A reserve fund is an amount of money held in Condominium buildings by the Condominium Corporation in order to fund any major repairs to the capital assets of the Corporation, like the Corporation building for instance. The reserve fund is held in an account of reserve funds under the name of the Condominium Corporation. The fund itself is drawn from the common expenses and/or special assessment charges (along with any legally valid interest or investments) paid by the Condominium owners. The most common contribution to the reserve fund is made from the common expenses’ payment made by condo owners; a portion of this payment is allotted to the account of reserve funds.
Reserve funds are used in order to render any major repairs required to the maintain the capital asset or the condominium building. They may also be used to fund any alterations, renovations and/or additions to the capital asset.
It is required by the provisions of the Condominium Act that Condominium Corporations ensure periodic reserve fund updates and studies are carried out in order to assess whether sufficient and adequate money has been reserved to fund any major repairs and/or replacements if the need arises. The Condominium Act identifies and lists certain qualified professionals who can carry out the required periodic reserve fund studies. In the case of new development, where the first periodic reserve fund study required has not occurred the Condominium Act requires that the Condominium Corporation must maintain a reserve fund of not less than 10% of it’s common expenses budget. Once the first reserve fund study has been conducted, the recommendations made by the qualified professionals will need to be implemented. The recommendations are known as the reserve fund plan.
A complete Reserve Fund Study conducted by a qualified professional will contain an assessment of the Condominium Corporations capital asset(s) regarding its physical as well as financial state. The Condominium Act requires that the study needs to be conducted once every three years; it can alternate between a complete study and an update. An analysis of the financial state includes a determination as to the state and/or amount of the reserve fund at the time of the study. An assessment of the physical state determines whether the capital asset needs any major repairs and/or replacements, renovations etc. A Reserve fund Study for instance may assess the elevator of a building and determine when the elevator will need to be replaced and what the expected cost of replacement might be.
Changes To The Condominium Act
It is important to note that recent amendments have been made to the Condominium Act. The amendments have introduced new regulations which are aimed at ensuring that Condominium Owners are able to gain a greater degree of understanding regarding the operation of Condominium Buildings reserve fund. The new regulations seek to achieve this goal by requiring an inclusion of;
- a definition of an ‘adequate’ reserve fund;
- A determination of a required funding plan following a reserve fund study.
- The amount of moneys collected from the common expense fees of Condominium owners and put into the reserve fund
- The meaning of ‘major repairs’ (the amendments also introduced the inclusion of major repairs to the list of things the reserve fund can be used for;
- Whether the Condominium Corporation has an obligation to repair a unit.
At times the Condominium Board may determine and call a special assessment. Special Assessments when declared represent a financial obligation upon the owns of Condominium Units.
If the reserve fund does not have enough funds a Special Assessment may be declared by the Condominium Board in order to;
- Carry out any major repairs;
- Or replace an asset of the corporation;
- Or raise money to fund a lawsuit involving the condominium corporation.
A Special Assessment upon declaration requires that the owners of each Condominium Unit are notified. A failure to pay the special assessment may enable a Condominium Corporation to register a lien against the Condominium unit thereby effecting the financing or even force a sale.
For more information please contact one of our experienced Real Estate Lawyers at MEHDI AU LLP.
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