The Crossroads of Condominium Corporation Budgets, Covid-19 and Reserve Funds

Post Script:  

The Alberta Government issued an Order in Council on June 1, 2020 which now permits encroachment on reserve funds for purposes of temporarily paying for the control, management and administration of the real and personal property of the corporation, the common property and managed property:

 

https://www.qp.alberta.ca/documents/Orders/Orders_in_Council/2020/2020_169.pdf

Section 27.2 of the Regulations must be met:

2) Before a corporation may transfer funds under this section, the following conditions must be met:

(a) a declaration of emergency has been proclaimed under the Emergencies Act (Canada), a state of emergency or state of local emergency has been declared under the Emergency Management Act or a state of public health emergency or local state of public health emergency has been declared under the Public Health Act, and the declaration of emergency, state of emergency, state of local emergency or state of public health emergency or local state of public health emergency remains in effect; 

(b) the corporation has received lower revenue from contributions compared to the revenue expected from contributions levied on owners as a result of:

       (i)   the declaration or state of emergency,
       (ii)  events that caused or led to the declaration or state of emergency, or
       (iii) events related to the declaration or state of emergency that occurred during the declaration or state of emergency;

(c) as a result of the lower revenue described in clause (b), a shortfall exists between revenue received and expenditures to be paid from the operating fund; 

(d) the corporation has no prohibition in the corporation’s bylaws on using the reserve fund in this manner. 

(4) Prior to transferring funds currently in the reserve fund for a purpose identified in subsection (1), the board must:

a) serve a notification to owners consisting of

1. (i)  a statement of the board’s intention to transfer reserve funds for a purpose identified in subsection (1),
   
2. (ii)  notice of the date when the board intends to make a decision,
   
3. (iii)  a description of any alternative that was considered to transferring reserve funds, and the reason why the alternative was not adopted, and
   
4. (iv)  a proposed revision to the reserve fund plan that
   
   (A)  identifies the amount of the reserve fund being transferred to the operating fund under this section, and
   (B)  identifies a specific repayment plan that will be used to repay the amount transferred from the reserve fund within 2 years of the date the declaration or state of emergency has ended,

(b) pass a board resolution with a 75% majority of directors eligible to vote that

1. (i)  authorizes a transfer from the reserve fund to the operating fund in accordance with this section, and
   
2. (ii)  approves the proposed revision to the reserve fund plan referred to in clause (a)(iv),
   

     and

(c) serve a notice to owners confirming that the changes to the reserve fund plan have been adopted and provide the revised reserve fund plan to owners.

(5) Nothing in this section is to be read as relieving, limiting or deferring an owner’s obligation to pay any contributions levied by the board. 

Original Blog:


The Crossroads of Condominium Corporation Budgets, Covid-19 and Reserve Funds

Norway has one of the largest sovereign wealth funds in the world; it is estimated to have been built to over $1 trillion.  Ordinarily Norway’s government does not draw from the fund more than what it generates in cash flow.  However, the deficit caused by Covid-19 has led the government of Norway to draw from the fund more than this sum effectively encroaching on the capital of the fund; https://www.bloomberg.com/news/articles/2020-05-12/world-s-biggest-wealth-fund-faces-record-37-billion-withdrawal

The Covid-19 viral infection may be creating a similar dynamic which the Boards of Directors of condominium corporations must face.   The monthly revenue received by condominium corporations may soon or already be insufficient to cover the monthly expenditures of the condominium corporation.  In this circumstance can a Board of Directors encroach upon the Reserve Fund to make up this deficiency?

Condominium Corporations are required to be maintain a Reserve Fund by section 38 of the Condominium Property Act  

Reserve fund

38(1)  Subject to the regulations, a corporation shall, from funds levied under section 39(1)(a) or under section 39.1, establish and maintain a reserve fund that is reasonably sufficient to provide for major repairs and replacement of the following, where the repair or replacement is of a nature that does not normally occur annually:

                             (a)    any real and personal property of the corporation;

                             (b)    the common property;

                             (c)    managed property.

The Condominium Property Act was recently amended to permit withdrawals for payment of the reserve funds study and reports prepared by an expert in examining the condition of the real and personal property of the condominium corporation and any other purpose provided for in the regulations.  However, neither the Condominium Property Act nor the Regulations specifically permit a withdrawal from the Reserve Fund for deficiencies in operating funds.  They do specify the contrary that money in the reserve fund is an asset of the corporation and shall not be distributed or refunded to owners.  For general interest, the Condominium Property Act was recently amended to prescribe what capital improvements were permissible to use Reserve Funds for:

 (4)  For the purposes of this section and section 39.1, the following are not capital improvements:

                             (a)    the replacement of existing real and personal property of the corporation, the common property or managed property with

                                     (i)    the contemporary equivalent of an obsolete property, or

                                    (ii)    a lower cost equivalent of the existing property;

                             (b)    any other replacement prescribed by the regulations.

The Regulations do not assist in this regard.  Section 27 of the Regulations provides that condominium corporations must fund the Reserve Fund in accordance with section 38 of the Condominium Property Act and the corporation shall not commingle monies in the Reserve Fund with the condominium corporation’s operating funds:

Maintenance of reserve fund

27(1)   A corporation must maintain the funding of its reserve fund at an appropriate amount or in an appropriate state so that the requirements of section 38 of the Act continue to be met.

