Advice and Opinion

Reserve funds will become mandatory

Most sectional title schemes are now preparing for their annual general meetings (or might have just had them) and will have set their budgets for the year which will be approved by the owners at the AGM for the new financial year. What will have to be factored in which often isn’t, says Michael Bauer general manager of the managing agents IHFM, is to make provision for a reserve fund.

When the Sectional Titles Schemes Management Act comes into force, reserve funds will become mandatory for every sectional title scheme and the minimum amounts will be prescribed by the new ST Act so each body corporate will have to bear this in mind when working out their budgets in future, said Bauer.

Reserve funds up until now have been seen as an option but it should actually be part of a normal sectional title scheme budget because maintenance to the building will be needed at some stage. If there is only a budget for day to day expenses then it would mean that the body corporate would have to raise a special levy if maintenance or repairs became necessary.

There should be an allowance in the budget for a purpose-bound reserve fund to be built up for capital expenditure items and the trustees must stipulate what this surplus is set aside for by means of a maintenance plan or schedule for the next three to ten years, said Bauer.

If they work out a short term plan for the current year, and then list the three year and five year projects needed, the budgets can be allowed for and they will have the peace of mind of knowing that they have been proactive in raising funds, rather than waiting for something to happen, he said.

What the trustees should do is make a list of all the common property assets, which could include such items as the driveways, paving, letterboxes, intercom systems, plumbing, lighting, perimeter walling, roofs, gardens, lifts and the swimming pool, etc.

Going through this list they can then ascertain when repairs or maintenance will be needed and earmark items and budgets accordingly.

The benefit of having a reserve fund is that the body corporate can avoid having to raise a substantial special levy in the future and there will be no maintenance backlog (which will affect property values). This is a healthy position for any sectional title scheme because any maintenance needed to the building should be done as soon as it is needed, and not left until the building starts to look run down or there are things that break, he said.

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