This question came in from an NSW Lot Owner enquiring about how to progress with the new legislation around the capital works fund. Thank you, Leanne Habib, Premium Strata for providing a response.
Question: How do I get the executive to acknowledge obligations under the new legislation – have a 10 year plan, have it professionally costed, take steps to raise the required funds and commence overdue works?
At its last AGM, my strata’s executive chose not to engage the services of a specialist consultant to establish a 10 year sinking fund plan. As a result, there is neither a plan nor any budget to conduct necessary maintenance.
Our strata’s sinking fund is obviously not well enough funded and either a levy increase (but more likely a special levy), is required to allow overdue activities to be adequately funded without spending every last cent in our sinking fund.
How do I (a new arrival), get an entrenched and highly resistant executive to acknowledge their obligations under the legislation, to have a 10 year plan, have it professionally costed and take immediate steps to raise the required funds to support it as well as commence overdue works?
Finally, is there a practical minimum (percentile of revenue), that a sinking fund should maintain for contingencies?
From Will the New Reform Mean that Owners Corporations Will Now Raise Money to Match their 10 Year Sinking Fund Plan? – David Bannerman, Bannermans Lawyers:
Under the current legislation, there is a requirement for owners corporations “to take into account” the 10 year capital works plan. Many schemes do not comply with this obligation in good faith with the result that the capital works fund remains just as underfunded as it was before 10 year plans were required.
The new legislation seeks to make it harder for those schemes to completely ignore their 10 year plan when it comes to having money in the bank by:
- Importantly, requiring the plan to include:
- details of proposed work or maintenance,
- the timing and anticipated costs of any proposed work,
- the source of funding for any proposed work,
- any other matter the owners corporation thinks fit,
- any other matter prescribed by the regulations for the purposes of this section.
- A requirement for schemes to implement the plan in so far as is practicable.
Answer: It is mandatory for an Owners Corporation to have a 10 year capital works fund on file and must review the plan at least every 5 years.
The sinking fund is now referred to under the new legalisation as the Capital Works Plan.
It is mandatory for an Owners Corporation to have a 10 year capital works fund on file and must review the plan at least every 5 years. This is a requirement under Section 80 of the Strata Schemes Management Act 2015.
Owners corporation to prepare 10-year capital works fund plan
80 Owners corporation to prepare 10-year capital works fund plan
- An owners corporation is to prepare a plan of anticipated major expenditure to be met from the capital works fund for a 10-year period commencing on the first annual general meeting of the owners corporation.
- An owners corporation is to prepare a plan for each 10-year period following the 10-year period to which the first plan applied. The plan is to be prepared for the annual general meeting at which the period covered by the previous plan expires.
- An owners corporation may, by resolution at a general meeting, review, revise or replace a 10-year plan prepared under this section and must review the plan at least once every 5 years.
- A plan under this section is to include the following:
(a) details of proposed work or maintenance,
(b) the timing and anticipated costs of any proposed work,
(c) the source of funding for any proposed work,
(d) any other matter the owners corporation thinks fit,
(e) any other matter prescribed by the regulations for the purposes of this section.
- A plan under this section is to be finalised by the end of the next annual general meeting of the owners corporation after the annual general meeting for which the plan is prepared.
- An owners corporation may engage expert assistance in the preparation of a plan under this section.
- An owners corporation is, so far as practicable (and subject to any adjustment under this section), to implement each plan prepared under this section.
There is no obligation of the Owners Corporation to adopt and raise the recommended levy capital works fund contribution, although it is now a requirement under the new legalisation to set out the 10 year proposal plan in the Section 184 Certificate which is a Certificate issued by an Owners Corporation in relation to financial and other matters relating to a lot and usually requested for settlement purposes when a lot is being sold.
This will provide purchasers with assistance in determining if an Owners Corporation is not raising adequate funds to the capital works fund.
Section 74 of the Strata Schemes Management Act 2015 requires an Owners Corporation to establish a capital works fund and determine on an annual basis amounts payable to this fund to assist with the expenditure of capital works.
The Acts refers to an exemption for a two lot scheme, Section 74 (5) states
(5) Exemption An owners corporation for a strata scheme comprising 2 lots need not establish a capital works fund if:
(a) the owners corporation so determines by unanimous resolution, and
(b) the buildings comprised in one of those lots are physically detached from the buildings comprised in the other lot, and
(c) no building or part of a building in the strata scheme is situated outside those lots.
In summary there is no obligation on how much funds should be raised to the capital works fund (formerly referred to as the sinking fund) however the Act is clear in that a capital works fund must be established and amounts of contribution to the capital works fund must be determined annually. In addition, it is a requirement to have a capital works fund plan on file for consideration which must be reviewed every 5 years.
A lot owner may apply to the tribunal if the Owners Corporation are not meeting their obligations under Section 80 and 74.
This post appears in Strata News #127
Question: Are three quotes required for work being paid for by the capital works fund?
I am aware that it is required under the act that managing agents in NSW solicit and present three competitive quotes for any work requiring Capital Works Funding to the Strata’s executive committee.
Does the current legislation demand that executive committees are bound by the same requirement, to exercise due diligence by acquiring three competitive quotes prior to awarding any substantial maintenance contract?
Answer: It is our understanding that the need for three quotes is only a requirement for obtaining insurance quotations.
It is our understanding that the need for three quotes is only a requirement for obtaining insurance quotations (see below). When it comes to Capital Works, only a large scheme needs more than 1 quote (at least 2). Large Strata Schemes are schemes with more than 100 lots.
Section 166 Strata managing agent to obtain insurance quotations
A strata managing agent must provide the owners corporation with not less than 3 quotations from different providers for each type of insurance proposed by the agent to the owners corporation or provide written reasons to the owners corporation if less than 3 quotations are provided.
STRATA SCHEMES MANAGEMENT ACT 2015 – SECT 102
Limits on spending by large strata schemes
102 Limits on spending by large strata schemes
(1) An owners corporation for a large strata scheme must obtain at least 2 quotations in relation to proposed expenditure in respect of any one item or matter if the proposed expenditure will exceed the amount prescribed by the regulations for the purposes of this section.
(2) An owners corporation for a large strata scheme must not spend on an item or matter an amount greater than the amount specified for the item or matter (plus 10%) in estimates provided for that item or matter at an annual general meeting.
(3) The owners corporation may by a resolution passed at a general meeting remove the limitation imposed by subsection (2) generally or in relation to any particular item or matter.
(4) This section does not apply to expenditure for emergency purposes, including (but not limited to) the following:
(a) burst or blocked water or sewerage pipes,
(b) serious damage caused by fire or storm or any other natural disaster,
(c) unexpected electrical or security system failure,
(d) glass breakages that affect the security of any building in the strata scheme or could result in damage to the inside of any such building.
To restrict the strata committee’s spending, the Owners Corporation would need to determine in general meeting to so restrict the limit of expenditure by the strata committee.
This post appears in Strata News #131.
This article is not intended to be personal advice and you should not rely on it as a substitute for any form of advice.
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