(2)  Except for the purposes of paying for repairs to or replacement of depreciating property, neither a corporation nor any person holding money or dealing with money on behalf of the corporation is to commingle any funds that make up the corporation’s reserve fund with the corporation’s operating funds or any funds of any other corporation or other entity.

(3)  Neither a corporation nor any person holding money or dealing with money on behalf of the corporation is to commingle any funds that make up the corporation’s reserve fund with the funds that make up any other corporation’s reserve fund.

From these sections, the conclusion which must be drawn is that condominium corporations cannot follow Norway’s approach and encroach on the condominium corporation’s Reserve Fund to fund an operating deficiency.   However, does the existence and impact of Covid-19 change this general principal?

Though decided prior to the recent amendments to the Condominium Property Act the Court of Queen’s Bench in Scotwick Realty Services Inc. v. The Owners: Condominium Plan No. 7510479, (https://www.canlii.org/en/ab/abqb/doc/2003/2003abqb550/2003abqb550.pdf) commented on the ability to use monies from the Reserve Fund in emergent situations.   Though the case dealt with an expenditure not contemplated by the Reserve Fund Plan, a question can be asked whether the Court’s commentary could apply in situations of great urgency (ie. Covid-19) to allow condominium corporations to use monies from the Reserve Fund to make payment of operating expenditures.  Again, on the face of it based on section 38 of the Condominium Property Act and section 27 of the Regulations the answer is a clear NO!  However, the question can be asked if an argument supporting such encroachment can be based on the decision in the Scotwick Realty Services Inc. case.  The Court of Queen’s Bench stated:

[15] The next question is then the consequences of there being an unexpected expenditure from the reserve fund. One possible interpretation of the Act is that the corporation is not permitted to make any expenditure from the reserve fund unless that expenditure is anticipated in the reserve fund study and the reserve fund plan. In my view, this is not the correct interpretation of the Act. Preparing a reserve fund plan that projects many years into the future is always going to be a bit of a guessing game. The exact timing of the expenditure and the exact quantum of the expenditure will always be an estimate only. I note that Regulation 23 specifically states that the study is to be an “estimate”. That the estimate will not always be accurate is obvious.

Boards of Directors could argue that the circumstances of Covid-19, the concomitant closure of the Courts and the impact of this on the ability of the condominium corporation to collect unpaid contributions is a special case not precluded by the section 38 of the Condominium Property Act and section 27 of the Regulations.  This Board of Director’s decision would not be without risk as this position is not supported by the act or the law and as such is a weak argument.  Moreover, an owner could assert that such conduct of the Board of Directors is “improper” (section 67 of the Condominium Property Act) based on the clear breach of the Condominium Property Act and the Regulations.  However, some may think that Covid-19 has created an unprecedented situation that required a Board of Directors of a condominium corporations to run this risk.  Covid-19 has created tremendous financial pressure on Boards of Directors who remain responsible for managing the condominium corporation’s revenue and expenses.  As such these desperate times may be motivation for Boards of Directors to take such risks.  However, Boards of Directors should think long and hard before taking this very likely unlawful step.   

As an alternative to encroaching on the Reserve Fund and commingling monies from the Reserve Fund with the operating account, Boards of Directors may, to assist financially strapped owners, elect to amend their budgets to reduce the amount of money being collected for the Reserve Fund.  Such decision, though is likely still in breach of the Condominium Property Act and the obligation of the Board of Directors to fully fund the Reserve Fund.  Notwithstanding the action is still a breach of the Condominium Property Act, it may be less offensive to the Court because it does not involve allowing funds which have become part of the Reserve Fund to become commingled with the operating account.   If the Court concludes that this lesser step of a Board of Directors is permissible in light of Covid-19, the Board of Director’s has an obligation to remedy the impact on the Reserve Fund.  The Court commented in the Scotwick Realty Services Inc. case on the obligation of the Board of Directors to repay the funds removed from the Reserve Fund:

[19] One must then go on to consider what happens if an unexpected expenditure is made from the fund. This will, in many cases, put the fund in a deficit position, particularly when the expenditures are of the magnitude being experienced in this case. In my view, this takes the condominium corporation back to Section 38(1), which I have noted requires that the fund at all times, "provides sufficient funds that can reasonably be expected to provide for major repairs and replacement". Regulation 27(1) states that this requirement must "continue to be met". The only conclusion that I can reach is that a Board confronted with an unexpected expenditure then has a duty to revisit the reserve fund plan and make any necessary adjustments to the reserve fund levy to accommodate this unexpected expenditure. In some cases, a whole new reserve fund study might be needed. In other cases, the Board might simply wait for the 5-year anniversary of the reserve fund study, at which time the Act requires a new study in any event. In other cases, the Board could make a special levy, as was done in this case. The Board is also at liberty to fund such expenditures from its general operating account. The Board could also increase the reserve fund levy so that the reserve fund will be back on track. In most cases, the Board will probably use a combination of these techniques.

As such any impact of a Board of Director’s decision on the Reserve Fund must be remedied in future. 

The writer queries if the longer the catastrophic impact of Covid-19 occurs if it will be more likely that Covid-19 will be remembered as a time when what was normal conduct of the Board of Directors gave way to what was most practical?