May 1, 2004
Reserve studies are due Tuesday
Report must plan for future repairs
If deadline missed, board risks liability
Tuesday, May 4, is an important deadline for every Ontario
condominium building that has been registered for more than three years.
It's the final deadline for completion of a reserve fund study, which
details the estimated common element expenditures in each building for
the next 30 years and sets up a plan to fund those costs.
Under the Condominium Act 1998, every condo corporation that was in
existence prior to May 4, 2001, is required to complete a reserve fund
study by May 4, 2004.
The study analyzes every part of the common elements of the building and
predicts when repair or replacement will be required over the next 30
years. It also proposes how the costs will be funded.
Typically, a reserve fund study will look at things like roof repair or
replacement, parking garage restoration, window and balcony replacement
programs, exterior maintenance and interior decorating programs.
As an example, an older condominium may have to come up with $2 million
or $3 million in 12 years to repair anticipated salt damage to the
underground parking garage. It should put a plan in place now to raise
the money over time so that the full cost will not come as a shock in
2016.
Ron Danks is a condominium lawyer with Simpson Wigle LLP in Hamilton and
national president of the Canadian Condominium Institute. In the latest
issue of the Golden Horseshoe chapter's Condo News, Danks writes that
there are two methods of properly funding the catch-up necessary for a
reserve fund.
The traditional method is to direct part of each month's common elements
fee to the reserve fund. If that doesn't produce enough rainy-day cash,
a special assessment can require each owner to contribute an extra
amount for a set period of time.
The second method is to obtain a loan from outside sources, such as
banks or private lenders. This is an increasingly popular method of
fundraising, particularly when there is an urgent need for immediate
repairs.
In the hypothetical case of a 150-unit building requiring $1.5 million
for a garage restoration, each unit owner would have to come up with
$10,000 immediately.
If the money is borrowed at, say, 8 per cent interest, monthly payments
of $125 could be spread out over 10 or more years.
In this way, an owner who sells his or her unit within that period would
pass the ongoing payments to the new owners.
After the board receives its reserve fund study, it has 120 days to
develop a contribution plan. The board is then required to send each
owner a Form 15 notice containing a summary of the study and the
proposed plan to raise the required money.
Under the act, corporations have a period of 10 years from the date of
the first study to achieve an adequate level of money in the reserve
fund.
Although there are no condo police to enforce compliance with the act,
Danks says condo boards that have not completed a reserve fund study by
Tuesday's deadline may have their directors' and officers' liability
coverage terminated by their insurance carrier. They are in breach of
the act and are exposed to liability from several sources.
According to Danks, the condominium and its directors could be sued by
unit owners who want to sell but cannot because potential purchasers are
concerned by the lack of a reserve fund study.
In another scenario, a purchaser might buy a unit after May 4 in a
condominium that does not have a reserve fund study and later find out
there is a need for a special assessment. This buyer might be able to
claim damages against the board for failing to comply with the act.
Danks says boards that have not completed the study should contact their
insurance broker and lawyer for direction on how to minimize liability.
One final reminder: Reserve fund studies must be updated every three
years, so the next deadline is May 4, 2007. For condominiums registered
within the last three years, the deadline is one year from the date of
registration. Mark your calendars.
Bob Aaron is a Toronto real estate lawyer. He can be reached by email at bob@aaron.ca, phone 416-364-9366 or fax 416-364-3818.
Visit the Toronto Star column archives at http://www.aaron.ca/columns for articles on this and other topics or his main webpage at www.aaron.ca.