Paying the Bills: Properly Spending the Strata Corporation’s Money
When I was the owner and managing broker for a strata property management firm, we managed over 100 strata corporations and paid hundreds of invoices each month on their behalf. We often advised council members and owners on where the money was held (the contingency reserve fund, the operating fund, or a special levy fund), who was permitted to spend strata corporations’ money, and when that money could be spent.
Show Me The Money: A Strata Corporation’s Funds
The Strata Property Act requires every strata corporation to meet its common expenses. The money to meet those expenses is usually held in one of three funds: an operating fund, a contingency reserve fund, or a special levy fund.
These different funds are for different expenses and need to be kept in different bank accounts or investments. Strata corporations may also raise money, from time-to-time, through the passing of a special levy which has specific rules regarding accounting for that money (special levy funds are not discussed in this article).
Understanding the operating fund and the contingency reserve fund and the requirements for spending the money in these funds are fundamental concepts that must be understood by anyone intending to spend the strata corporation’s money.
The Operating Fund
The operating fund is for paying the strata corporation’s expenses that usually occur once per year or more often than once per year. Examples of expenses that are paid from the operating fund are utility bills, property management fees, and routine janitorial or landscaping services.
The money in the operating fund primarily comes from strata fees. However, there are other ways that money can be added to the operating fund, including user fees and fees for the production of statutory forms (Form F & B).
The money in the operating fund is usually held in a bank account and not invested. This is because the money is expected to be spent in the same year that it is collected. Generally, a self-managed strata corporation will open a bank account with a preferred financial institution. A strata corporation managed by a licensed property management company will have a Trust Account in the name of the strata corporation with an insured financial institution in BC.
It is always advisable that any payment of money from the operating fund require two different people to authorize the payment (for example, two signatures on a check or two signatures on a record approving an electronic funds transfer). Generally, for self-managed strata corporations the two people are two members of council and for strata corporation’s managed by licensed property managers it may be a member of council and the property manager.
Contingency Reserve Fund (CRF)
The contingency reserve fund is often referred to as the ‘rainy day fund’. Unlike the operating fund, it is established to meet expenses that usually occur less often than once a year or do not usually occur. Examples of expenses that are paid from the contingency reserve fund are roof repairs and the purchase of personal property for the strata corporation.
The money in the contingency reserve fund comes from strata fees. It is common (and expected) for there to be money in the contingency reserve fund. This money can be invested, but only in investments permitted by the Strata Property Regulation.
I often received the question “Can our strata corporation spend all of the money in the contingency reserve fund?” The simple answer is yes, however the minimum contribution to the contingency reserve fund is determined by the amount of money in the contingency reserve fund at the end of a fiscal year. As a general statement: if all or most of the money in the contingency reserve fund is spent in a year strata fees may increase to begin replenishing the contingency reserve fund.
Calculating the minimum requirements for the annual contribution to the contingency reserve fund is done based on the Strata Property Regulation. If a strata corporation is uncertain about the minimum amount to be budgeted for contribution to the contingency reserve fund it should ask for assistance from a qualified person.
Determining Which Fund Pays For An Expense
When a strata corporation needs to pay money to meet an expense, it needs to make sure the money comes from the proper fund. To determine which fund should be used the nature of the expense must be understood. The most common expenses can be categorized into one of the following:
- Expenses that usually occur at least once a year;
- Expenses that usually don’t occur at least once a year;
- Expenses to ensure safety or prevent significant loss or damage;
- Expenses not approved in the annual budget.
Expenses that usually occur at least once a year
Expenses that usually occur at least once per year are generally referred to as routine expenses or operational expenses. These may include but not be limited to:
- The premium for an Insurance policy;
- Strata management services;
- Professional services (legal or accounting);
- Landscaping services;
- Snow clearing;
- Elevator maintenance; and
- Other expenses that occur on a routine basis.
There are some specific non-routine expenses which can be paid from the operating fund such as commissioning a depreciation report or dealing with emergency repairs.
These expenses are paid from the operating fund.
Expenses that usually don’t occur at least once a year
Expenses that don’t usually occur once a year and may include:
- Roof replacement;
- Window replacement;
- Building envelope repair;
- Most of the items listed in the depreciation report; and
- Significant professional services.
Another expense that is usually paid with money held in the contingency reserve fund is for legal expenses that occur less frequently than each year. As examples, assisting a strata corporation with bylaw reviews and revisions or with contract reviews.
These expenses are paid from the contingency reserve fund.
