At every annual general meeting of a sectional title scheme the members are required to approve and adopt a budget, presented to them by the trustees of the scheme. Once the budget is adopted the levies may be resolved and applied and, within 14 days of the annual general meeting being held, must then be confirmed to all members by the trustees.
In the past providing for reserves to meet future repairs and maintenance requirements in the budget process has been loosely applied in sectional title as no statutory implications existed, short of the trustees’ being required to budget to meet the ensuing year’s commitments and to allow for reasonable contingencies.
It can be said that two schools of thought exist currently in this regard (1) to keep the levies as low as possible and to raise a special levy if and when required, or (2) to provide for the future repairs and maintenance now, thereby building a healthy cash reserve, and reducing the needs for future special levies.
There are valid arguments for both above cases, however, once the new Sectional Schemes Management Act (2011) ‘the Act’ is promulgated (widely believed to be imminent), then the trustees will be required by statute to provide for a reserve for future repairs and maintenance.
Section 3(1)(b) of the Act provides for the mandatory establishment of a reserve fund to cater for future repairs and maintenance and specifies the following:
a) If the amount of money in the reserve fund at the end of the previous financial year is less than 25 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least 15 per cent of the total budgeted contribution to the administrative fund;
b) if the amount of money in the reserve fund at the end of the previous financial year is equal to or greater than 100 per cent of the total contributions to the administrative fund for that previous financial year, there is no minimum contribution to the reserve fund; and
c) if the amount of money in the reserve fund at the end of the previous financial year is more than 25 per cent but less than 100 per cent of the total contributions to the administrative fund for that previous financial year, the budgeted contribution to the reserve fund must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance to the common property in the financial year being budgeted for.
At Intersect we have always advocated the provision of reserves and tried to strike a balance between the two arguments above. As a result, most of the schemes we administer have healthy cash reserves.
Although the Act is not yet law it is advised that trustees take the above into account when preparing the 2016 and 2017 budgets.