Why is it important for strata schemes to have a 10-year capital works fund plan, and what are the consequences of not implementing it?
Section 80 of the Strata Schemes Management Act 2015 (NSW) (‘the Act’) requires an owners corporation to prepare a 10-year capital works fund plan for the purpose of anticipating and meeting major capital expenses required of ageing buildings.
The concept was introduced many years ago in response to the vast number of strata schemes that were resorting to raising special levies to reactively meet those expenses as they arose.
Owners were buying into properties where the previous owners had benefitted from the building’s components and facilities, but had made no contributions towards replacement of those components and facilities.
So, the concept of a capital works fund, and a 10-year capital works fund plan was born to create a proactive culture in strata schemes to build up funds during the life of the ageing process, in order to quickly and effectively maintain the building – as is the fundamental obligation of a strata scheme. It is intended to prevent buildings from entering a state of disrepair at the behest of its owners.
However, section 80(7) of the Act only requires that “an owners corporation is, so far as practicable (and subject to any adjustment under this section), to implement each plan prepared under this section.”.
There effectively no real penalty (i.e. fines) for those owners corporation’s that fail to implement their 10-year capital works fund plan.
That being said, there are other “penalties” to those owners corporation’s which ignore their duty, such as:
- The owners corporation’s asset (the building) losing value as it deteriorates.
- Prospective buyers who choose not to invest into the strata scheme when seeing the “red flag” of an owners corporation failing to plan for the future, thus devaluing the price of lots.
- A potential addition for those arguing that the owners corporation is dysfunctional, and seek to have it managed under compulsory appointment of a Strata Managing Agent (by order of the NSW Civil & Administrative Tribunal).
- Liabilities for failing to repair and maintain common property in a timely manner (such as owners successfully suing the owners corporation’s for damages that arose out of neglect), which drives up the cost of running the owners corporation.
- Being forced to raise special levies or take out strata improvement loans (and paying interest on those) to meet the major capital expenses when they arise.
In other words, there are real disadvantages for those who ignore their obligation to implement the plan. They are just less obvious to the uninitiated.