At only thirteen years young, the Condominium Act, 1998 (which became effective in 2001) is currently undergoing a full-scale review, led by Ontario’s Ministry of Consumer Services and Canada’s Public Policy Forum. The second of three stages of the review is now complete. The goal of this stage was to provide recommendations for the government to consider when creating the revised Act.
Stakeholder working groups and industry experts have recently released a report outlining recommendations in five key areas: consumer protection, dispute resolution, governance, condominium management, and the focus of this post, financial management. This is the first in our series of posts on the report’s recommendations.
Not only is good financial management of condos important for resale value, but it affects owners on an ongoing basis through payment of their monthly common expense fees. We have outlined a number of the key recommendations relating to financial management, which seek to improve education, accountability and transparency.
Introductory Online Course
The report recommends offering owners an introductory course geared towards the basics of financial statements, common expenses, and owners’ rights to access financial records under Section 55 of the Act. Education is absolutely essential (though too often lacking) in effective condo ownership. Sure, owners can buy a condo, pay common expense fees and have little or no regard for their condo’s financial health. But owning a condo is so much more than simple, maintenance-free living. Condo ownership is complex and an introductory online course teaching some of the financial basics would go a long way to bridging the educational gap that currently exists.
Reserve Fund Budget
Section 93(2) of the Act restricts the use of the reserve fund to major repair and replacement of the common elements and assets of the Corporation. As many of you may know, the Board does not require the consent of owners to make an expenditure from the reserve fund, regardless of the magnitude. Naturally, this leads to some concern that the Board may not be held accountable for its expenditures on major repair and replacement projects.
Stage two of the review has addressed this glaring lack of transparency with the proposed introduction of a reserve fund budget, designed to set out the fund’s planned annual expenditures. Deviations from the study, it is recommended, must be clearly explained. Furthermore, off-budget spending over a certain threshold would require a notice to be sent to owners. The budget and notice requirements would foster an increased (and much needed) level of trust between the Board and owners and would contribute to a greater understanding of reserve fund expenditures, while still providing the Board with the freedom to undertake what it deems necessary with respect to the common elements and assets of the Corporation.
Reserve Fund Study Updates
Reserve fund studies must be updated every three years. The study outlines the next 30 years’ worth of major repairs and replacements, and thereby provides owners with a certain expectation that upcoming obligations can and will be met. Occasionally, a big-ticket item fails unexpectedly, which results in the Corporation digging into some of the reserve fund earlier than anticipated. The fund may then hold a balance that is potentially inadequate to meet its upcoming obligations. While proactive Boards may request a new reserve fund study immediately upon suspicion of a potential shortfall, the current Act has no requirement to do so, leaving owners (and Boards) in the dark until the next mandated reserve fund study update.
The stage two report recommends a solution to this previously unaddressed problem: if the reserve fund balance in the Corporation’s audited financial statements is less than 50% of the balance shown in the fund’s notice of future funding, the Board must ask their reserve fund preparer if the study requires updating. Preempting an update to the reserve fund would give the Corporation additional time to bring the reserve fund up to an adequate level; this would give owners more time to arrange their finances, if necessary.
Alternate Uses of Reserve Funds
The stage two report also recommends that the Board should be able to utilize the reserve fund for expenses incurred to implement alterations required by law or for certain green energy projects.
If the government imposes new requirements, such as wheelchair ramps for accessibility or elevator guardrails for worker safety, the report recommends that Corporations should be able to fund these alterations from the reserve fund. Alterations required by law typically create unexpected (and quite costly) expenses for Corporations, sometimes with short notice. Accordingly, permitting Corporations to expense this through the reserve fund would reduce some of the financial pressure to comply with the new requirements and may encourage Corporations to comply in a more expedient manner.
Green energy projects help protect the environment and can provide energy efficiencies and cost-savings to a Corporation. The report recommends that, by following certain criteria, the reserve fund could be used for these expenses. Initiatives that encourage increased investment in green energy projects will help a Corporation manage its future utility costs. As these costs rise, these projects become increasingly valuable to Corporations.
Changes without Notice
Currently, Section 97(2)(c) permits the Corporation to make an addition, alteration or improvement without notice to owners if the estimated cost in any given month is not more than $1,000 or 1% of the annual budget, whichever is higher. The report recommends an increase in that amount to the lower of: $30,000 or 3% of the annual budget. There is also a recommendation that notice must be sent to owners if the change results in a material reduction or elimination of services. Under the current Act, a Board can (but likely should not) close down a swimming pool, for example, without notifying the owners, if that change would cost less than the stipulated amounts. This recommendation would prevent a Board from deciding to materially reduce or eliminate a service without notifying owners.
These recommendations if implemented will provide owners with more insight and information about various aspects of financial management. Reserve fund spending will be more transparent, owners will be more educated, and Boards will be more accountable and will have clear instruction on how and when to communicate financial matters to owners.
You can provide your feedback on the report until November 8, 2013, here.