Area of Law: Real Estate Law
Answer Number: 0426
What are reserve funds and special assessments?Region: Ontario Answer Number: 0426
A condominium reserve fund is a fund used for major repairs of the capital assets of the corporation. The money deposited into the fund comes from a portion of the money paid by unit owners for either common expenses or by way of special assessments (plus any interest or investments that are legally allowed).
Reserve funds are held in a reserve fund account in the name of the condominium corporation. Generally speaking, unit owners will make one monthly payment for common expenses and the portion allotted to the reserve fund will be transferred to the reserve fund account.
Reserve funds can only be used for major repairs to the condominium building, that is, the major repairs or replacement of the assets of the corporation, including the common elements. They may also be used for additions, alterations and renovations.
The Condominium Act specifies that periodic reserve fund studies and updates are to be carried out by the corporation for the purpose of determining if there is adequate money in the reserve fund to provide for such major repairs and replacements. Reserve fund studies can only be conducted by certain groups of qualified professionals, which are listed in the Act.
If the condominium corporation is new (for example a new construction by a developer), reserve fund fees cannot be less than 10% of the corporation’s common expense budget (the total amount of common fees paid by unit owners), until the first reserve fund study is conducted and its recommendations are implemented in a reserve fund plan.
A comprehensive reserve fund study will include an analysis of both the physical state of the condominium and the financial state of the corporation’s assets. The financial analysis details the state of the reserve fund at the time of the study. The study includes recommended repairs and replacements of the corporation’s assets as well as the estimated costs to complete them. For example, it may include a common element asset, such as an elevator, and list the expected date of replacement as well as the anticipated cost. Under the law, a study must be conducted every three years, and can alternate between an update and a complete study.
Changes to the Condominium Act
Under recent amendments to the Act, regulations have been added that ensure condo owners are able to gain a better understanding of how their reserve fund operates. This includes:
- defining what an “adequate” reserve fund is
- determining a condo board’s required funding plan following a reserve fund study
- establishing the amount of common expense fees that a condo corporation collects from the owners to apply to the reserve fund
- amending the purpose of reserve funds to include major repairs (in addition to the common elements and any assets of the corporation) if a corporation has an obligation to repair a unit; and defining what a ‘major repair’ is
Special assessments are determined and declared by the condominium board. A special assessment is a financial obligation on the condominium unit owners.
A special assessment may be declared by the board for several reasons, such as, if the reserve fund does not have enough money to:
- implement a major repair,
- replace one of the corporation’s assets, or
- fund a lawsuit involving the condominium corporation.
Notice of a special assessment must be given to each condominium unit owner.
If a condominium unit owner fails to pay a special assessment, it may lead to a lien being placed on the unit, which may in turn affect the financing of the unit, or in the extreme case, force a sale of the condominium unit.
Additional information on the changes to Ontario’s condominium laws, condominium reserve funds, and special assessments can be found from the Condominium Authority of Ontario (CAO).
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