What are Reserve Funds?
A reserve fund is like a savings account or investment fund used to set money aside to meet unexpected or future expenses (i.e. expenses other than those of a routine nature).
For example, the funds could be used for large maintenance tasks such as repainting a strata development due to wear and tear, which can be a rather big once off expense. Instead of the owners raising the funds required all at once, it may be easier to for the owners to establish a reserve fund and ‘save’ the funds over a number of years for when they are needed.
Is it compulsory to have a reserve fund?
Currently there is no obligation under the Strata Titles Act 1985 (WA) to establish or maintain a reserve fund.
It is however prudent to establish a reserve fund (even with new developments), because no matter how small the fund is every bit helps when there is an unexpected expense or the owners desire to undertake some maintenance or other task which is costly in nature.
How much should the reserve fund be?
This will differ from development to development.
It is important to plan ahead to work out what might need to be replaced or repaired in the future.
Other factors to consider are the age of the development and the expected life of the various components of the strata development. Whilst insurance may cover some items, general wear and tear is rarely, if ever, covered under insurance policies.
When should the reserve fund be established?
The sooner the better. The earlier the reserve fund is created, the more opportunity there is for the funds to grow over time. Even a modest yearly amount contribution will likely assist in future if it is allowed to accumulate until it is needed.
Other reasons why a reserve fund should be established
Aside from setting money aside to meet unexpected or future expenses, raising a big once off expense may cause:
- a unit owner financial difficulty;
- animosity between unit owners if work that needs to be done cannot be undertaken due to insufficient funds;
- a strata development to deteriorate if work that needs to be done cannot be undertaken;
- a strata development to become less desirable to buyers, in the event that a unit owner wants to sell the unit.
If there is a reserve fund in place, there is more chance that the impact on owners will be significantly less than it would be if there was not a reserve fund in place. Even a small reserve may assist in the event of unexpected or future events.
Disclaimer: The information on this page is intended to be general information only and NOT legal advice. No responsibility is accepted for any errors or omissions.
