According to the provincial government, the majority of all new housing starts involve strata properties. In a dozen municipalities, strata properties now make up more than half of all taxable properties.[1]

In December 2011 the provincial government proclaimed in force several important strata requirements.[2] The most significant changes involve depreciation reports and contributions to a strata corporation’s contingency reserve fund (“CRF”). Some changes are immediate, while others come into effect at different times over the next two years. This update reviews the changes that most concern strata owners, strata property managers and real estate licensees.

Please bear in mind that this review is not legal advice. Undoubtedly, these amendments will generate many questions concerning these changes. If a strata corporation is unsure of its obligations or procedure concerning these changes, the corporation should consult its own lawyer to determine the corporation’s proper course in those circumstances.

 

1. Immediate Changes

 

The following changes are now in force.

A. Depreciation Reports

A strata corporation’s depreciation report estimates the life expectancy of major items and the ultimate cost of their repair or replacement.

 

Mandatory

Effective December 13, 2011, every strata corporation must obtain and periodically update a depreciation report, unless otherwise exempted.[3]

Unless exempted, every strata corporation must obtain its first mandatory depreciation report within two years (in most cases, by December 13, 2013) and then update that report every three years.[4]

What if, before December 13, 2011, a strata corporation had already acquired a depreciation report that complies with the new requirements? In that case, the strata corporation has three years before that report must be next updated.[5] The three year period runs from the date the strata corporation obtained the depreciation report in question.

Where a strata corporation contributes to the CRF based on a depreciation report, the contributions in respect of an item become part of the CRF.[6] Recall that the strata corporation may only spend money from the CRF if the expenditure is consistent with the purpose of the fund and: [7]

  • The expenditure is first approved by a resolution passed by a 3/4 vote at a general meeting,
  • In an emergency where an immediate expenditure is necessary to ensure safety or prevent significant loss or damage, whether physical or otherwise, or
  • To cover an insurance deductible in certain circumstances.

 

Who Is Exempt?

The legislation completely exempts some strata corporations from obtaining a mandatory depreciation report and permits others to defer compliance.[8]

The government may now exempt classes of strata corporation from the mandatory depreciation report requirements. Currently, the regulations only exempt one class of strata corporation, being those whose strata plans contain fewer than 5 strata lots in the strata plan.[9] For example, a strata four-plex development is exempt because there are only four strata lots in its strata plan. This exemption, however, only applies so long as the number of strata lots in the strata plan is fewer than five. In the four-plex, suppose that the municipal authorities and the eligible voters agree to permit a subdivision of one strata lot into two. Following subdivision of the strata lot, the strata corporation would presumably lose its exempt status because there would now be five strata lots in the strata plan.

Deferring a Depreciation Report

Where the Strata Property Act requires a strata corporation to obtain a depreciation report, the corporation may defer compliance for up to 18 months.[10] The strata corporation must first pass a 3/4 vote at a general meeting to defer compliance.[11] The vote must occur within the one-year period immediately preceding the date by which the strata corporation must otherwise obtain the depreciation report.[12] For example, suppose that the Strata Property Act requires a strata corporation to obtain its first mandatory depreciation report by December 13, 2013. To defer this requirement for 18 months (that is, until approximately June 13, 2015),[13] it appears the strata corporation must pass the necessary resolution within the one year period leading up to the December 13, 2013 deadline.

Can An Exempt Strata Corporation Comply If It Wants To?

Being exempt means only that the strata corporation does not have to obtain a depreciation report that complies with the new requirements. An exempt strata corporation could still obtain a depreciation report in compliance with the Act if it wished to do so. Where an exempt strata corporation’s strata council wishes to obtain a depreciation report in these circumstances, council should first obtain the approval of the eligible voters by the appropriate vote. Since the legislation does not address what vote is necessary in this situation, strata council may wish to obtain legal advice on the question.

 

A Qualified Person Must Prepare the Depreciation Report

According to the legislation, only a qualified person may prepare a depreciation report.

The regulations broadly define the term qualified person as a, “person who has the knowledge and expertise to understand the individual components, scope and complexity of the strata corporation’s common property, common assets and those parts of a strata lot or limited common property, or both, that the strata corporation is responsible to maintain or repair under the Act, the strata corporation’s bylaws or an agreement with an owner and to prepare a depreciation report that complies with [the legislation].” [14] While a civil engineer is likely qualified to prepare a depreciation report, there will surely be debate whether other persons have the necessary qualifications to meet this definition. To avoid disputes, strata lawyer Cora D. Wilson recommends that a strata corporation amend its bylaws to clarify who is qualified to prepare the corporation’s depreciation report.[15] If a strata corporation wishes to amend its bylaws for this purpose, this author suggests that the corporation have its lawyer draft the necessary bylaw wording to ensure compliance with the Strata Property Act.

 

What Must The Depreciation Report Contain?

