Buying a Condo? Ask About Reserve Funds

Buying a condo doesn’t have to be intimidating when you know the right questions to ask about reserve funds.

Quick Read

What a reserve fund pays

Why reserve funds are important

How they differ from business reserves

Where the money goes

Are reserve funds mandatory?

Can I get my money back?

How much will I pay?

Other things to know about reserves

What the new home warranty covers

What are reserve fund studies?

Are they accurate?

Do owners get a copy?

What if I can’t afford repairs or upgrades?

Can non-owners look at the study?

What’s the status certificate?

What’s the insurance binder?

What if repairs aren’t made?

Can I complain about a manager?

Are condo boards compelled to have reserve funds?

Can I sue the board?

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What does a reserve fund pay for?

Good question. Reserve funds cover non-routine repairs or replacement items for common areas like parkades or lobbies. They’re used to repair faulty HVAC systems, replace aging roofs, or install new swimming pool liners. Day-to-day maintenance like shampooing lobby carpets or repairing the front door security system come out of the building’s operating funds, paid for by your common element fees.

Why are reserve funds important anyway? 

Think of reserve funds as a rainy day fund. Condo corporations hold back reserve funds the same way you might save for new siding for a single family home. By law, condo corporations are required to hire specialists to calculate how much is needed for future major renovations or repairs, and set that aside as their reserve funds.

See how hiring professional home inspectors makes a difference.

Is that like a reserve in a business?

You may be thinking of financial reserves businesses keep to pay for anticipated future liabilities. The difference between reserves and reserve funds is that reserves are optional. Reserve funds are mandatory financial accounts for future repair or replacement costs. Profits businesses make by investing their financial reserves can be used for any purpose. Condo corporations must return income they make by investing reserve funds in GICs or government bonds back to the fund.

So what happens to money in reserve funds?

It’s separated from the annual operating account and can be invested in low-risk vehicles like GICs or government bonds. 

Do I have to pay the reserve fund?

Yes, reserve funds are generated from the monthly common element fees all owners pay. 

Does my money get refunded if I leave?

No, the fund belongs to the condominium corporation. Like painting your home, it’s part of being a condo owner

What will it cost me?

All condo owners contribute to the reserve fund through common element fees. By law, the Ontario Condominium Act, at least 10% of your condo’s operating budget goes into the reserve fund. 

That’s not too bad. Is that all?

Not quite. Reserve funds are calculated by conducting a reserve fund study. Most condo corporations prepare an initial study, and update it every three to five years. You may pay special assessments or condo fee increases if costly building problems are uncovered.

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Isn’t that covered by Tarion?

You mean your Ontario New Home Warranties Plan. Tarion covers structural problems caused by Ontario Building Code violations or defective workmanship or materials that make your unit uninhabitable. Provided your unit is still under warranty.

Explain the reserve fund study to me. What are the types of reserve fund studies?

The initial, class 1 reserve fund study is done by a professional engineer or appraiser. It requires a physical visit to your building to review common elements and assets, like HVAC systems and unit balconies, and conduct interviews with condo corporation directors, employees, and agents. The class 1 study results in a report detailing non-routine repairs and replacements required to keep the building functioning for the next 30 years or more.

Expect yours to outline:

  • what needs repairing or replacing
  • what it will cost yearly
  • when it’s needed
  • and whether reserve funds are sufficient or should be increased.

Follow-up studies are conducted every three to five years. Class 2 studies involve a site inspection, and are similar to the initial class 1 study. Class 3 studies involve a review of the corporation’s records, and interviews with directors, employees, and agents. Depending on the building’s age and condition, condo corporations may conduct either a class 2 or 3 study. Read more on reserve fund studies.

Make new home purchases conditional until your inspection is complete.

Are reserve studies accurate?

As much as they can be. Building components may wear out quicker than expected. For example, if the builder skimped on the waterproofing underneath exterior siding, you could wind up paying for repairs sooner than planned for. You could face extra assessments if that happens.

Do I get a copy?

Owners usually get a copy with the building’s annual budget. But if you don’t, here’s what you need to know. Condo directors have 120 days to accept the study or propose alternatives. It’s circulated to owners 15 days after adoption and the board has up to 30 days to act on it after that.

What if owners can’t afford repairs or upgrades?

The engineer or appraiser who does the study proposes how to fund the work. A small condo might put 10% a year aside so that, over time, it can afford the needed repairs and upgrades.

Could you live in a life lease vs condo?

How do I get a copy if I’m not an owner?

You ask for a condominium status certificate. Certificates can be ordered from condo managers or the condo property management company. They include the reserve fund study and schedule.

Why do I need a status certificate?

To check if the owner has paid their common expenses fees, what insurance the building has and if any special assessments have been levied. The certificate may have minutes of the last AGM — it’s among documents your lawyer may need when you buy a condo. The condo declaration, bylaws and rules are included. You can also find out about litigation that could increase the condo’s operating expenses and your fees.

What is the insurance binder for a new condominium?

It confirms you have been approved for fire insurance. Fire insurance for condos is mandatory in Ontario. The “binder” is proof of insurance while your policy is being issued.  

Can I complain if repairs aren’t made?

You can complain about reserve funds disputes to the Condominium Authority of Ontario  The online Condominium Authority Tribunal (CAT) deals with concerns that a condo corporation is not keeping common building elements in satisfactory condition. 

What if the condo manager isn’t doing their job?

That’s a Condominium Management Services Act matter. Condo managers and management companies have rules to follow. First read this. Next, work with your condo corporation board or other owners to try to resolve your complaint. If that doesn’t work, mediation, arbitration or lastly, legal action may be appropriate.

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Do condo boards have to create a reserve fund?

Owners may be able to sue if they don’t. Your property may go down in value and you may be unable to sell your unit in future if repairs and upgrades aren’t made. 

Take, for example, concrete balcony slabs. While you’re turning on your air conditioner inside, the sun is baking your balcony floor outside. That mixture of cold and hot air causes moisture to form where the slab joins the building. Someone has to pay to keep your building dry. That’s where the reserve fund comes in. 

Axess Law refers owners for legal advice if their condominium corporation is not taking necessary steps to fund repairs.

See how a construction lien could affect your property.

What do you mean by legal action?

When owners sue the condominium corporation, such as for a fall. Or not maintaining the building by failing to use “due diligence”. (Boards have directors’ liability insurance but it may not cover negligence.) Or if the corporation sues contractors for shoddy workmanship. Owners can be responsible for legal costs through special assessments. 

Axess Law refers you to trusted condominium lawyers in Toronto, Greater Toronto Area or Ottawa if you are facing costly or ongoing lawsuits.

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