Condo Corporations Now Permitted to Access Reserve Funds in “Emergencies”
June 2, 2020
In a significant move for Alberta condominiums, on June 1, 2020 the Lieutenant-Governor of Alberta, the Honourable Lois Mitchell, approved an Order in Council to amend the Condominium Property Regulation, AR 168/2000. Among other slight changes to document retention periods, the amendments notably give condominium corporations the ability to temporarily remove funds from their capital replacement reserve account to supplement their operating accounts, when certain conditions are met. You can read the Order in Council here.
Condo corporations can now access their reserve funds to fill shortfalls in their operation funds if a declaration or state of emergency has been declared at either the federal or provincial levels of government, and the state of emergency remains in effect. Other requirements that must be present in order to make use of this ability include confirming that:
- The condo corporation’s revenues have decreased as a result of the declaration or state of emergency, or as a result of the events that caused or are related to the declaration or state of emergency
- As a result of the lower revenue, the condominium corporation faces a shortfall between actual revenue received and budgeted expenses, and
- There is no prohibition in the corporation’s bylaws preventing reserve funds from being used in this way
As this is such a novel power, it is unlikely that many condominium corporations in Alberta have such restrictions in their bylaws, but this must be confirmed. The actual amount that may be transferred out of the reserve fund is also limited to the difference between the reduced/received vs. expected revenue received from monthly contributions, the amount of the shortfall between the received revenue and the corporation’s budgeted expenses, or any limit on using the reserve funds in this manner that may exist in the corporation’s bylaws, whichever is less. Again, such a limit is not likely to exist in most condo bylaws.
Should a condominium corporation satisfy the above criteria, and wish to access its reserve funds to temporarily relieve any operating budget shortfalls caused by COVID-19, the amendments to the Regulation set out a process that must be followed:
- A preliminary notice to owners must be sent that sets out the Board’s intention to transfer the reserve funds in order to temporarily pay for the corporation’s operating expenses, the date of the proposed transfer, a description of alternatives considered and the reasons why those were not adopted, a proposed revision to the corporation’s reserve fund plan setting out the amount being transferred from the reserve fund, and a 2-year repayment plan in respect of the total funds removed, starting from the date the declaration or state of emergency has ended.
- The Board of Directors must pass a resolution by a 75% majority of directors eligible to vote, that approves the transfer and the revision to the reserve fund plan.
- A second notice to unit owners must be provided, confirming that the proposed changes to the reserve fund plan have been adopted by the Board and enclosing a copy of the revised reserve fund plan.
The Order in Council was made on the recommendation of the Minister of Service Alberta, the Honourable Nate Glubish, in response to the unique problems faced by condominium corporations as a result of the COVID-19 pandemic and associated public health closures and restrictions. Importantly, however, while these measures may provide a great deal of relief for condo corporations that are now struggling from reduced revenue from contributions, they do not relieve the owners’ obligations to pay their monthly contributions toward the common expenses. The amendments expressly confirm that the owners’ obligations continue.
For any questions related to these amendments, or for legal advice and information specific to your condominium, please contact Erin Berney.
Borrowing from the Reserve fund to shore up operating cash in an emergency is a novel idea however, I see it is a short term solution that is likely to exacerbate condominium cash management challenges in the future. Allowing condo corporations to use Reserve Funds to pay operating costs, will perpetuate anti commons. Condo corporations already borrow money from Reserves to pay for art, furniture, insurance, etc, when they shouldn’t be. Many Boards are unaware that this is contravention of the CMA. Often boards consider it a short term loan with an intention to pay it back. Inevitably, something always comes up, and over time the loan is forgotten. Service Alberta will only investigate when a stakeholder files a complaint. How often does this occur? I am concerned that Borrowing money from the Reserve Fund to pay operating expenses will occur, with little or no consideration for other options being considered. In a balanced approach to cash flow and commons, today’s financial decisions shouldn’t bring harm to future interest groups. Unfortunately, small groups of condo owners are often already paying the price for the ill thought out financial decisions of those who came before them. Let’s not add to the problem by spending Reserve Funds today, with little regard for future interest groups. After having reviewed some 600 Reserve Fund cash flow plans, we see few ownership interest groups that balance Reserve Fund contributions over time, while deferring maintenance and replacement of components. Consumption of the useful life of building assets and unbalanced contributions to Reserve Funds is already a challenge. COVID-19 is undeniably going to take its toll on the condo industry, therefore survival for many condo corporations will require foresight and prudent resource management. I suggest that borrowing from the Reserve Fund should be considered only as a last resort option. CWB Maxium is offering line of credit solution for depleted condo operating funds, to get through COVID-19. Condo corporations can access up 6 months of budgeted operating expenses, with interest only payments, for up to twelve months, converting to a short term loan, with a repayment schedule of up to 5 years.