WA: What’s the Purpose of My Reserve Fund’s 10 Year Plan?

This article is about the reserve fund expenditure budget and the 10 year plan..

Table of Contents:

• QUESTION: We are a group of 10 ageing townhouses with accumulating maintenance and repair issues. One owner refuses to pay sinking fund fees and 2 owners only want to make monthly payments to the fund. How do we raise enough funds so necessary repairs can be actioned now?
• QUESTION: Our Strata Company is in a strong financial position with a large surplus of funds. Do we need to keep building this surplus?
• QUESTION: When do we need to complete the 10 Year Plan for a staged development that won’t be completed for another year?
• QUESTION: Does Landgate monitor the Ten Year Plan? If not, who does?
• WEBINAR: What’s the Purpose of My Reserve Fund’s 10 Year Plan?
• ARTICLE: Does the 10 Year Plan Set the Annual Reserve Fund Expenditure Budget?
• ARTICLE: What’s the Purpose of My Reserve Fund’s 10 Year Plan? (INTRODUCTION)

Question: We are a group of 10 ageing townhouses with accumulating maintenance and repair issues. One owner refuses to pay sinking fund fees and 2 owners only want to make monthly payments to the fund. How do we raise enough funds so necessary repairs can be actioned now?

Answer: Perhaps your strata company could look into alternative funding options.

Section 102 of the Strata Titles Act 1985 (The Act) sets out strata company budget requirements. This section requires a strata company to prepare a budget for approval at the annual general meeting. The budget must take into consideration any 10 year plan and reserve fund requirements. The annual general meeting and approve the budget as it is or as modified by that meeting. The budget will set out both the proposed expenditure and the income raised to meet that budget.

Section 100 of The Act sets out how strata levies are administrated. This section of The Act requires that a strata company raises an Administration Fund sufficient enough to control and manage the common property, payment of insurance and other obligations of the strata company. It also sets out that levies will be raised in accordance with the unit entitlements or by a varied basis should the scheme contain a by-law that provides for this.

A designated Strata Company (10 lots or more, or with a building replacement value of $5 Million or above) must also have a reserve fund for the purpose of meeting contingent expenses that are not routine in nature. A designated strata company must also have a ten year maintenance plan and a financial plan to meet the requirements of that plan.

To get down to the specifics of your question. If the reserve (sinking) fund was implemented by ordinary resolution at a general meeting of the strata company then all owners are liable to pay the levy. The meeting can determine the terms of the levies. For example:

• The frequency they are due and payable
• When they must be paid for

The most common is quarterly but some schemes choose annual or monthly contributions. It is also most common for the levies to be payable in advance and due on the first day of the period in which they are for. This should be clearly set out in the agenda (proposed) and the minutes (adopted) so it is clear for all owners. Levies attract interest under The Act at a rate of simple interest prescribed by the general regulations (currently 11%) on the date from which they are due and payable.

If you are levying quarterly but have owners that prefer monthly, there really is no reason you cannot accommodate this, provided their three monthly instalments are paid by the quarterly due date. Providing this type of flexibility helps in managing your arrears and really does not impact cash flow if paid by the same date as those paying quarterly. If you are levying annually in advance it may be that some owners might struggle to meet this obligation financially. It would be reasonable to expect that the Strata Company would work with these owners to come up with a suitable payment plan to ensure the obligation is met. It is a good idea for a Strata Company to develop financial hardship guidelines.

It sounds as if your strata company has repairs that may be urgent in nature without the funds to meet these repair requirements. 10 year planning legislation has been introduced to try and combat this from happening and to avoid hefty once off special levies that can place financial hardship on owners. Perhaps your strata company could look into alternative funding options. For example:

• A Strata Loan Company: StrataLoans or Macquarie Bank
• A Broker can assist with loan options: Capita Finance https://www.capitafinance.com.au/
• Interest Free Instalment Options with suppliers such as Programmed

The above options I have provided are examples. With a little research you will find many more options available to Strata Companies. It is a good idea for your Strata Company to seek financial advice when looking into funding options. Depending on the overall cost of the maintenance being carried out in some cases a loan can be secured to fund some but not all of the lots. This is beneficial if some owners have the funds to contribute up front whilst others do not. In this scenario the loan repayments would be distributed across those owners contributing to the loan.

