Reserve Funds

April 26, 2024 Published by Eastern Ontario Chapter - By Patricia Elia

Planning Ahead for 2024: Are Your Condominium Finances in Order?

From the Volume 37 issue of the CCI Eastern Ontario Condo Contact Magazine

RESERVE FUNDS

Are your finances in order? This is a powerful question and often many of us, while we consider ourselves responsible, do not always have the time and energy to focus on the answer to this question. Further, when we live or own a condominium Corporation in Ontario, we trust the legislation, the Board, the Property Manager and the Engineer to ensure that we are in compliance with the expectations set for consumer protection and financial management, under the provincial condominium legislation.

So, what exactly does the Condominium Act, 1998 (the “Act”) require the Corporation to undertake to ensure that our condominium finances are in order? What could undermine finances being in order? How long can we go without ensuring compliance?

Over the last several years, we have seen the impact of the pandemic on the finances of condominium Corporations across Canada and Ontario. We have seen both operating costs and the cost of construction go up and therefore, capital replacement go up because of construction price index increases in major business centres in Ontario.

Accordingly, the Boards have been educating themselves and working hard with property management teams to ensure that they are in “reasonable” shape to move towards. I will not say “great” or “good” because I think we need to be honest about the forces outside of our control that we are still experiencing, such as inflationary tendencies (while things still seem under control), interest rate uncertainty, the delayed effects from the shortages of materials, inadequate labour supply and strife across the world. Therefore, a reasonable take on the legal requirements under the Act is a must, but compliance with the Act is also a must to protect your community.

Under the Act and the Declaration, unit owners must pay their common expenses in the proportions specified in the Declaration. The contributions by unit owners or common expenses must be in respect of all operating costs and Reserve Fund contributions, in accordance with the Reserve Fund Funding Plan. Via the bylaws, most condominiums are mandated to have an annual budget presented to owners. Since we are a not-for-profit organization, our budgets are zero balance budgets, meaning that there is no surplus, we cover the cost anticipated. Generally, in the industry, we like to see one to 1 1/2 months of common expenses, as a cash flow buffer. However, from an economic perspective, we must be looking realistically at where costs are going and budgeting accordingly. I have unfortunately seen in recent months budgets where Reserve Fund contributions are underfunded, as well as operating expenses. Further, I have seen Reserve Fund Plans augmented to not follow the Reserve Fund. While there can be a level of assessment and prioritization, since Reserve Funds are “guesstimates”, there is also a point where directors may be negligent and unfairly prejudicial to unit owners.

Section 37 of the Act mandates directors to act in good faith and to be prudent. Ignoring the recommendations in the Reserve Fund Study to the point where a condominium Corporation is hundreds of thousands of dollars behind, just to keep common expenses low, is myopic and negligent in my opinion. There is an unfairness to unit owners and while Section 135 of the Act, may or may not come into play, we need to think practically about ensuring people can continue to live in their homes. The assessment for tens of thousands of dollars is not always a practical solution for unit owners, especially where interest rates and costs of living are rising.

Therefore, the Boards need to execute their duty properly and should be working with professional property management companies and Engineers to provide realistic budgets, but also set obtainable goals to ensure that people can afford where they live and continue to live there.

Under the unproclaimed Sections of the Act, the following section regarding budgets is proposed.

83.1 (1) A corporation shall have a budget for each of its fiscal years that is prepared in accordance with this section. 2015, c. 28, Sched. 1, s. 76.

Fiscal year

(2) The fiscal year of a corporation shall end on,

(a) in the case of the first fiscal year after the registration of the declaration and description, the last day of the month in which the first anniversary of that registration takes place or such other day as is prescribed; and

(b) in the case of a fiscal year after the first fiscal year after the registration of the declaration and description,

(i) the day specified by a by-law of the corporation passed after a new board is elected at a turn-over meeting held under section 43,

(ii) the day specified by a resolution of the board, if there is no by-law as described in subclause (i), or

(iii) the next following anniversary of the end of the first fiscal year, if there is no bylaw or resolution as described in subclauses (i) and (ii). 2015, c. 28, Sched. 1, s. 76.

Budget for first fiscal year

(3) Within the prescribed periods of time, the declarant shall ensure that the budget of the corporation for its first fiscal year is prepared in accordance with the regulations and shall deliver it to,

(a) the first board mentioned in subsection 42 (1); or

(b) the corporation, if the first board has not been appointed in accordance with subsection 42 (1). 2015, c. 28, Sched. 1, s. 76.

Budget for subsequent years

(4) At least 30 days before the start of each fiscal year of the corporation after its first fiscal year, the board shall prepare a budget for the ensuing fiscal year that covers the corporation’s general and reserve fund accounts and that is prepared in accordance with the regulations. 2015, c. 28, Sched. 1, s. 76.

