A closer look at the Report on Complex Stratas—should strata corporations be allowed to allocate expenses paid for out of the contingency reserve fund to types?
11 July 2017
By Kevin Zakreski
This post is the second in a three-part series highlighting key recommendations in the Report on Complex Stratas (PDF). For other entries in the series, click here.
Currently the Strata Property Act and the Strata Property Regulation only allow strata corporations to designate types of strata lots for the purpose of dealing with cost sharing relating to expenses paid for out of the operating fund. Some commentators have suggested that giving types a broader purpose and allowing them to take responsibility for expenses paid for out of the contingency reserve fund too would improve the operation of complex strata corporations. The committee give considerable thought to this proposal but ultimately decided not to recommend it. Here is a closer look at the committee’s reasoning.
Brief description of the issue
Types may only be used to vary the act’s general rules on cost sharing in relation to “a contribution to the operating fund [that] relates to and benefits only one type of strata lot.” So, for example, in a strata property consisting of an apartment building and townhouses, expenses related to the regular maintenance and upkeep of the building’s elevators may be allocated to apartment strata-lot owners. But when the time comes to replace an elevator, this capital expense must be borne by the strata corporation as a whole. Should types be expanded to encompass capital expenses, as well as operating expenses?
Discussion of options for reform
The options for this issue are essentially two: expanding the reach of types so that they embrace capital expenses, or standing pat on the current rules, which limit the scope of types to operating expenses.
Expanding the circumstances in which types may be used to share expenses would give strata corporations greater flexibility in structuring their affairs. Strata corporations could embrace a broader form of cost sharing that would come without the administrative complexity that results from creating sections.
Allowing for sharing of capital, in addition to operating, expenses would also support the legislative purpose for types, which involves protecting owners of one type of strata lot from having to pay costs that are exclusively for the benefit of another type of strata lot. Limiting types to operating expenses leaves this legislative goal only partially fulfilled.
Finally, expanding the reach of types would not be a leap into the unknown. It would simply restore the law to where it stood before the advent of the Strata Property Act. The long experience with full cost sharing under the Condominium Act should help to allay any practice concerns that could crop up from changing the law.
The rationale for the current, limited scope of types appears to be that it fits into a broader system for cost sharing under the Strata Property Act. As one judge explained, the “solution” for owners who wish to allocate costs more specifically is to “establish separate sections, each with an operating and a contingency reserve fund.”
The comparatively informal nature of types could also cause problems for sharing capital expenses. When this is done with sections, each section is a separate entity from the strata corporation and each has (or should have) its own contingency reserve fund. With types, on the other hand, expenses would be allocated with respect to a single (strata-corporation) contingency reserve fund. There were concerns under the Condominium Act that this approach would result in capital expenses not being properly allocated in practice.
The committee’s recommendation for reform
Among all the issues on types, this one commanded the greatest share of the committee’s attention. The committee gave extended consideration to extending types’ cost-sharing rules to capital expenses. This option seemed particularly attractive because it appeared to allow a way to build on the successes of types and tackle some of the shortcomings of sections. If owner-developers and strata corporations were given a way to couple a flexible cost-sharing regime with a streamlined administrative structure they might in the future gravitate toward types and avoid the challenges many have found with sections.
But the more the committee discussed proposing this reform, the more it realized that it couldn’t simply leave things at that. Other rules, covering financial accountability, administration, and even the beginnings of a governance structure for types, would also have to be contemplated and, in all likelihood, adopted. In the absence of such rules, expanding the scope of types would also, inevitably, expand the scope for issues involving types—particularly if a type were allowed to have its own contingency reserve fund. But adopting such rules causes another dilemma. Adding these features to types would have the effect of duplicating just those qualities of sections that have caused such administrative trouble. It would be more than ironic if reforms ended up remaking types into an echo of sections.
Faced with these concerns, and buoyed by the understanding that types in their limited form have proved effective for their purposes, the committee ultimately came to the view that the current approach should be retained.
The committee recommends:
The Strata Property Regulation should not allow capital expenses (expenses that occur less frequently than once a year) to be shared by types of strata lots, even if the capital expense relates to an item that benefits only the type of strata lot.