Ultimately it is a general meeting that must decide on the amount, frequency and terms of the budgeted income and associated levies.

Luke Downie
Realmark
E: [email protected]
P: 08 9328 0999

This post appears in Strata News #544.

Question: Our Strata Company is in a strong financial position with a large surplus of funds. Do we need to keep building this surplus?

I live in a strata complex in WA and I am on the Council of Owners. With recently introduced laws covering maintenance of common property, we have had a 10 year maintenance plan report carried out and created a fund out of levies to cover all listed items.

The complex is in a strong financial position with $30,000 surplus funds in the administrative fund (separate to the maintenance plan fund) and that is growing every month. The Council of Owners had suggested at the recent AGM that we could afford to paint the facias and gutters on each unit out of the $30,000 surplus as a way of keeping the exterior of the complex, which faces common property.

However the Strata Company has rejected this request, saying it is not common property and not payable out of these funds. With a maintenance plan in place, there are a lot of excess funds.

Can the Council of Owners enforce expenditure for items other than common property and is there a need to keep building such a surplus?

Answer: The 10 year maintenance plan is your best guide to determining whether you need to keep building any surplus within the reserve.

In this instance, I’m assuming that the boundaries to the lots are to the external surfaces and therefore an owner’s responsibility. In the end, the council can’t enforce the expenditure, particularly if at the AGM the owners voted against it. At any AGM, if a motion is put restricting actions of the council then the council can’t contravene those motions and likewise, if the Strata Company passes motions requiring the Council of Owners to do certain works, the Council of Owners can’t refuse that instruction. So they can’t enforce the expenditure.

With regards to the surplus funds, if they have had the 10 year maintenance plan undertaken, then that gives them a guideline around what their future expenditure on maintenance of common property would entail. That’s their best guide to determining whether they need to keep building any surplus within their reserve.

You can structure bylaws that enable the strata company to maintain owners lots and this is particularly relevant where you have the strata plan which puts the boundaries to the external of the lot. When you have this on a building, you can’t expect the owner to paint the outside of the building because you could end up with a patchwork quilt. So, it is generally anticipated that you would pass a bylaw empowering the Strata Company to maintain certain items of the owners property which is generally the painting of the external boundaries of the lots. This would perhaps be the next best suggestion: get that bylaw drafted and introduce it at the next general meeting of the strata company, so the Strata Council can undertake these works.

The 10 year maintenance plan will give them the best guide to what needs to be maintained within the scheme and then what needs to be raised going forward over the next 10 years. I strongly encourage them to refer to the 10 year maintenance plan and identify those items which they are responsible for and do need to be actioned, and budget accordingly. If they can reduce the reserve then that’s great but yes, refer back to the 10 year maintenance plan.

Scott Bellerby
B Strata
E: [email protected]
P: 08 9382 7700

This post appears in Strata News #510.

Question: When do we need to complete the 10 Year Plan for a staged development that won’t be completed for another year?

I look after a Strata Complex of 157 units. 57 lots are not yet completed in the development.

What is the legal requirement to finalise the 10 Year Plan? Would I be expected to carry out the 10 year plan now based on lots completed, and then carry out a second plan in 12 months when the development is complete? Or would it be better to wait 12 months and carry out a single complete report for all stages of the development?

If we wait until the development is complete, would we be in contravention of the Act by not having the 10 year plan in place within 12 months of the reform?

Answer: As a designated strata company (having more than 10 lots), you must have a 10 year plan in place by the regulatory deadline.

Working out the legislative requirements for a 10 year plan at a staged development is surprisingly complex.

Answering your question is the easy part of the process. As a designated strata company (having more than 10 lots), you must have a 10 year plan in place by the regulatory deadline.

• A strata company automatically comes into existence when the first stage of the development is registered.
• Once in existence, the strata company must comply with all the relevant sections of the Act and the Regulations.
• Consequentially,
  
  • a new designated strata company must submit their first 10-year plan for approval at the first annual general meeting [section 77(7) of the Strata Title (General) Regulations 2019]; and
  • a pre-existing designated strata company must submit their first 10-year plan for approval no later than the first AGM occurring after 1 May 2021.