Notice to owners

(5) Within 15 days of preparing a budget described in subsection (4), the board shall provide a notice to the owners that is in the prescribed form, if any, containing a copy of the budget. 2015, c. 28, Sched. 1, s. 76.

Implementation

(6) The board shall not implement a budget of the corporation until it has provided the notice mentioned in subsection (5). 2015, c. 28, Sched. 1, s. 76.

Amendment

(7) Subject to subsection (9), the board may amend a budget of the corporation for any fiscal year at any time before the end of the fiscal year. 2015, c. 28, Sched. 1, s. 76.

Notice to owners

(8) Within 15 days of amending a budget of the corporation, the board shall provide a notice to the owners that is in the prescribed form, if any, containing a copy of the budget. 2015, c. 28, Sched. 1, s. 76.

Implementation

(9) The board shall not implement an amendment to a budget of the corporation until it has complied with subsection (8). 2015, c. 28, Sched. 1, s. 76.

Notice of non-budgeted amounts

(10) If the board proposes that the corporation incur a prescribed expense in a fiscal year that exceeds, in the manner determined by the regulations, the budgeted amount for the expense in the applicable budget or amendment to a budget for that fiscal year, the board shall provide the prescribed notice of the expense to the owners within the prescribed time and in accordance with the prescribed requirements. 2015, c. 28, Sched. 1, s. 76.

I think this Section sets the right standard for budgets and will ultimately protect unit owners. The Government should proclaim this into force and effect to move forward on a good idea.

Notwithstanding the proclamation of the Section, it is important that Boards set a direction that moves condominiums forward in a way that protects its stakeholders. At the end of the day, the unit owners are the “taxpayers” of the Corporation. This means when we practically execute our budgetary steps, we should look at real projections for utility costs, which are costs that are controlled by third parties that we have no control over. We should negotiate fair, transparent and market-rate contracts. We ensure that there are no “benefits” being derived by Board members or other participants to ensure that it is the best market rate. Thus, we should have a good corporate governance framework to manage risks, including policies and/or processes for managing contracts and we should have bylaws that regulate disclosure of conflict and duties.

Where there are referral fees that should be disclosed, a Board should discuss the same with their counsel. From my research in corporate law, the key to referral fees is disclosure. Once you are made aware as a Board Member of any potential referral fee, then issues can be dealt with by either disqualifying the same or accepting the same as a price of doing business, especially if the rate is lower. The political fallout may not be the best though. Therefore, in meeting the thresholds under the Act, it is important that we also disclose any conflicts of interest, so that the thresholds of Sections 40 and 41 of the Act are met, at a minimum. Remember that conflicts are not a reason for disqualification necessarily, they are a matter of disclosure and they are a matter of management of the conflict as directed by the Act. This is where further policies and procedures may help the Board. We are in different times today and we must help our communities move forward in healthy financial parameters that ensure that their buildings will be taken care of, and their operations managed cost-effectively. There must be trust and transparency and there should be no “getting ahead” on the back of unit owners.

As art of managing risk and costs, we must ensure that we are enforcing compliance and using the tools that are necessary to fulfil our obligations. Therefore, budgeting amounts that are inadequate for enforcement are not helpful to the Corporation in the long run. What I would also suggest is that it is very important to appreciate the fact that condominium Corporations should also have good corporate governance frameworks, to allow for the management of projects and compliance issues in advance. Also, what we are recommending these days is that Declarations be amended to ensure that indemnities are broad enough that bylaws be amended to ensure that insurance deductibles and the language associated with insurance deductible bylaws and standard unit bylaws are useful to the Corporation. This is a powerful way to curb the costs of operating.

Working as a Board Member and as an industry professional, demands time, education and integrity to move our condominiums forward in a financially healthy way.

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By Patricia Elia, Elia Associates

Patricia Elia is a senior lawyer with Elia Associates and has practiced law for over 25 years in the areas of condominium law and corporate law, in large, medium and the boutique specialty law firm of Elia Associates. Patricia is intrigued by the interplay of economics, the law and critical thinking models in condominiums and she likes to understand people. As a trained mediator, she understands the value of early and creative dispute resolution opportunities.

As an active industry participant, she believes that the sharing of knowledge has the potential to empower Boards of Directors. Patricia’s commitment to condominiums has been in leadership roles such as the President of CCI Huronia, Co-Chair of CCI’s National Council, a member of CCI National Executive and a member of all 5 Ontario chapters. She has also sat as Vice- Chair of CCI National’s Government Relations Committee and Governance Committee.

Founder of Women in Condos.

She has been a Condominium Director for the last 19 years and a Unit Owner of a condominium. Patricia is pleased to have been a recipient of the CCI National Volunteer Award and to have received CCI National’s LCCI designation as a leader of the Canadian Condominium Institute.

Patricia is passionate about the condominium industry because of the important role condominiums play in the lives of real people.