The financial management of sectional title schemes often requires balancing between the reserve fund, earmarked for long-term planned maintenance, and the administrative (admin) fund, which covers day-to-day expenses. In cases where unexpected admin fund expenses arise, trustees may feel tempted to use reserve funds to avoid raising a special levy. However, strict regulations govern these funds, and improper use can lead to legal and financial repercussions. This article explores when and how reserve funds may be transferred to the admin fund while ensuring compliance with the Sectional Titles Schemes Management Act 8 of 2011 (the STSM Act) and its Prescribed Management Rules (PMRs).
1. What Does the Law Say About Reserve Fund Usage?
The STSM Act and PMR 24(5) strictly regulate the use of reserve funds. According to these provisions:
Reserve funds may only be used:
- In accordance with the approved maintenance, repair, and replacement (MR&R) plan, or
- For necessary urgent maintenance, repair, or replacement expenses not included in the MR&R plan.
General administrative costs are not permitted uses of reserve funds.
PMR 21(3)(a) provides a solution to address unexpected and necessary admin fund expenses that cannot wait to be included in the admin fund budget for the next financial year – raising a special levy. But many trustees are loath to raise special levies, especially if there are surplus funds in reserve.
2. Can Trustees Transfer Reserve Funds to the Admin Fund?
The legislation does not expressly allow reserve funds to be transferred to the admin fund, even if there are “excess funds” in the reserve account. Trustees do not have the unilateral authority to reallocate funds without owner approval. However, there are legal mechanisms to manage this issue:
Revise the MR&R Plan and Budget Reallocation
- Trustees can propose a revision to the 10-year MR&R plan to allocate surplus reserve funds to the admin fund account.
- This needs to be supported by updated reserve and admin fund budgets to account for the transfer of excess reserve funds to the admin fund.
- The revised MR&R plan and revised budgets must be presented to and approved by the members by ordinary resolution at a general meeting (Annual General Meeting or Special General Meeting).
- The notice of the meeting must include the proposed changes to the MR&R plan and budgets and should invite any members who believe they may be prejudiced by the transfer to raise concerns about the reallocation. If any members express concern, these should be discussed at the general meeting prior to voting on the motion.
Pass an Owner Directive Authorising Reallocation of Surplus Reserve Funds to Admin fund
A proactive approach members may consider is providing trustees with a directive under section 7(1) of the STSM at a general meeting, authorising the reallocation of surplus reserve funds to the admin fund under specific conditions. For example:
- The surplus exceeds legislative and MR&R plan requirements; and
- There are unforeseen admin fund costs.
Conclusion
While reserve funds may seem like a lifeline during financial challenges, their usage is strictly regulated. Trustees must exercise caution and follow proper procedures to ensure compliance with the law. Revising the MR&R plan and budgets or raising a special levy are practical solutions to cover unbudgeted expenses without violating the legislation. By adhering to best practices and engaging with members, schemes can navigate financial pressures effectively and legally.
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Article reference: Paddocks Press: Volume 19, Issue 11
This article is published under the Creative Commons Attribution license.