• Annual budgets must be prepared and approved “taking into account … the 10 year plan for the reserve fund” [section 102 of the Strata Titles Act 1985].
• The 10 year plan must be revised “at least once in every 5 years” [section 100(2A)(b) of the Strata Titles Act 1985].

That a strata complex is not fully developed does not vary these legislative requirements.

There are practical reasons why this must be the case. It is not unusual for large developments to be staged over three or more years. Not requiring the 10 year plan until the end of the construction period would significantly undermine the consumer protection which 10 year plans are designed to provide.

Up to this point in my answer, the application of the Act and Regulations is very black and white. Interpreting the legislative requirements for future stage infrastructure is much more interesting.

1. Does the Act require me to update the 10 year plan following major infrastructure changes?

section 100(2A)(b) of the Strata Titles Act 1985 says that the strata company must ensure:

“that the 10 year plan is revised at least once in each 5 years and that, when revised, the plan is extended to cover the 10 years following the revision”.

Nothing in the Act or Regulations expressly states that the 10 year plan must be updated before the end of the 5th year if there are major infrastructure changes. However, using a substantially out-of-date 10 year plan as the basis of setting your budget would be inconsistent with the legislation’s intent. Hopefully, we will get further Landgate advice about this point in the future.

2. Can the initial 10 year plan include infrastructure in future development stages?

section 100(2A)(a)(i) of the Strata Titles Act 1985 says that the 10 year plan must set out:

“‘the common property and personal property of the strata company that is anticipated to require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan”.

If your strata complex is close to completion, it is possible major repairs and replacements associated with the future stages can be predicted and reasonably described as “anticipated”.

Sections 53(6) to (8) of the Strata Title (General) Regulations 2019 require the developer to include a copy of the architectural plans and specifications for future construction stages in the scheme’s by-laws. If you have a good relationship with the developer, they may also provide up-to-date architectural plans on a provisional basis.

A quantity surveyor with extensive experience preparing 10 year plans can use these documents to estimate future stage costs as part of your initial 10 year plan. We do this regularly for developers who want to market their development off-the-plan and need to provide preliminary levy guides.

You just need to be mindful that the staged addition of new lots must be reflected in both the future cost forecasts and the calculation of future levy contributions.

We recommend that the 10 year plan be reviewed at the end of construction and updated to reflect any changes in the final construction design or timing. However, unless there have been substantial variations, leaving that review until the end of the standard 5 year period may not significantly change the recommended annual levies.

I can see no reason to question the compliance of a 10 year plan which includes reasonably anticipated future stage expenses, provided it satisfies sections 77(1)(g) and 77(6) of the Strata Title (General) Regulations 2019 by clearly identifying the costs relate to the future stages and stating the method used in their estimation.

I’ll leave it up to the lawyers to argue the technical case about exactly when future stage expenses become reasonably anticipated and if (or when) section 100(2A)(a)(i) makes their inclusion mandatory.

As is typically the case, the best option for your strata complex will need to balance technical compliance with practical application. Therefore, my advice for your scheme is:

1. Confirm with the developer that the final stages will be constructed after the last date that section 127 of the Strata Titles Act 1985 permits you to hold the AGM.
2. Consider the availability and reliability of information about the future construction stages.
3. If reliable information is available, prepare a 10 year plan that contains all the expenses anticipated to occur during the plan period, including those for future stages. Then update the plan after all the stages are constructed, or at the end of 5 years, depending on which comes first.
4. If reliable information is not available, prepare an initial 10 year plan that covers the current infrastructure. Then update the 10 year plan after each new stage is constructed.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
P: 1800 808 991

This post appears in the September 2021 edition of The WA Strata Magazine.

Question: Does Landgate monitor the Ten Year Plan? If not, who does?

Answer: Ensuring that their body corporate complies with the requirements of the Act is ultimately the responsibility of the individual lot owners.

This is a question that Landgate appears to have been asked on numerous occasions.

On their strata support and frequently asked questions webpage under the “Strata management” heading, Landgate answers the question, “Is it compulsory to develop a 10 year plan and will Landgate be checking?”