The depreciation report must state the name of the person who provided the report, as well as his or her qualifications and a description of the person’s insurance, if any, for an error or omission.[16]

To comply, a depreciation report must include these two components: [17]

  1. A physical component inventory and evaluation; and
  2. A financial forecasting section.

The requirements for these components are described in more detail below.

In addition, the depreciation report must contain any other information or analysis that the strata corporation or the person providing the depreciation report considers appropriate.[18] If a strata corporation wants its depreciation report to consistently address other items over and above those required by the legislation, the corporation may wish to amend its bylaws to stipulate those matters. Alternatively, a strata corporation might incorporate those additional requirements into the contract by which the corporation hires the person to prepare the depreciation report.

If a strata corporation amends its bylaws to require additional information or analysis in a depreciation report, then the strata property manager or the strata council, as the case may be, should ensure that the person engaged to prepare the report knows about any extra requirements.

Physical Component Inventory And Evaluation

The physical component inventory and evaluation must be based upon an on-site visual inspection. Where practicable, the regulations require that the person who provides the depreciation report must personally conduct that on-site inspection.[19]

In broad terms, the physical component inventory must identify which features the strata corporation must repair and maintain versus any common property areas (including limited common property areas) that an owner must maintain.

Repair or Maintenance By the Strata Corporation

Specifically, the physical component inventory must identify all those items that comprise the common property, the common assets and those parts of a strata lot or limited common property, or both, that the strata corporation must maintain or repair. According to the legislation, this list includes:[20]

(i)  the building’s structure;

(ii)  the building’s exterior, including roofs, roof decks, doors, windows and skylights;

(iii)  the building’s systems, including the electrical, heating, plumbing, fire protection and security systems;

(iv)  common amenities and facilities;

(v)  parking facilities and roadways;

(vi)  utilities, including water and sewage;

(vii)  landscaping, including paths, sidewalks, fencing and irrigation;

(viii)  interior finishes, including floor covering and furnishings;

(ix)  green building components; and

(x)  balconies and patios.

This list is not exhaustive; if the strata corporation must repair or maintain a particular area, the physical component inventory must identify it.

For items for which the strata corporation is responsible, the report must also:

  • Estimate each item’s service life over the next 30 years; and [21]
  • Identify the repair and maintenance work that usually occurs less often than once a year or that does not usually occur.[22] In other words, this list of repair and maintenance work must also identify which of those expenditures may be funded by the CRF. [23]
Repair or Maintenance of Common Property by An Owner

In addition, the physical component inventory must also identify any case where an owner is responsible to maintain or repair a common property area (including limited common property).[24]

Financial Forecast

The financial forecasting section must state the current balance of the CRF, minus any expenditures which have been approved but not yet taken from the fund. [25] The financial forecasting section must also describe how the CRF is currently being funded.[26]

For maintenance or repair items for which the strata corporation is responsible, the financial forecasting section must identify which of those expenses usually occur less often than once a year or do not usually occur, and for each of those items, project their anticipated maintenance, repair and replacement costs over 30 years. The 30 year period must begin with the current or previous fiscal year of the strata corporation. [27] The 30-year projection must include at least three cash-flow funding models for the CRF. The cash-flow models may include any one or more of the following: [28]

  • Balances of, contributions to and withdrawals from the CRF;
  • Special Levies;
  • Borrowing.

The 30-year projection must also describe the factors and assumptions used to calculate these costs, including interest rates and rates of inflation. [29]

 

B. Funding the CRF

In the past, the Strata Property Act imposed a CRF ceiling. In simple terms, once a strata corporation’s CRF exceeded the amount of the previous year’s operating budget, the law prohibited further CRF contributions, unless the eligible voters by 3/4 vote decided otherwise. Effective December 13, 2011, the CRF cap disappeared. Now, so long as the strata corporation has the statutory minimum amount in its CRF, the corporation may approve further contributions as part of the ordinary budget approval process after considering the depreciation report, if there is one.[30]

Apart from the disappearance of the former CRF ceiling, it appears that the requirements for funding the CRF remain the same as before.

 

C. Strata Records

Effective December 13, 2011, a strata corporation must keep among its records any depreciation report obtained by the strata corporation.

The strata corporation must also keep any reports respecting the repair or maintenance of major items in the strata corporation, including engineers’ reports, risk management reports, sanitation reports and reports respecting any items for which information is mandatory in a depreciation report.

