Legal

October 8, 2021 Published by Eastern Ontario Chapter - By James Davidson

Waiting for Amendments About Reserve Funds and Reserve Fund Studies

From the Volume 29 issue of the CCI Eastern Ontario Condo Contact Magazine

Readers will be aware of the many amendments to the Condominium Act, 1998 (the Act) and Regulations that were passed by the Ontario legislature in 2015 (and some subsequent amendments as well). Many of those amendments were also proclaimed in force (mostly in 2017). To mention a few examples, we’ve seen the arrival of the Condominium Authority of Ontario, the Condominium Authority Tribunal, mandatory training for Directors, Information Certificates, Meeting Pre-Notices, New Disclosure Obligations for Directors, Annual Returns, various new Mandatory Forms, etc.

But many promised amendments have still not been proclaimed in force. And we’re also still waiting for many new Regulations. Some of the important pending amendments relate to reserve funds and reserve fund studies.

Many of the key recommended amendments originated with the “Stage Two Solutions Report”, spearheaded by the then-Ministry of Consumer Services. The report was published by Canada’s Public Policy Forum in September 2013, based upon input from a panel of distinguished experts. The report included numerous recommendations about reserve funds and reserve fund studies. Some of those key recommendations were as follows:

• The minimum required first-year reserve fund contributions (set by Declarants) should be based upon proper calculations.
• The legislation should include a definition of an “adequate” reserve fund. More specifically: “The year-overyear percentage change in total contributions to the reserve fund should be no greater than the assumed inflation rate used in the reserve fund study, except for the first three years when total contributions may be greater than the assumed rate”.
• Permitted reserve fund expenditures should include green energy projects (subject to various conditions).
• Reserve fund study updates should be “triggered” if the fund balance drops below a prescribed level.

These recommendations were then “taken up” for further analysis and anticipated implementation by industry experts and legislation drafters appointed by the Ministry. We also heard wind of some additional (in my view, excellent) ideas from those industry experts. For instance, industry experts suggested lengthening the current 30-year reserve fund study period (to 45 or perhaps even 60 years). The idea is to hopefully include, in the study period, at least one replacement cycle for the condominium’s “large future replacement projects”. For instance, if window replacement isn’t expected until 35 years after the study is performed, a 30-year study might not call for (perhaps significant) contributions needed for that future window replacement. [In my view, there is room to argue that a study, even under the current legislation, needs to be adjusted to account for any such large replacements that are anticipated to come outside the study period. Or alternatively, it may be appropriate to include mention of the “unaccounted-for future replacements” in the status certificates (since an increase may be needed when those future replacements “come into the study” as the condominium approaches the predicted replacement date). But a longer study period would hopefully help to minimize those concerns.]

Amendments to Sections 93 and 94 of the Act (which we assumed were intended to implement the above recommendations) were passed in 2015. But again, those amendments haven’t been proclaimed in force. We also haven’t yet seen any draft Regulations (which are important because much of the detail will be contained in the Regulations).

In December 2020, Ontario’s Auditor General published a report entitled “Condominium Oversight in Ontario”. The report contained a number of significant findings, including the following findings about condominium financial planning:

• “Initial developer-set condo fees are typically understated.”

This resulted in the following recommendation from the Auditor General:

To better protect buyers of new condos and minimize the risks of developers understating common area expenses, we recommend that the Ministry of Government and Consumer Services look to implement the following:

• require additional disclosure by developers of expected increases to common area expenses;
• give condo boards more time, such as 90 days, to claim increased amounts spent on common area expenses compared with the developer’s budget statement; and
• implement best practices from other jurisdictions, such as requiring developers to place money in trust to be available to the condo corporation if the developer understates common area expenses; or that developers have to pay a penalty if they were found to understate condo expenses by a set percentage compared with their budget statements.
• “We found that 69% of the 32 condo boards that responded to the relevant question in our survey did not have adequate amounts set aside in their reserve funds to plan for repairs and replacements of common areas and assets in their older condo buildings—those registered in 1980 and 2000.”

This resulted in the following recommendation from the Auditor General:

So that condominium corporations are required to set aside sufficient resources to safely and properly maintain condominiums, we recommend that the Ministry of Government and Consumer Services look to:

• extend reserve fund studies of condo buildings to include the cost of repairs and replacements looking forward 45 to 60 years, instead of 30 years;
• set thresholds and define adequacy of reserve funds; and
• work with the Condominium Authority of Ontario to raise awareness and communicate this issue in a clear and understandable manner.
• “Our audit found that buyers of new condos are also at risk of facing higher-than-expected fee increases because reserve funds start out underfunded.”

This resulted in the following recommendation from the Auditor General:

For there to be sufficient funding of the long term reserve from the outset and for condominium fees to realistically accrue sufficient funds to handle the long-term repair and replacement needs of the building, thus protecting condominium owners from unexpected financial shocks, we recommend that the Ministry of Government and Consumer Services look into removing the option of developers basing reserve fund contributions on 10% of operating expenses and replacing this option with a requirement to have the contributions be supported by a third-party reserve fund study.

The Auditor General’s findings and recommendations in fact align quite closely with the recommendations contained in the Stage Two Solutions Report.

The Ministry has expressed agreement with the Auditor General’s recommendations, but it has noted that some of the recommendations will require consultation with industry stakeholders followed by legislative drafting. My guess is that the Ministry is continuing to work on these issues and is “fine-tuning” the applicable Regulations. I believe that this may account for the further delay.

But I hope and believe that we can soon expect to see final legislation that will include the following:

• A definition of an “adequate” reserve fund.
• Longer reserve fund study periods.
• More robust requirements in relation to Declarant-specified firstyear reserve fund contributions.
• Revised permitted reserve fund projects, to include green energy projects.
• Triggering of early studies (when the reserve fund drops to a certain level).

It goes without saying that condominium long-term (reserve fund) planning is exceptionally important. The Florida condominium disaster was a reminder of the risks that can come from inadequate long-term planning and maintenance. Also: Sound long-term planning is part of what “allows condominiums to sell”, for the simple reason that “condominium buyers can’t beware”. Condominium buyers have no way to independently assess the condition of most common elements… and therefore have to rely upon adequate long-term planning and disclosure on the part of the condominium corporation. The amendments noted above will make reserve fund planning, in Ontario, that much more reliable.

James Davidson is one of the founding partners of Davidson Houle Allen LLP. Jim has been practicing condominium law for over 35 years. He represents condominium corporations, their directors, owners, and insurers throughout Eastern Ontario. His experience also includes building deficiencies, shared property interests, co-ownership and construction law. Jim is proud to be an associate (ACCI) and also a fellow (FCCI) of the Canadian Condominium Institute.