6 minute read
The Ohio Condominium Reserve Contribution Conundrum
obin St rohm
Every condominium association in Ohio has a legal requirement to contribute a portion of the association’s annual budget to reserves in order to fund the maintenance, repair or replacement of the condominium’s capital items consisting of the common elements. These capital items normally include the roadways, structural and exterior elements of the buildings, recreational amenities and other physical assets of the condominium.
The Ohio Condominium Act (Ohio Revised Code 5311) was updated in 2004 and includes language requiring condominium associations to make an annual reserve contribution. Board members for condominium associations have since had to navigate vague and confusing language concerning the annual reserve requirement.
O.R.C. 5311.081(A) states, “Unless otherwise provided in the declaration or bylaws, the unit owners association, through the board of directors, shall do both of the following: (1) Adopt and amend budgets for revenues, expenditures, and reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, provided that the amount set aside annually for reserves shall not be less than ten percent of the budget for that year unless the reserve requirement is waived annually by the unit owners exercising not less than a majority of the voting power of the unit owners’ association; (2) Collect assessments for common expenses from unit owners.”
This statutory provision applies where the declaration and bylaws do not provide otherwise for reserves. It attempts to fill a void when there is no guidance from the governing documents and provides for an arbitrary minimum contribution when funding reserves. Most declarations and bylaws provide little guidance as to what the amount of the reserve contribution should be each year. Normally general provisions in the governing documents refer to a portion of the association’s annual budget funding a working capital reserve for normal operations or for maintaining reserves for over a one year period to fund major capital expenditures.
The Ohio Condominium Act was updated in 2004 and includes language requiring condominium associations to make an annual reserve contribution. Board members for condominium associations have since had to navigate vague and confusing language concerning the annual reserve requirement.
One possible interpretation of the statute is as long as the association is setting aside at least 10 percent of the association’s annual operating budget for a reserve contribution each year, the association is meeting the statutory requirement for funding the reserves and, if necessary, the association may levy a special assessment to make up for any shortfalls with capital expenditures. If the association is not going to contribute at least 10 percent to the reserves for that year, the board must then obtain a majority vote of the owners to waive the statutory reserve contribution.
Another interpretation of the statute is the association must be funding the reserve account pursuant to a reserve study which outlines the future costs for repair or replacement of capital items based on the expected useful life of those assets. With this interpretation, if an association is not funding the reserves to that extent, a majority vote of the owners must be obtained to fund the reserves in a lesser amount. Under this interpretation, a special assessment would not be permissible to fund the capital expenditures.
It may be that, to some extent, both interpretations are correct, and until the statutory language is revised to provide more clarity and guidance as to what the annual reserve contribution requirement is, the courts will have to provide guidance on interpretation of the statute.
The Tenth District Court of Appeals held that O.R.C.
5311.081(A)(1) did not prohibit an association from levying a special assessment without the approval
of a majority of the owners. The Court’s rationale in
Olentangy Condominium Association v. Lusk was that despite careful budgeting, the board could impose a special assessment if necessary. i
to establish and maintain a reserve fund per the requirements of O.R.C. 5311. The owners also sought injunctive relief to prevent the association from levying
a special assessment. The association’s bylaws state, “the Association shall build up and maintain a reasonable reserve for contingencies and replacement. Extraordinary expenditures not originally included in the annual estimate which may be necessary for the
year, shall be charged first against such reserve.” This
case includes discussion of the statutory requirement
for funding reserves and the court’s interpretation
that the bylaws do “otherwise provide.” Based on the
language in the bylaws, the Eighth District Court of Appeals reversed judgment in favor of the association and remanded the case to trial court for further
proceedings. This case calls into question whether
a special assessment is permissible when there is
a shortfall in reserves and how specific language in
the governing documents for an association may be interpreted regarding reserve contributions. ii
Proposed legislative changes to O.R.C. 5311(A)(1) in S.B. 289 will provide clearer guidance on the annual reserve contribution. The proposed change to the statute at this time is: “The unit owners’ association, through the board of directors, shall do both of the following: (1) Annually, adopt and amend an estimated budget for revenues and expenditures. The budget shall include reserves in an amount adequate to repair and replace major capital items in the normal course of operations without the necessity of special assessments, unless either of the following applies: (a) the declaration and bylaws include language limiting the ability of the board of directors to increase assessments for common expenses without a vote of the unit owners; (b) the unit owners exercising not less than a majority of the voting power of the unit owners association, waive the reserve requirement in writing annually. (2) Collect assessments for common expenses from unit owners.”
Until there are legislative changes to the annual reserve requirement or Ohio courts have settled the matter as to whether special assessments are permissible given language that may exist in the association’s governing documents, board members should take care in funding reserves with the use of a reserve study or independent engineer’s analysis of the future costs to repair or replace capital items and the useful life expectancy of those capital items. Board members should be mindful of the responsibility to fund reserves in an amount to avoid special assessments if at all possible and to pay close attention to the language in the governing documents about the reserve requirement.
i Olentangy Condominium Association v. Lusk, 2010-Ohio-1023, 2010 WL 927002 (Ohio Ct. App. 10th Dist. Franklin County 2010). ii Attar v. Marine Towers East Condominium Owners’ Association, 2018-Ohio-3274, 2018 WL 3954170 (Ohio Ct. App. 8th Dist. Cuyahoga County 2018), appeal not allowed, 154 Ohio St. 3d 1445, 2018-Ohio-4962, 113 N.E.3d 553 (2018).
Robin Strohm, Esq.
Williams & Strohm, LLC r.strohm@wslawllc.com
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