11 Sep What to do when your body corporate holds sufficient reserve funds
Once a body corporate already holds substantial funds in reserve, do they need to keep contributing to the maintenance reserve? In this blog, we address this question about reserve funds.
What does the Act say?
Naturally, owners do not want to make unnecessary payments, especially considering that the fact that when they sell their apartment, they will not be able to withdraw any of the surplus funds.
The Sectional Titles Schemes Management Act No 8 of 2011, section 3 (1)(b) requires the body corporate: “to 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”
The Sectional Titles Schemes Management Regulations (STSMR) provides trustees with guidelines as to what monies must be allocated to 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
Calculating the required reserve amount
As you may know, two funds are now required by the Act – an administrative fund and a reserve fund. Read more about that here.
The Sectional Titles Schemes Management Regulations provide clear guidance on how the minimum annual reserve amount must be calculated:
(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.
Simply put: If – at the end of the financial year – the body corporate’s reserve fund is equal to (or more than) the previous financial year’s annual contribution to the administrative fund, there is no minimum contribution to the reserve fund. Therefore, the body corporate is not obliged to further contribute to the reserve fund.
The situation will need to be reassessed every year and prudent trustees will maintain (or increase) the reserves, even if it is sufficient.
Financial obligation
Bodies corporate may find themselves in a position where the required financial contribution is too taxing. The Ombud allows such bodies corporate to submit a plan on how they will raise the necessary reserves in order to comply with the regulations.
In essence, the new Act requires trustees to budget effectively to ensure day-to-day maintenance of the complex, planning for long-term maintenance and adequate accumulation of reserve funds.
Another blog you may enjoy reading: Pre-paid meters in sectional title schemes – a good idea or not?