A lot owner from NSW is wondering about capital works expenses and how to handle a project that has not been budgeted for. Luke Derwent, Wellman Strata provides the following response.
Question: As treasurer, what should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds.
Whilst I was away overseas late last year our strata promoted and subsequently approved the painting of all common area fencing. A not insubstantial project, with a significant cost to match.
Subsequently as our newly appointed strata treasurer, I inherited this fence painting project, its approved quotation and our committee’s instructions to proceed. A Capital Works project that I discovered is one of a number of pending projects that had not been budgeted for nor incorporated into our 10 year Capital Works Plan.
Whilst this fiscal oversight appears to me to have been a shortcoming of my predecessor to appraise our Capital Works fund’s capacity (in the short term), to afford fence painting, as treasurer I am presumably responsible for not spending more than we have, or compromising our funds contingency on this non-critical project.
Obviously, I cannot simply veto our (inadequately informed) committee’s instructions to proceed, nor postpone issuing the painter’s work order without some explanation.
I am not eager to make my first Capital Works project retrospectively require a special strata levy. Particularly, as the fence painting’s unaffordability was neither raised, discussed nor considered during the previous treasurer’s tenure.
What should be my “official” approach to capital works expenses such as maintenance overspends that haven’t been budgeted for, in light of our finite available Capital Works funds?
Answer: There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.
There are a couple of possible issues that arise with this scenario, and some out of the box solutions that are possible.
If this scheme is a Large Strata Scheme the Act imposes limits on spending, firstly being if the expense is greater than $30,000, the Strata Committee need to have obtained at least 2 quotes and also in a Large Scheme, the owners corporation can not spend more than 10% above the budgeted amount, unless the owners corporation has resolved at a general meeting to remove the limitation.
Further, if the owners corporation were to proceed with the works and not have sufficient funds in the Capital Works Fund to meet this expense, in accordance with Section 81(4) of the Act, it must then strike a levy to the Capital Works Fund at a general meeting to meet the expense.
The other alternative is that the Owners Corporation “borrows” the funds from the Administration Fund to cover the difference, but again as per Section 76(2) of the Act, no later than 3 months strike a levy to reimburse the Administration fund.
As the Treasurer, it is prudent to set good fiscal policy, and in saying this, it is important that the unaffordability is raised with the Strata Committee, and a hold is placed on issuing the work order for the moment. I would recommend looking at having the Capital Works Fund Plan revised and updated to include all the pending projects and probably looking to establish a priority order, starting with a focus on those works needed for structural efficacy.
From there, if the fence painting is still a priority and the funds are not immediately available, the Committee may wish to look at breaking down the works and completing these over a greater period so that it meets with the cash flows of the Owners Corporation.
One further alternative is for the Owners Corporation to obtain a loan to fund the difference, though this will likely require a general meeting resolution also.
In the worst case scenario, the works proceed and the Owners Corporation has insufficient funds to pay the contractor who may then make a claim on the Owners Corporation. In the event that this was to occur it is possible that the owners may seek an action against the Office Bearers, past and present for any additional costs.
This post appears in Strata News #177.
- NSW: Q&A Amendments to the Capital Works Fund Plan
- NSW: Q&A How to augment a 10 Year Capital Works Fund Plan
This information is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.