The Initial Contingency Reserve Fund Should be Based on the Cost of Deferred Maintenance

The Strata Property Act requires that the Developer establish the Initial Contingency Reserve Fund and the minimum amount that must be deposited is 10% of the interim budget if a strata lot is sold within one year after the creation of the Strata and 50% of the interim budget if a Strata Lot is sold more than one year after the creation of the Strata.

However, these minimums likely presume that the Strata is a relatively new construction.

We are aware of several Stratas that have been created and the Developer owned all the strata lots for several years, usually as rental accommodation. There are a lot of practical reasons for this, including:

• Zoning or development restrictions that favour a Strata development over a single building.

• Government initiatives or incentives that reflect the number of dwelling units that are created instead of through a single building.

• Creating flexibility to sell off individual strata lots in the future in conditions that may make selling an entire development to a single purchaser difficult.

• Tax implications.

• Financing implications.

• Benefits to ownership through a Corporation instead of through ownership of individual strata lots.

However, this creates a problem because the Contingency Reserve Fund is essentially completely unfunded. This is contrary to the purpose of a Contingency Reserve Fund.

A Contingency Reserve Fund is for common expenses that usually occur less often than once a year or that do not usually occur. Implicitly, this is to ensure that those expenses can be made without requiring a special levy be imposed on Owners. The BC Supreme Court has said that a Strata is obligated when there are “many deferred maintenance items” to “consider the amount of funds in the Contingency Reserve Fund”.

For most portions of a Strata, deterioration occurs over a period of time. For example, a roof may have an expected lifespan of 50 years. If the cost of replacing the roof in $1,000,000 then $20,000 a year should be contributed to the Contingency Reserve Fund so that there is enough money in the fund when the roof must be replaced.

Using this model, sometimes referred to as the “Current Replacement Cost New of Reserve Items”, a Developer that owns all the strata lots should be contributing $20,000 a year to the Contingency Reserve Fund. This is not the model used with the minimum contribution provision in the Strata Property Act.

The requirement in the Strata Property Act for a Developer to act in good faith and with a view to the best interests of the Strata should inform the amount that a Developer must deposit to the Initial Contingency Reserve Fund. This would be consistent with the overall design and purpose of the Strata Property Act which includes an aspect of consumer protection.

Consequently, we believe that the Initial Contingency Reserve Fund should be a range from the minimum specified in the Act to an amount that is equal to the Current Replacement Cost New of Reserve Items.

We made this argument before the BC Supreme Court in 2024 and unfortunately, the judge did not agree. In that situation, the court stated

“At its core, the Strata Corporation’s argument amounts to a submission that the legislature ought to have set the minimum contribution amount in s. 12(3) of the SPA at a higher level where the strata property in question is older and the owner developer is aware of significant deferred maintenance items. While there may well be policy arguments that could be advanced in support of such a change, that is not the choice the legislature made at the relevant time.”

We note that the BC Government has increased the minimum contribution amounts in the Strata Property Act but it has not adopted our proposal.

However, despite the BC Government not amending the Strata Property Act, there is the opportunity to create change through the market. Developers can highlight the decision of the amount of their contribution to the Initial Contingency Reserve Fund in their marketing materials and purchasers can either favour purchasing strata lots from Developers that have properly funded the Contingency Reserve Fund or can try to negotiate a purchase price that reflects the likelihood that Owners will be required to pay money by Special Levy to fund repairs whose cost exceeds the money available in the Contingency Reserve Fund.