Under the amended STA a strata company has a general duty to:

• Control and manage the common property for the benefit of all lot owners.
• Keep the common property in good and serviceable repair.
• Properly maintain, renew or replace the common property where necessary.

The addition of the 10 year plan and reserve fund is a tool to assist the strata company to fulfil this general duty. It is the responsibility of lot owners to hold the strata company accountable as to whether they are meeting the requirements set out under the amended STA.

Landgate will not be monitoring whether a scheme requiring a 10 year plan has one. However, if a 10 year plan is required, but not created, a strata owner could make an application to SAT to resolve a scheme dispute. This would be on the basis that the strata company has failed to perform a function they were supposed to perform. The STGR sets out the requirements for the 10 year plan, which includes that the strata company makes a list of elements of the common property that are anticipated to require maintenance, repair, renewal or replacement in a 10 year period. This knowledge will assist owners when they are considering how much the reserve fund should contain, and how much it should have established over time.

Ensuring that their body corporate complies with the requirements of the Act is ultimately the responsibility of the individual lot owners. They are the ones who risk financial harm if inadequate maintenance funding resulting in either a special levy or a run-down building.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
P: 1800 808 991

This post appears in Strata News #468.

What’s the Purpose of My Reserve Fund’s 10 Year Plan?

On the 3 December, 2020 Kaylene Arkcoll from Leary & Partners joined Nikki Jovicic from LookUpStrata for a 1 hour Webinar to discuss the 10 Year Maintenance Plan and its relationship with the Reserve Fund.

The session, including the accompanying slide presentation, was packed full of practical and useful information from Kaylene.

We receive a stack of excellent feedback from our audience at the end of the session, including:

My neighbour and I watched the very informative webinar, for which we were grateful…. Margo

Thank you for organising the webinar session. It was just great, easy to follow and very well presented…. Joe

You can watch the video presentation in full by clicking on the image above. Kaylene has also provided us with the Slide Pack, which you can print off as a reference to accompany the recording of the presentation.

The end of the session includes a few Q&A we received in either prior to the event or during the session. If we did not get to your submitted question on the day, stand by for the release of the remaining questions at a later date.

Kaylene has plenty more helpful information to share with the LookUpStrata audience, so please watch out for more webinars in this series in 2021.

Download your copy of the slide pack here.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
T: 1800 808 991

This post appears in the December 2020 edition of The WA Strata Magazine.

Does the 10 Year Plan Set the Annual Reserve Fund Expenditure Budget?

The annual budget process requires lot owners to consider two separate questions.

1. What maintenance, repair, renewal and replacement work do we expect to do next year?

The answer to this question becomes the list of work voted on and approved by the lot owners at the annual general meeting (the approved reserve fund expenditure).

The 10 year plan will help identify work that should be considered for inclusion in the budget. However, the fact that you have a 10 year plan which predicts a work item will occur next year does not automatically mean the work item should be included in next year’s reserve fund budget.

The forecast timing of work in the 10 year plan is based on typical wear and tear levels and typical item lives. Your external painting may have weathered better than was initially expected. Conversely, your carpet may require early replacement because of staining. The annual expenditure budget should always reflect the actual maintenance
requirements of the scheme. Regularly updating the 10 year plan ensures that the variations between actual and forecast work do not create a long-term funding inconsistency.

2. What reserve fund levy should we raise to cover both the cost of next year’s proposed reserve fund expenditure and the future-year expenditure identified in the 10 year plan?

The purpose of the 10 year plan is to answer this question.

How do we use the 10 year plan to set our reserve fund levy?

Section 77(1)(h) of the Regulation requires the 10 year plan to contain “a plan or recommendation for the funding of the estimated costs for the maintenance, repairs, renewal or replacement” identified as occurring during the plan period.

Expressed simply, section 77(1)(h) requires the preparation of a cash-flow projection which shows the expected annual outgoings, along with the proposed funding/levies and then demonstrates that the books can be balanced.

The legislation does not specify that the funding plan must be calculated in a particular way. A strata company is free to recommend and adopt any funding plan which sets out a reasonable method of payment for the identified future costs. For example, a strata company can choose to take out a loan to pay for a major expense as long as they incorporate the finance costs into the funding plan.

