The Contingency Reserve Fund


As I am sure all readers are by now aware, the Strata Property Act became the law July 1, 2000 in British Columbia, replacing the Condominium Act. While we know that the current bylaws under which a strata corporation operates will remain in force until January 1, 2002 unless amended, there are many other provisions of the Strata Property Act that are not only enforceable now, but also dramatically change the way strata corporations must operate. A classic illustration of that immediate change is the Contingency Reserve Fund, affectionately called the “CRF”.

The Condominium Act defined the CRF as follows:

” … means a fund for the expenditures, other than annual, of the strata corporation for repair, maintenance and replacement of the common property, common facilities and other assets of the strata corporation, including, if applicable, without limiting this definition, the roof, exterior of the buildings, roads, sidewalks, sewers, heating, electrical and plumbing systems, elevators, laundry and recreational facilities (emphasis added).”

The Strata Property Act defines the CRF as follows:

” … means a fund for common expenses that usually occur less often than once per year or that do not usually occur, as set out in section 92(b).”

Section 92(b) reads:

“To meet its expenses the strata corporation must establish, and the owners must contribute, by means of strata fees, to a contingency reserve fund for common expenses that usually occur less often than once per year or that do not usually occur.”

Reviewing these definitions is important. Under the old Act, any CRF expense had to be for repair, maintenance or replacement of common property, common facilities or other assets of the strata corporation. That was severely limiting. For example the cost of repair of a leaking building could be funded from the CRF but the legal costs incurred with respect to review of engineering and remediation contracts or recovery lawsuits could not be so funded. Under the new legislation, such legal costs can be funded from the CRF because they obviously are expenses that occur less often than once per year or that usually do not occur.

On the face of it, it would appear that the new legislation makes matters much easier for strata corporations. For example if an owner commences arbitration against a strata corporation, the owners could fund a defence through the CRF. In fact, it now would seem that the new legislation is much more limiting than first expected. Why? Because of the existence of section 92(a) of the Strata Property Act. That section provides as follows:

“To meet its expenses the strata corporation must establish, and the owners must contribute, by means of strata fees, to an operating fund for common expenses that usually occur once a year or more often than once a year.”

Under the old Act, a strata corporation that could not obtain a 75% majority for the purpose of funding repairs could include the repairs as part of the budget (operating fund). While legal costs related to building remediation and recovery technically could not be funded through the CRF (many strata corporations did anyhow), they could be funded through the budget if more than 50% but less than 75% of the owners were in favour. Now, by operation of the Strata Property Act, unless a strata council can show that legal costs are expenses than occur at least once per year (such as costs to collect arrears or enforce bylaws), such costs must be excluded from the operating fund and hence must require a 75% vote because any contribution from the CRF still requires a 3/4 vote. I have used remediation and recovery legal costs as an example (maybe because I am a lawyer) but I am sure the reader can think of a number of different examples.

Under the old legislation, a strata corporation had to contribute a minimum of 5% of the annual budget to the CRF until the CRF reached 25% of the annual budget at which time there were no minimums. Once the CRF reached 100% of the annual budget, then a special resolution was required. The new legislation provides that a minimum of 10% of the annual budget must be contributed until 25% of the annual budget is reached. At that point any amount can be contributed but if over if the CRF has reached 100% then a 3/4 vote is required. The result is very little difference between the old and the new with the exception of more contribution required when the CRF is low. However, there is a significant difference with respect to an expense not contemplated or voted upon; i.e what used to be called an emergency.

Many councils would declare an emergency to permit an expense to be paid from the CRF. Obviously the Legislature was not satisfied with councils’ interpretations. Hence while the Condominium Act provided for “emergency” payments, the Strata Property Act (section 98(3)) provides that such a payment can only occur from the operating fund or the CRF:

” … if there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage, whether physical or otherwise.” (emphasis added).

In addition, sections 98(5) and (6) provide that the expenditure cannot exceed the minimum amount needed to ensure the safety or prevent significant loss or damage and the strata corporation must inform the owners as soon as feasible about any such expenditure.

As can be easily seen, the CRF process has been significantly changed. I suspect those that drafted the Act have done their best to ensure that expenditures from the CRF require a large democratic majority, full disclosure and only occur less often than once per year or usually not at all. While the reasons for expenditures has been dramatically expanded, the process for approving payment has been severely limited. It would be difficult to argue that the changes are not an improvement; unless of course you happen to live in a condo that leaks and the developer controls more than 25% but less than 50% of the vote!

I will leave the property manager reader with a question. $1,000,000 full meal deal repair is clearly a special levy or CRF requiring a 3/4 vote. What is a five year plan with $200,000 per year? Does that evidence an expense than occurs at least once per year (operating fund, read budget and majority vote) or less than once per year over a 6 year period (read special levy or CRF payments and 3/4 vote)?