By Auren Freitas dos Santos
A reserve fund is an essential aspect of body corporate management. It is a fund that is set aside to cover the costs of major repairs and maintenance that may arise in the future. The purpose of the reserve fund is to ensure that a body corporate has sufficient funds to cover the costs of maintaining and repairing the common property.
In order to prepare an accurate reserve fund budget, a body corporate must have a ten-year maintenance repair and replacement plan. This plan outlines the anticipated costs of maintaining and repairing the common property over a ten-year period. It includes an assessment of the current condition of the common property, an estimation of the lifespan of the various components of the common property, and a plan for the replacement or repair of those components as they reach the end of their useful life.
After almost seven years following the promulgation of the Sectional Titles Schemes Management Act one would expect every managing agent and body corporate to understand the relationship between a reserve fund and a ten-year maintenance repair and replacement plan. Unfortunately, in our experience this is not the case and we find that many schemes still prepare their reserve fund budgets by only focusing on the prescribed minimum amounts without having regard to their specific needs set out in their ten-year maintenance repair and replacement plan.
In this article we explain three main reasons why a body corporate cannot prepare a reserve fund budget without having regard to its ten-year maintenance repair and replacement plan:
1. Ensuring Adequate Funding: The purpose of the reserve fund is to ensure that the body corporate has sufficient funds to cover the costs of maintaining and repairing the common property. Without a ten-year maintenance repair and replacement plan, it is impossible to accurately estimate the costs of future repairs and maintenance. This could lead to underfunding of the reserve fund, which could leave the body corporate unable to cover the costs of major repairs when they arise.
2. Prioritising Maintenance and Repairs: A ten-year maintenance repair and replacement plan helps the body corporate prioritise maintenance and repairs. It allows the body corporate to identify which components of the common property are likely to require repair or replacement in the near future, and to allocate funds accordingly. This ensures that the most critical repairs are completed first, which can help to prevent more costly repairs down the road.
3. Meeting Legal Requirements: Although the Sectional Title Schemes Management Regulations prescribe the minimum amount of the annual contribution which a body corporate must make to its reserve fund, it is important to understand that the actual amount of the annual contribution to the reserve fund must be determined according to the formula set out in prescribed management rule 22(2). A body corporate will only be able to calculate this formula if it has a ten-year maintenance repair and replacement plan in place.
In conclusion, a body corporate cannot prepare a reserve fund budget without having a ten-year maintenance repair and replacement plan in place. This plan is essential for ensuring adequate funding, prioritising maintenance and repairs, and meeting legal requirements. Budgeting for the bare minimum amount is not enough to ensure that a body corporate will have sufficient funds to cover the costs of maintaining and repairing the common property over the long term.
Specialist Community Scheme Attorney (LLB, LLM), Auren Freitas dos Santos, is a Director of The Advisory, a boutique consultancy specialising exclusively in community schemes law.
Contact him at www.theadvisory.co.za or email info@theadvisory.co.za should you require any assistance with determining your reserve fund contributions.