However, section 100(2)(a) states that the purpose of the reserve fund is to “accumulate funds to meet contingent expenses… likely to arise in the future”. This reflects the expectation that most schemes will have a funding plan which is based on a progressive contribution toward future expenses. Our experience from equivalent interstate systems is that over time Administrative Tribunals increasingly default to requiring a planned progressive contribution unless there is a convincing argument for an alternate funding approach.

The unique feature of an ‘accruing’ reserve fund levy is that the levy in a particular year is not based directly on the approved expenditure for that year. In years when little maintenance, repair, replacement or renewal work is required, the levy builds up the reserve in the fund to pay for future large expenses. In years when high costs such as external painting occur, the fund reserve is used to off-set the expenditure and avoid a special levy.

The reserve fund balance must remain positive. The levies should equitably spread the cost over the plan period without accumulating excessive cash reserves. This requires careful financial modelling. Over a 10 year period, ensuring the accuracy of these calculations is at least as important as ensuring the accuracy of the initial inspection information.

If a professional consultant prepares your 10 year plan it should include a full cash flow analysis. The report’s funding plan and recommendations should:

• Recommend the amount of money the strata company needs to deposit in the reserve fund each year to pay for future expenditure without requiring major variations in levy amounts or special levies.
• Demonstrate how the recommended levies and fund balances relate to the ongoing future expenditure.
• Provide sufficient detail to enable you to adjust for minor variations in planned expenditure during the period between forecast updates.

Kaylene Arkcoll
Leary & Partners
E: [email protected]
T: 1800 808 991

This post appears in Strata News #431.

What’s the Purpose of My Reserve Fund’s 10 Year Plan?

After receiving their strata company’s 10 year plan, many lot owners ask us “What do I do with it now?”. They know the strata company must have a 10 year plan but they don’t understand its purpose or how this affects the type of report they should commission.

So, what is the purpose of a 10 year plan?

Section 100 (2)(a) of the Strata Title Act 1985 requires the strata company to establish a reserve fund:

“for the purpose of accumulating funds to meet contingent expenses… and other major expenses of the strata company likely to arise in the future”.

Section 100(2A)(a) requires designated strata companies to have a 10 year plan that sets out–

1. “the common property and the personal property of the strata company that is anticipated to require maintenance, repair renewal or replacement (other than of a routine nature) in the period covered by the plan; and
2. the estimated costs for the maintenance, repairs renewal or replacement; …”

The Explanatory Memorandum for the Strata Tiles Amendment Bill says

“The 10 year plan is aimed at assisting the strata company in deciding how much money it should set aside in their reserve fund.”

How does the purpose of the 10 year plan influence its contents?

The 10 year plan is a budget document. Its primary function is not to act as a detailed maintenance manual or specification. Knowing this when preparing/commissioning the 10 year plan may save the strata company time and money.

Section 77(3) of the Regulations lists infrastructure items which may need to be included in the 10 year plan. Section 77(6) of the Regulations also contains a list of information about the infrastructure which, depending on their circumstances, the strata company may decide to include in the 10 year plan.

We are observing an overemphasis on identifying and assessing the current physical condition of the scheme (which is important) and not enough focus on the quality of long- term cash-flow calculations required to assist the strata company set reserve fund levies.

Many lot owners do not appear to understand that:

• Common property infrastructure only needs to be documented in the 10 year plan if it is likely to require maintenance work during the plan period (the “covered items”).
• It is only necessary to document the “covered items” in the detail and format required to broadly assess their condition and estimate the cost of future maintenance.
• The extent of section 77(6) discretionary information which the strata company includes in their 10 year plan should be determined on a scheme-by-scheme basis to match their specific needs.

The most important questions you should ask when you read your 10 year plan are

1. Can I clearly understand what the major reserve fund expenses will be in each year of the 10 year plan?
2. Does the 10 year plan provide clear advice about the levies we should collect annually to fund the future work?

Kaylene Arkcoll
Leary & Partners
E: [email protected]
T: 1800 808 991

This post appears in Strata News #417.

Have a question about the purpose of the reserve fund’s 10 year plan or something to add to the article? Leave a comment below.

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Read next:

• WA: Strata Reform Seminar Session 2: 10 Year Maintenance Plans
• WA: What is ‘Personal Property’ of the Strata Company?

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