Expenses to ensure safety and prevent significant loss or damage
The Strata Property Act permits expenses from the operating fund or the contingency reserve fund when there is an ‘emergency’. An expenditure may be authorized as an ‘emergency’, without first receiving approval from the owners, only if it is to ensure safety and prevent significant loss or damage and is the minimum amount required.
These expenditures must be considered carefully by the strata council due to their indirect authorization and lack of involvement by the owners. We know of situations where strata council’s have used the provision for emergency spending to receive routine legal services. A good question for a strata council to ask itself before considering whether it is an emergency is: If a special general meeting is called to approve this expenditure, will it be too late?
These expenses can be paid from either the contingency reserve fund or the operating fund.
Expenses that usually occur at least once a year but for different work
A question we often get is about expenses that usually occur at least once a year but are related to different specific tasks.
An example is costs for legal services. Many strata corporations require some amount of legal services on a regular basis which indicates that the money should come from the operating fund. However, the specific legal services provided might not occur at least once a year which indicates the money should come from the contingency reserve fund. For example, a strata corporation may incur $5,000 in expenses for legal services every year, but the specific legal services might vary. One year the legal services may be related to responding to questions from an owner and the reviewing or drafting of resolutions while the following year the legal services may include assistance with a civil resolution tribunal dispute or the collection of a debt.
Another example would be routine maintenance. Some strata corporations have a maintenance schedule that varies each year. For example, one year may involve the expense of painting of common property fences and the next year involve the expense of painting interior hallways. The fact that this is an expense that occurs at least every year and is for the same purpose of maintenance (potentially done with the same maintenance company) indicates the money should come from the operating fund. However, another way of approaching the question would be: The painting of the fences does not occur every year so the money should come from the contingency reserve fund.
It is generally accepted that if the approved annual budget includes a category of expenditure that refers to usual expenditures but for different tasks (legal, accounting, maintenance) the money for that expenditure can come from the operating fund. However, if the approved annual budget does not include that category of expenditure that the money must come from the contingency reserve fund.
Expenses not approved in the annual budget
The operating budget is approved during the annual general meeting and this is how owners authorize the spending of money from the operating fund. However, there can be times when expenses arise that were not contemplated in the operating budget or when the expenses for a category of expenditure exceed the amount in the approved budget.
The Strata Property Act provides authority for the strata corporation to pay money from the operating fund if the total of all unapproved expenditures is equal to or less than $2,000 or 5% of the operating budget (whichever is less). A strata corporation can change the amount of unapproved expenditures that can be made if it adopts a bylaw that sets out a different amount.
Authority to spend the strata corporation’s money
Knowing which fund the money comes from is only half the battle, the strata corporation must also understand if it is authorized to spend money. That authorization can come from several sources:
- The Strata Property Act;
- Operating budgets;
- Resolutions at general meetings; and
- A judgement made by the civil resolution tribunal a court or another body.
Authorization under the Strata Property Act
The Strata Property Act directly authorizes the expenditure of money in some circumstances. These include unapproved expenditures (described above) and expenditures when necessary to ensure safety or prevent significant loss or damage.
Authorization by the Operating Budget
The strata corporation may spend money from the operating fund once authorized through the passing of the operating budget.
Authorization by Resolution at a general meeting
The strata corporation may spend money from the operating fund if the expenditure is consistent with the purpose of the operating fund and is approved either in the operating budget or by a resolution passed by a ¾ vote at a general meeting.
The strata corporation may spend money from the contingency reserve fund if it is consistent with the purpose of a contingency reserve fund and is approved by a resolution passed by a ¾ vote at a general meeting.
The strata corporation may spend money from the contingency reserve fund to obtain a depreciation report if it is approved by a resolution passed by a majority vote at a general meeting.
The strata corporation may spend money from the contingency reserve fund to meet an expense related to the repair, maintenance or replacement of common property, common assets or portions of a strata lot if that expense is recommended in the most current depreciation report and it is approved by a resolution passed by a majority vote at a general meeting.
Authorized by a judgment
The civil resolution tribunal and courts have the authority to order a strata corporation to pay money without the requirement for it to be authorized by the operating budget or approved by a resolution passed at a general meeting.
Spending the money of the strata corporation is something that needs to be done carefully and deliberately.
The first step is to ask: What is the money going to be spend on?
The second step is to ask: Which fund should the money come from?
The third step is to ask: Is the strata corporation authorized to spend that money?
If the strata corporation is not confident that it has fully and properly answered those questions, it should seek advice from a qualified person.