Can we borrow from the Reserve Fund for a capital expenditure

GR writes:

Hello Paul.  Our Corporation is considering a significant capital expenditure which will be considered a critical enhancement to the common element in support of the health and wellbeing of owners.  While the current financial position of the Corporation is healthy it would be unable to sustain operations should it experience an approximately 10K lump sum investment within the upcoming budget year.  I have heard that Corporations can “borrow against” their Reserve Fund for such things.  How does this work? and would it require a specific motion to be passed at either an AGM or Special Meeting?

Paul replies:

Dear GR:  Before borrowing from the Reserve Fund (RF), let’s tackle the project itself. While you did not specify the type of change contemplated, you did state that it would be an “enhancement” to the common elements. I must assume that this is something that may not currently exist and that it would constitute a change to the common elements. The Manitoba Condominium Act requires that any major change to the common elements be approved by unit owners. This could be done at your next AGM or a Special Meeting. Unless your governing documents state otherwise, at least a majority of owners present at the meeting must vote in favour of the change.

Changes made without notice, approval

175(1)      A condominium corporation may, if authorized by a resolution of the board, make a change without notice to the unit owners and without their approval if

(a) the change is required by an Act, regulation or municipal by-law or to give effect to an order of a court or tribunal; or

(b) in the board’s opinion, it is necessary to make the change to ensure the safety or security of persons on the property or who are using the common assets, or to prevent imminent damage to the property or common assets.

Notice required for all other changes

175(2)      Before making any other change, the condominium corporation must give each unit owner a written notice that

(a) describes the proposed change;

(b) contains a statement of the estimated cost of the proposed change and the source of the funds to pay for it; and

(c) describes the right of unit owners to request a special general meeting under section 114 within 30 days after receiving the notice.

Approval required for substantial change

176(1)      If the change proposed in a notice under subsection 175(2) is substantial, the change may be made only with the written consent of unit owners who hold the specified percentage of voting rights in the corporation.

The manner in which the enhancement will be financed is a different matter. It should normally come from the operating budget. However, as you state, the budget will not be able to sustain the cost at this time. If your budget ends the year with an operating surplus, you may be able to utilize the surplus for this purpose. The next avenue could be a Special Assessment. Each unit owner would be required to pay their share in a lump sum or over time. Since this may have significant impact on less affluent unit owners and that this does not appear to be necessary like roof repairs, it should be approved by the owners.  I am not a lawyer, but I could not find anything that would prevent the corporation from “borrowing” from the RF and to avoid any possible legal entanglements legal advice should be sought before putting it to a vote by the unit owners for approval. Keep in mind, that this is a “loan” and that the RF must be paid back. Because the RF is a rainy-day fund established to pay for future major expenses, I would not recommend borrowing from the RF unless it exceeds the ideal amount determined by the RF study.

The bottom line is that owners will have to pay for the enhancement. There is no escape!

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