Unapproved Expenditures From The Operating Fund
Expenditures from the Contingency Reserve Fund (CRF) are a generally well understood concept, and a Google search will show many articles from our esteemed colleagues in the legal community discussing the many nuances and elements that need to be taken into consideration when authorizing an expenditure from the CRF. In a nutshell, the CRF is for either planned expenses (with Owner authorization) or emergencies (without).
A less discussed and understood “unapproved expenditure” is also covered under Section 98 of the Strata Property Act:
98 (1)If a proposed expenditure has not been put forward for approval in the budget or at an annual or special general meeting, the strata corporation may only make the expenditure in accordance with this section.
(2)Subject to subsection (3), the expenditure may be made out of the operating fund if the expenditure, together with all other unapproved expenditures, whether of the same type or not, that were made under this subsection in the same fiscal year, is
(a)less than the amount set out in the bylaws, or
(b)if the bylaws are silent as to the amount, less than $2 000 or 5% of the total contribution to the operating fund for the current year, whichever is less.
(3)The expenditure may be made out of the operating fund or contingency reserve fund if there are reasonable grounds to believe that an immediate expenditure is necessary to ensure safety or prevent significant loss or damage, whether physical or otherwise.
(3.1)For the purposes of subsection (3), the prevention of significant loss includes, without limitation, the obtaining and maintaining by the strata corporation of insurance that is required under section 149 or 150 or the strata corporation’s bylaws.
(4)A bylaw setting out an amount for the purposes of subsection (2) (a) may set out further conditions for, or limitations on, any expenditures under that provision.
(5)Any expenditure under subsection (3) must not exceed the minimum amount needed to ensure safety or prevent significant loss or damage.
(6)The strata corporation must inform owners as soon as feasible about any expenditure made under subsection (3).
It’s atypical for a Strata Corporation’s bylaws to adopt a different amount than what is covered under SPA, but it is possible your Strata Corporation may have taken steps to alter the respective Bylaws in the past. In our discussion, we’ll take three things for granted:
- The amount authorized in your Bylaws is consistent with the Act;
- Your budget is an amount that ensures 5% of the total is more than $2,000 and;
- You have a reason why an expenditure from the Operating Fund is preferable to an expenditure from the CRF (i.e. the latter is low on funds);
What this section of SPA provides for is to allow the Strata Council to authorize an expense up to $2,000 (cumulatively, throughout the entire fiscal year) from the Operating Budget which was not approved as a line-item at the Annual General Meeting by the Owners. This is contingent on sub-section 3 which says that the expenditure needs to be necessary to ensure “safety or prevent significant loss or damage, whether physical or otherwise”. A typical example of this is that many Strata Corporations lack a “Legal” budget (though we encourage you to change that, for reasons we’ll outline below*) especially when they are not planning for any legal expenses. If the Strata Corporation is sued and there is no insurance coverage, or needs to obtain a legal opinion on a pressing matter which could lead to “significant loss”, the Strata Council can spend up to $2,000 without seeking explicit authorization from the Owners in advance. It should be recorded in the minutes, in order to satisfy sub-section 6 and ensure that the Owners are aware of the expense.
Interestingly, sub-sections 2 and 4 allow for a Strata Corporation to adopt a Bylaw that gives authorization beyond the $2,000 in SPA. It is also permissible to adopt Bylaws that grant Council more latitude beyond the “safety/significant loss or damage” reasons to make such expenditures. For example, authorization could be granted by way of a Bylaw to allow Council to expend up to $5,000 in the event of legal expenses not otherwise budgeted.
Keep in mind that the default amount in SPA hasn’t been updated in 17+ years and, as most Council members will know, costs for just about everything have risen dramatically in that time. Using the example from above, there’s no doubt that obtaining a legal opinion on any matter would be more expensive than it was 17 years ago. Strata Councils should give some thought to implementing a Bylaw that gives them a little more latitude for Unapproved Expenditures, though this may be a bit of a politically uphill battle to fight with Owners who might be hesitant about granting extra authority to the Strata Council. The flip side, though, is that technically any expense beyond that $2,000 threshold made by Council out of the Operating Budget is in violation of the Strata Property Act and a General Meeting would be required to authorize the expenditure especially if sufficient funds were not available in the CRF. This in and of itself is time consuming and costly.
*We mentioned above that we’re encouraging our clients to budget more for Legal expenses than they may previously have done. This is because, in general, life in Strata Corporations is becoming more and more litigious every year. With the arrival of the Civil Resolution Tribunal (CRT), all Strata Corporations should expect to require legal advice on a more frequent basis – simply put, the barriers to legal action against Strata Corporations have been greatly reduced and thus more Owners are filing claims through the CRT. While some of these may be straight forward and some potentially even have legal assistance covered by the existing Strata Corporation insurance policy, many will require legal counsel to be hired in order to assist the Strata Council with the proper handling of the claim.
Please refer to our previous post on the CRT for more information on that specific topic.