Unit owners often expect the reserve fund study to be a definitive statement of the costs that will be incurred over the next three years. Reserve fund contributions are based on expected repair and replacement costs, the anticipated life of the corporation’s assets and the requirement that the fund remain adequate. While reserve fund planners are very knowledgeable and skilled at what they do, the reserve fund study is not a guarantee that reality will be consistent with the plan.
As managers and board members are acutely aware, construction costs continue to vary between the date a reserve fund plan is developed and the date a project is tendered. This variance can be significant. There can also be unanticipated increases in the scope of a project, or items that must be repaired or replaced earlier than anyone anticipated. Even where a board follows all of the best practices, relies on qualified professionals and plans carefully, the unfortunate reality is that the reserve fund may not be sufficient to meet the actual cost of the work. Intentional planning, therefore, means treating the reserve fund study as a governance document, not simply a compliance document, while also recognizing that it is a forecast rather than a crystal ball.
In many corporations, the challenge is not identifying that major repair and maintenance work is needed, or identifying the reasons that the actual costs have exceeded the amount planned for in the reserve fund study. The challenge is deciding when to begin the conversation with owners.
Intentional planning does not eliminate hard conversations. Bad news does not often get better with time. When a special assessment, increase in common expenses, or a loan becomes necessary, the board should resist the temptation to delay the conversation because this almost always invites frustration. Delays can also create liability for the corporation. When these hard conversations are delayed, the discussion is no longer only about the building but also about assigning blame, feelings of distrust for the board, and concerns about whether the board is not being transparent with owners. If the information is not disclosed in a status certificate, this can also create liability for the corporation.
A better approach is to be transparent with owners as soon as the board is aware of the need for the work and that the costs are likely to exceed the amount set aside in the reserve fund. The board should explain the problem in sequence: what physical condition has changed, what professional advice the board has received, what work is required, what funding options have been considered, and why the board has selected the proposed approach. Owners are still likely to be unhappy with the financial impact, but the discussion is less likely to become personal or accusatory when the board can prioritize transparency and show the reasoning behind the decision.
The reserve fund study should also be connected to the corporation’s broader long-term strategy. It is not enough to receive the study, approve a funding plan and then return to it three years later. Boards should use the study as a standing governance tool. That means comparing the study against current conditions of the common elements, pending capital projects, construction cost volatility, borrowing capacity, common expense increases and owner tolerance for financial disruption. Where the board knows that major work is likely to arrive earlier than projected, or that costs have moved materially since the study was prepared, the issue should be addressed before the corporation is forced into a crisis-driven decision.
Communication is most effective when it is candid, timely and tied to the board’s statutory obligations. The purpose is not to persuade every owner to agree with the board. That may not be realistic, particularly where the financial impact is significant. The purpose is to reduce the sense that the decision has come from nowhere. Owners are less likely to view a special assessment, request for a loan, or significant increase in fees as arbitrary if they have full and transparent communication.
A practical board message to the owners might be: “We know this is difficult news. The board did not arrive at this recommendation lightly. The work is required because of the condition identified by our professionals, the timing is driven by the risk of further deterioration, and the amount is based on the funding options available to the corporation. We are providing the information we relied on so owners can understand the path from the reserve fund study to this decision.”
That type of message does not make the costs easier for owners in difficult financial circumstances, but it does make the process more transparent. Transparency is often the difference between an unpopular decision that prompts requisitions and personal accusations against board members and an unpopular decision that owners can understand as unavoidable and the result of responsible governance.
Ultimately, intentional reserve fund planning is not simply a budgeting exercise. While special assessments, loans, or substantial increases to common expenses may never be welcomed, they are less likely to become sources of serious and prolonged conflict when owners can understand how the board moved from identifying a problem to selecting a solution.
Laura Gurr is a partner with Cohen Highley LLP in London. Cohen Highley LLP has offices in London, Kitchener, Windsor, Strathroy and Sarnia. Laura provides risk management and regulatory compliance advice to condominium corporations, unit owners, and property management companies.
Megan A. Alexander is a licensed paralegal who works within the Commercial Litigation and Multi-Residential Housing Groups at Cohen Highley LLP in London, Kitchener, Strathroy and Windsor. Ms. Alexander’s main areas of practice are within the Ontario Small Claims Court (including enforcement) and the Condominium Authority Tribunal (CAT).
