WA Strata – Sinking Fund Planning Vs Maintenance Plans and the New WA Legislation

With the passage of the Strata Titles Amendment Bill 2018 and the Community Titles Bill 2018 some significant changes are about to be introduced into the way strata properties are managed in WA. While the Regulations which are required to support these Acts are yet to be provided, forward planning must start as soon as possible.

So to start with, let’s restate the Legislation as it has been passed.

Strata Titles Act 1985 Incorporating the amendments proposed by the Strata Titles Amendment Bill 2018 Pt. 2 (Bill No. 80-2)

S.91 General Duty

• A strata company must —
  • enforce the by-laws; and
  • control and manage the common property for the benefit of all the owners of lots; and
  • keep in good and serviceable repair, properly maintain and, if necessary, renew and replace —
    1. the common property, including the fittings, fixtures and lifts used in connection with the common property; and
    2. any personal property owned by the strata company,and to do so whether damage or deterioration arises from fair wear and tear, inherent defect or any other cause

S.100 Administrative and Reserve Funds and Contributions

(2) A strata company must, if it is a designated strata company, and may, in any other case:

(a) establish a fund (a reserve fund) for the purpose of accumulating funds to meet  contingent expenses, other than those of a routine nature, and other major expenses of the strata company likely to arise in the future; and

(b) determine the amounts to be raised for payment into the reserve fund; and

(c) may raise amounts so determined by levying  contributions on the owners in proportion to the  unit entitlements of their respective lots.

(2A) A designated strata company must ensure —

• that there is a 10 year plan that sets out —

1. the common property and the personal property of the strata company that is anticipated to require maintenance, repair, renewal or replacement (other than of a routine nature) in the period covered by the plan; and
2. the estimated costs for the maintenance, repairs, renewal or replacement;
3. other information required to be included by the regulations;

and

• that the 10 year plan is revised at least once in each 5 years and that, when revised, the plan is extended to cover the 10 years following the revision.

designated strata company means —

• a strata company for a scheme with 10 or more 14 lots; or
• a strata company included in this definition by the regulations. (The regulations will specify that a strata company with less than 10 lots but with a building replacement value over a certain amount is a designated strata company

S102. Budget

• A strata company must prepare a budget for each financial year and submit it for approval to its annual general meeting.
• The budget must be prepared —
  1. taking into account, if applicable, the 10 year plan for the reserve fund; and
  2. in accordance with any requirements set out in the regulations and the scheme by-laws.

It is important to note that at the time of writing this article, the supporting Regulation for the above Act had not been released. As a result, the following comments may be amended by the Legislation.

A non-legal interpretation of the above includes:

• Designated strata companies need to prepare a 10 year plan for the common property and the personal property of the strata company that is anticipated to require maintenance, repair, renewal or replacement
• The plan must be revised at least once in each 5 years and that, when revised, the plan is extended to cover the 10 years following the revision
• The annual budget must take into consideration the requirements of the 10 year plan.

As such, these documents will be discoverable during the strata company due diligence clause contained in the majority of strata lot purchase contracts, prospective Lot purchases will be able to review these documents.

In our opinion the above changes represent a significant move forward for the WA Strata Community. Currently, Lot owners and potential Lot owners can exist in a vacuum of information about the true condition of the strata common and personal property. There has been no requirement to document or plan for the maintenance of strata common property. There is a volume of examples where strata common areas have not been maintained and unsuspecting Lot owners and or new Lot owners, without any way of access the key information,  have been left to pick up substantial costs associated with undertaking overdue maintenance and remediation works. So from an equity perspective the outcome is positive. But, there are some challenges.

For many years many proactive strata companies have already been using sinking fund plans and maintenance plans to effectively manage the assets of the strata company. The challenge here is that the two terms are often used interchangeably. At Houspect, we believe the two are distinctively different although the new legislation will potentially cloud this position.

Sinking Fund Planning

Sinking fund plans have been used in the Eastern States of Australia for many years.  Often, the plans are prepared for 10, 15, 20, 25 years or even longer! Essentially the plans attempt to:

• List all of the assets of the strata company
• Determine their life span or residual life span
• Estimate the costs of maintaining or replacing the asset during the term of the plan
• Undertaking a range of calculations to index the costs over the term of the plan
• Estimate the annual contributions required to ensure that there are sufficient funds reserved to be available to meet the anticipated expenses identified by the sinking fund plan when they fall due.

Given the sheer volume of costs estimates required, along with the associated calculations to index and estimate, Quantity Surveyors are often called upon to provide these long term complex projections. Quality quantity surveyors will generally have created an extensive data base of generic costings to enable them to provide forward estimates on generic maintenance, remediation and replacement costs for both the building assets but also plant and equipment.