Keep in mind that the Strata Property Act does not define the term engineering report. Until the provincial government defines this term in legislation, the recent decision in Meslin v. Lee suggests that the phrase engineering report should be broadly interpreted, using the ordinary meaning of the words. [31] In that case, a seller listed his condo for sale and completed a standard form Property Disclosure Statement (Strata Title Properties) (the “PDS”), which is used in most residential strata sales. In the PDS, the seller answered “No” to the question whether there was available any “Engineer’s Report and/or Building Envelope Analysis”. In the contract of purchase and sale, the seller and buyer incorporated the PDS into their contract. The PDS said that “any important changes to this information made known to the seller will be disclosed by the seller to the buyer prior to closing”. A few weeks later, the strata corporation obtained from an engineering firm a study of the corporation’s building systems and the sufficiency of its CRF. The study amounted to a form of depreciation report. The study was called a “Reserve Fund Study and Maintenance Plan”. Shortly before completion, the buyer discovered the engineering firm’s “Reserve Fund Study and Maintenance Plan.” Given the way the strata corporation currently funded its CRF, the Study warned that special assessments in excess of $400,000 over the next five years would be required and that a further special assessment of almost $3 million would be required in 2020. When the buyer read the Study, he rescinded the contract to buy the condo before the completion date. The court held that the buyer was entitled to rescind because the engineering firm’s “Reserve Fund Study and Maintenance Plan” amounted to an engineering report within the meaning of the PDS. The seller had innocently misrepresented the absence of an engineering report when there actually was one.

 

2. Changes Effective March 1, 2012

 

Effective March 1, 2012, whenever a strata corporation issues an Information Certificate (Form B), the corporation must attach to it, among other things, the corporation’s most recent depreciation report, if there is one.

 

3. Changes Effective in 2014

 

Effective January 1, 2014 the Information Certificate (Form B) will change. At that point, the Form B will require a strata corporation to disclose if there is any parking stall or storage locker allocated to the strata lot and if so, whether that parking stall or storage locker is a separate strata lot, part of a strata lot, or part of the common property.

 

Conclusion

 

This is only a general description of these important changes. The new requirements for depreciation reports are reasonably complex. Anyone can view the legislation at http://www.housing.gov.bc.ca/strata/regs/OIC-SPA.pdf .

A strata property manager may better learn the practical consequences of these changes by regularly attending those industry events where these developments will undoubtedly be discussed in detail.

Finally, a real estate licensee who represents a strata seller or buyer should immediately add to their list of requisite documents any depreciation report, as well as the related documents listed in Strata Records above.



[1] British Columbia, Ministry of Energy and Mines and Minister Responsible for Housing, Information Bulletin, 2011ENER0125-001607, “New strata property regulations introduced” (14 December 2011) at 1.

[2] OIC 623/2011 (13 December 2011).

[3] Strata Property Act, s. 94(2)(a).

[4] Strata Property Act, s. 94(2)(b) and Strata Property Regulation, s. 6.2(7)(a).

[5] Strata Property Act, s. 94(2)(b) and Strata Property Regulation, s. 6.2(7)(d).

[6] Strata Property Regulation, s. 6.2(5).

[7] Strata Property Act, ss. 96, 98 and 158(3).

[8] Strata Property Act, s. 94(3).

[9] Strata Property Act, s. 94(3)(b) and Strata Property Regulation, s. 6.2(8).

[10] Strata Property Act, s. 94(2)(c) and (3)(a) and Strata Property Regulation, s. 6.2(7)(c).

[11] Strata Property Act, s. 94(3)(a).

[12] Strata Property Regulation, s. 6.2(7)(c).

[13] To precisely calculate the day on which the deferral period ends, a strata corporation should obtain legal advice. Ordinarily, the Interpretation Act, R.S.B.C. 1996, c. 238, s. 25 will govern the calculation of time in these circumstances.

[14] Strata Property Regulation, s. 6.2(6) (definition of “qualified person).

[15] Wilson, Cora D., “Recent Changes to the Strata Property Act & Regulations”, online: C.D. Wilson Law Corporation, http://cdwilson.bc.ca/Depreciation%20Reports.php (last accessed 5 February 2012).

[16] Strata Property Regulation, s. 6.2(1)(d).

[17] Strata Property Regulation, s. 6.2(1)(a),(b),(c).

[18] Strata Property Regulation, s. 6.2(1)(f).

[19] Strata Property Regulation, s. 6.2(2)(a).

[20] Strata Property Regulation, s. 6.2(2)(b).

[21] Strata Property Regulation, s. 6.2(2)(b).

[22] Strata Property Regulation, s. 6.2(1)(b).

[23] Strata Property Regulation, s. 6.2(1)(b). Recall that the Strata Property Act defines the purpose of the CRF. Section 1(1) of the Act says the CRF is, “a fund for common expenses that usually occur less often than once a year or that do not usually occur.”

[24] Strata Property Regulation, s. 6.2(2)(c).

[25] Strata Property Regulation, s. 6.2(3)(d).

[26] Strata Property Regulation, s. 6.2(3)(c).

[27] Strata Property Regulation, s. 6.2(3)(a) and (e).

[28] Strata Property Regulation, s. 6.2(3)(e) and (4).

[29] Strata Property Regulation, s. 6.2(3)(b).

[30] Strata Property Regulation, ss. 3.4 and 6.1.

[31] Meslin v. Lee, 2011 BCSC 1208.