Introduction
Historically bodies corporate did not budget for, or save for the maintenance, repair and replacement projects. So, for example, where the scheme’s lift needed an expensive service, the trustees would need to raise a special levy to fund the expense. The reason for trustees not budgeting for these future expenses was often due to pressure on trustees to keep levies low. With the advent of the Sectional Titles Schemes Management Act 8 of 2011 (the “STSM Act”) the requirement is now set in stone that bodies corporate need to plan, budget, and save for upcoming maintenance, repair and replacement projects for the scheme.
The STSM Act has introduced the requirement for a reserve fund as well as a maintenance, repair and replacement plan (“MR&R plan”) for larger maintenance projects of the common property in sectional title schemes. This has had the advantage of creating better budgeting and planning within schemes, while avoiding the necessity for raising as many special levies.
Reserve fund
In terms of section 3(1)(b) of the STSM Act a body corporate must establish and maintain a reserve fund in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property, but not less than such amounts as may be prescribed by the Minister.
PMR 22 provides that a body corporate must prepare a written maintenance, repair and replacement plan (“MR&R plan”) for larger maintenance projects of the common property. PMR 24(2) provides that the reserve fund must be used for the implementation of the MR&R plan of the body corporate, and should therefore be used to calculate the actual amount necessary for their reserve fund.
How are the minimum amounts to be held in reserve calculated?
The calculation for the minimum amounts that must be held in the reserve fund is set out in a formula in the Regulations to the STSM Act. This provision may not be amended by the members of the body corporate by resolution as the legislature viewed having adequate savings in the reserve fund as being critical to the sound financial management of the scheme.
Regulation 2 provides that the minimum amount of the annual contribution to the reserve fund, for a financial year being budgeted for, must be determined in terms of one of the following three categories:
- 15% contribution
The amount of money in the reserve fund, at the end of the previous financial year, is less than 25% of the total contributions to the administrative fund for that previous financial year then the budgeted contribution to the reserve fund must be at least 15% of the total budgeted contribution to the administrative fund.
- No minumum requirement
The amount of money in the reserve fund, at the end of the previous financial year, is equal to, or greater than, 100% of the total contributions to the administrative fund for that previous financial year then there is no minimum contribution to the reserve fund.
- The amount budgeted for administrative fund
The amount of money in the reserve fund, at the end of the previous financial year, is more than 25%, but less than 100%, of the total contributions to the administrative fund for that previous financial year then 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.
What must the funds held in reserve be used for?
In terms of PMR 24(2) the reserve fund maintained must be used for the implementation of the maintenance, repair and replacement plan of the body corporate. In this way the reserve fund is connected to the compulsory ten year maintenance, repair and replacement plan.
Maintenance repair and replacement plan
In terms of PMR 22(1) a body corporate must prepare a written maintenance, repair and replacement plan for the common property, setting out:
(a) the major capital items expected to require maintenance, repair and replacement within the next 10 years;
(b) the present condition or state of repair of those items;
(c) the time when those items or components of those items will need to be maintained, repaired or replaced;
(d) the estimated cost of the maintenance, repair and replacement of those items or components;
(e) the expected life of those items or components once maintained, repaired or replaced; and
(f) any other information the body corporate considers relevant.
In terms of PMR 22(2) the annual contribution to the reserve fund for the maintenance, repair or replacement of each of the major capital items must be determined according to the following formula:
[(estimated cost minus past contribution) divided by expected life].
In terms of PMR 22(3) a maintenance, repair and replacement plan takes effect on its approval by the members in general meeting. However, on approval of such a plan, the members may lay down conditions for the payment of money from the reserve fund.
In terms of PMR 22(4) the trustees must report the extent to which the approved maintenance, repair and replacement plan has been implemented to each annual general meeting.
What amounts must be paid into the reserve fund?
In terms of PMR 24(3) the following amounts must be paid into the reserve fund:
(a) any part of the annual levies designated as being for the purpose of reserves or the maintenance, repair and replacement plan;
(b) any amounts received under an insurance policy in respect of damage or destruction of property for which the body corporate is responsible;
(c) any interest earned on the investment of the money in the reserve fund;
(d) any other amounts determined by the body corporate, and all other body corporate income must be paid into the administrative fund.
All other body corporate income must be paid into the administrative fund.
What amounts must be paid out of the reserve fund?
In terms of PMR 24(5) money may be paid out of the reserve fund:
(a) at any time in accordance with trustee resolutions and the approved maintenance, repair and replacement plan; or
(b) if the trustees resolve that such a payment is necessary for the purpose of an urgent maintenance, repair or replacement expense, which purpose includes, without limitation
(i) to comply with an order of a court or an adjudicator;
(ii) to repair, maintain or replace any property for which the body corporate is responsible where there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage to persons or property;
(iii) to repair any property for which the body corporate is responsible where the need for the repairs could not have been reasonably foreseen in preparing the maintenance, repair and replacement plan; or
(iv) to enable the body corporate to obtain adequate insurance for property that the body corporate is required to insure; provided that the trustees must report to the members on any such expenditure as soon as possible after it is made.
Expenditure under PMR 24(5)(b) must further not exceed the amount necessary for the purpose for which it is expended, or any limitation imposed by the body corporate on expenditure, and must comply with any restrictions imposed or directions given by members.
What about urgent maintenance projects?
In terms of PMR 24(6) expenditure for urgent maintenance, repair or replacement:
(a) must not exceed
(i) the amount necessary for the purpose for which it is expended; or
(ii) any limitation imposed by the body corporate on expenditure; and
(b) must comply with any restrictions imposed or directions given by members.
Investment of reserve fund money
PMR 21(3)(d) states that the body corporate may, on the authority of a written trustee resolution invest any moneys in the reserve fund in a secure investment with any institution referred to in the definition of “financial institution” in section 1 of the Financial Services Board Act 97 of 1990.
Conclusion
This is the clearest example of where the sound financial management of a scheme is connected to efficient physical management of the infrastructure of the scheme. The legislative requirement for a reserve fund has created “nest eggs” for bodies corporate, and has the advantage that it reduces the need for raising special levies, where members are blindsided by unbudgeted expenses that arise in the course of a financial year. So, although levies are higher on a month to month basis, there should no longer be as many special levies raised.
