Legal Column Different Funds of a Body Corporate

THE DIFFERENT FUNDS OF A BODY CORPORATE EXPLAINED – MAKE SURE YOU GET IT RIGHT

Claire Tyler, Rainey Collins Lawyers, Wellington, www.raineycollins.co.nz

Abody corporate had weathertightness issues and was working out the best way to fund the repairs needed to the building.

They had originally budgeted for funds for the repairs to come out of the long-term maintenance fund, as they had budgeted for some repairs in the long-term maintenance plan.

However, the costs very quickly went over the budget item for the repairs and therefore the committee had go to back to the body corporate as a whole to pass a special resolution to continue.

One owner with a large amount of ownership interest then voted against the resolution which brought the process to a halt. That owner advised the body corporate that they also believed the long-term maintenance fund was the wrong fund to use for such repairs.

The body corporate took legal advice which confirmed that the courts had more recently held that the fund to be used for large scale remedial works was the contingency fund, and therefore they were using money from the wrong fund.

Types of funds

It pays for bodies corporate to be aware of what each fund is for, and make sure they are using them correctly so they don’t get caught out later, especially if the repairs lead to litigation down the track.

The types of funds are as follows: 1. An operating account – this is a general fund into which levies are paid and ordinary bills are paid from. This is compulsory, even for smaller bodies corporate who only share insurance costs, for example. 2. A long-term maintenance fund – this is a fund maintained to cover maintenance covered by the long-term maintenance plan. Even though all bodies corporate must have a longterm maintenance plan, it is not compulsory to have a longterm maintenance fund, as it can be contracted out of by special resolution. A body corporate must, by special resolution, approve any amount to be spent on any one maintenance item if the amount exceeds the

amount specified for that item in the long-term maintenance plan by more than 10% (as happened in the example above). 3. A contingency fund – this is an additional fund for unbudgeted expenses. This is not compulsory. As above, this is the fund that the courts have held should be used for projects such as weathertightness repair projects. 4. A capital improvement fund – this is for spending that adds to or upgrades the unit title development, if the spending is not included in the long-term maintenance plan. For example, a body corporate might decide to turn a grassed area into a swimming pool or change car ports into garages. This is not compulsory.

It will depend on the circumstances of each body corporate as to whether they choose to have certain funds.

Levies for the operating account, long-term maintenance fund, and any contingency fund are to be worked out in proportion to each unit owner’s

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