The outcome of a sinking fund plan is to assist to establish and maintain an appropriate reserve such that there are the funds available to fund the maintenance, remediation or replacement of strata common property and personal property of the strata company as required and hence avoid the need for extraordinary levies.

A core component of a sinking fund plan is the theoretical estimates. It is impossible to determine how an asset will actually age over time, especially when that time exceeds 10, 15 or 20 years.

Maintenance Planning

In contrast to a sinking fund, 5 year maintenance plans tend to be based on actual observations of how assets are performing and what will actually need to be done to preserve, extend or replace the assets over the 5 year period, based on actual site or performance observations. Generally a detailed inspection of the assets is undertaken to determine what will or is likely to need repairs over the maintenance period. Here lies the core challenge. A strata property will be made up of core building components which a building inspector (WA Registered Builder) can inspect and analyse but also potentially an extensive array of plant and equipment which is outside of the skill set of a building inspector.  However, all plant and equipment in a strata property is generally under long term maintenance contracts and the data from these contractors can be relatively easily merged into the broader building maintenance plan.

Facility managers will often undertake a maintenance plan which incorporates both building elements and plant and equipment and the fee structure reflects the aggregated position. However, it does not negate the need for observations and estimates to be provided by multiple skiled professionals.

New Legislation for 10 Year Plans

One view is that the new legislation represents a merger between sinking funds and maintenance plans with benefits, compromises and unclear positions.

On the positive side:

• A five year plan is effectively outdated as soon as it is completed, given the ordinary passage of time. For example a plan produced for the next 5 years is only a 4 .5 year plan in 6 months’ time. The scope of the plan dates to less than 5 years until such time as it is revisited. The revised arrangements contained in the legislation require a 10 year plan which needs to be reviewed every 5 years so at a minimum the plans should have a minimum of 5 years forward forecasts.
• Preparing a 10 year plan is a mixture of what can be visually identified at the time of the inspection (generally items within 5 years) along with an estimate of what might be required within the 5 to 10 year period. Hence a 10 year plan, in our opinion is a mixture of factual and theoretical planning.

On the negative side:

• Preparing the plans and updating them every 5 years can be expensive which will be an additional impost on strata companies and their members.
• On a low level strata property with limited plant and equipment, the 10 year plan will generally be focused on building elements, although gaining access to these elements can often be a challenge (i.e. roof covers, roof spaces, balconies and exclusive use areas) given the need to negotiate access with occupants. However, on a large multi storey strata property with extensive plant and equipment, preparing an inventory of assets and developing and renewing a maintenance schedule of the entire schedule every five years could be an expensive exercise.

Unclear Positions

• As identified above, the supporting regulations of the legislation have not been released and as such there are a number of unknown positions at this stage, which may or may not become clearer once the regulations are issued. Some of these issues include:
  1. There is no indication as to who can prepare the schedules and what qualifications or experience is required. There can be valid arguments that the Strata Members can simply prepare their own plan. In some instances highly qualified input will be required.
  2. There is no indication as to the implications where a schedule needs to be prepared and aggregated by several parties.
  3. What level of detail does the 10 year plan need to contain? Will there be example plans?
  4. What liabilities will be associated with the plans?
  5. The proposed 10 year plan specifically refers to the common property and the personal property of the strata company that is anticipated to require maintenance, repair, renewal or replacement. So the key issue being where there is common property and the personal property of the strata company that is not anticipated to require maintenance, repair, renewal or replacement during the 10 year period does this need to be excluded from the plan? If so does this mean that a 10 year (or longer) sinking fund plan which applies to the entire common property and the personal property of the strata company potentially not meet the requirements of a 10 year maintenance plan.
  6. What level of details and accuracy is required in the proposed 10 year plan?
  7. Given the cost of preparing these plans will run to many thousands of dollars, is the cost an operating cost or a reserve fund cost?

So while we can celebrate the passage of the new legislation we are still left with many issues and challenges. Long term sinking plans which reflect the cost of diminishing assets supported by shorter term maintenance plans which identify which assets will actually require  maintenance, repair, renewal or replacement are critical tools in the effective management of multimillion dollar assets. Irrespective of the new legislation, Strata companies should continue to utilise these tools to effectively manage strata assets but acknowledge that until such time as the Regulations are issued, absolute knowledge on the most compliant way to proceed will not be available.

Houspect has supported the WA Strata Community over the past 40 years with maintenance plans, defect liability inspections, investigation inspections and independent expert reports to support State Administrative Tribunal matters.