Financial Health and Longevity of Condominium Corporations

The board of directors of a condominium corporation in Ontario have significant responsibilities, particularly regarding reserve funds. The board of directors must collect and manage these funds prudently and in compliance with the Condominium Act. This article sets out the obligations of the board of directors concerning reserve fund contributions and the spending of these funds to protect the integrity of the condominium.

Understanding the Reserve Fund

The reserve fund is a crucial financial component of a condominium corporation. It can only be used for major repairs and replacements of the property's common elements, such as roofing, elevators, HVAC systems, and parking structures. The Condominium Act, 1998, mandates establishing and maintaining this fund to ensure the long-term viability of the property. An adequately funded Reserve account is the key to avoiding unexpected and substantial financial burdens on unit owners. By regularly setting aside funds for future repairs and replacements, the corporation can address significant maintenance issues without imposing sudden special assessments or dramatically increasing monthly fees. This proactive approach ensures that the property remains in good condition, thereby preserving its value and appeal.

Board of Directors' Responsibilities

Management of the Reserve Fund is one of the board of directors’ major obligations. The following sets out their key obligations:

1. Conducting Reserve Fund Studies

Under Section 94 of the Condominium Act, the board is required to have a reserve fund study carried out at least every three years. This study, conducted by a qualified reserve fund analyst or engineer, assesses the condition of the common elements and assets of the corporation and estimates the necessary future expenditures over 30 years. The study sets out the projected dates for repair and replacement and informs the board about the required contributions to maintain an adequate reserve fund balance.

2. Adequate Funding

Based on the reserve fund study, the board must ensure that contributions to the reserve fund are sufficient. This involves setting and adjusting the contributions from unit owners in accordance with the projections in the reserve fund study. These should be collected as part of the monthly condominium fees to accumulate enough funds to cover anticipated major repairs and replacements without resorting to special assessments.

3. Segregation of Reserve Funds and Investing

The reserve fund must be maintained in a separate account from the condominium's operating funds. This segregation is critical to ensuring that reserve monies are only used for their intended purposes. The board is responsible for overseeing this segregation and ensuring the investment of reserve funds complies with the requirements set out in the Condominium Act. 

4. Proper Spending

The board is authorized to spend reserve funds only on major repairs and replacements. The approval of owners is not required. This spending should align with a long-term maintenance plan and be executed with due diligence. The board must refrain from using reserve funds for regular maintenance or operational expenses, which should cover the condominium's operating budget. The board must also ensure that major repairs and replacements are carried out. 

5. Improvements

If the board is uncertain whether all or part of a reserve fund expenditure may constitute an improvement, which would require either notice to owners or approval of owners, it should check with the corporation's legal counsel for advice. Some improvements can be included in the expenditure without going to the owners, others cannot. It depends on what the improvement is and what its cost is.

6. Transparency and Communication

Effective communication with unit owners is critical. At AGMs, and more often, if necessary, the board should provide regular updates on the status of the reserve fund, including contributions, expenditures, and the results of reserve fund studies. Transparency builds trust and ensures unit owners are informed about their financial health and future obligations.

Challenges and Best Practices

Managing reserve funds involves navigating various challenges. Here are some best practices to address these challenges effectively:

1. Regular Monitoring and Review

The board should regularly monitor the reserve fund's status. Periodic reviews of the reserve fund study are essential. The board should stay informed about any changes in the condition of common elements and adjust contributions, as necessary, to maintain an adequate fund balance. If an unexpected expenditure negatively impacts the reserve fund balance, the board should consider doing an updated study before the next scheduled one.

2. Engaging Qualified Professionals

The Act sets out who can conduct a reserve fund study. Working with accredited reserve fund analysts and engineers ensures that the reserve fund study is accurate and comprehensive. These professionals provide valuable insights into the condition of the property and the financial requirements for its upkeep. Shopping reserve fund studies to get outcomes requiring lower contributions is inappropriate.

3. Long-Term Planning

The board should adopt a long-term perspective in managing the reserve fund. This involves anticipating future maintenance needs and adjusting the reserve fund contributions accordingly. Long-term planning helps avoid sudden financial pressures and ensures the ongoing viability of the condominium. When preparing the annual operating budget, the board should also consider preparing a reserve fund budget for the next fiscal year, including the anticipated work and associated costs. 

4. Educating Unit Owners

Educating unit owners about the importance of the reserve fund and their contributions will create a cooperative environment. Understanding the necessity of these funds and the rationale behind their contributions encourages support for the board's financial decisions.

5. Compliance

Compliance with the Condominium Act, 1998, and other relevant regulations is non-negotiable. Non-compliance can lead to legal repercussions and jeopardize the financial stability of the condominium corporation.

Conclusion

The board’s obligations regarding reserve fund contributions and spending are critical to the financial health and longevity of the condominium. By conducting regular reserve fund studies, ensuring adequate funding, segregating, properly investing reserve funds, spending prudently, and maintaining transparency, the board can safeguard the interests of all unit owners. Adopting best practices and adhering to legal requirements further strengthens the board's ability to manage reserve funds effectively, ensuring the sustained success and stability of the condominium corporation.

 

 

Audrey Loeb is a senior partner in the Condominium Law Group at Shibley Righton LLP. She has a focused practice in condominium law. She provides advice to buyers and sellers on conveyancing matters, to developers on condominium development, and to condominium corporations on issues of corporate governance and operations. Audrey has been recognized as a leading practitioner in her field by Martindale and Hubble, Lexpert, and Best Lawyers in Canada for several years. Audrey is a member of the Canadian Condominium Institute and has served as a member of a condominium board of directors.

Audrey is the author of the two leading texts on condominium law: The Condominium Act: A User’s Manual, 3rd Edition, Carswell, and Condominium Law and Administration, 2nd Edition, Carswell. She is also the author of the book Condominium Ownership: What You Need to Know. 
 

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