A body corporate reserve fund should build towards enough to carry out the scheme's approved ten-year maintenance, repair and replacement plan. It must also never fall below the minimum contribution Regulation 2 sets against the administrative fund. The regulation is the floor. The plan is the target.
That is the short answer to what a body corporate reserve fund must hold under South Africa's Sectional Titles Schemes Management Act. Many schemes meet the floor. Fewer meet the plan, and the gap shows up as a special levy the year the roof fails.
The floor: Regulation 2
The duty itself is in section 3(1)(b) of the Act. A body corporate must keep a reserve fund. It must hold "in such amounts as are reasonably sufficient to cover the cost of future maintenance and repair of common property but not less than such amounts as may be prescribed by the Minister".
Regulation 2 of the Sectional Titles Schemes Management Regulations, 2016 sets the minimum annual contribution to the reserve fund. It measures the reserve fund balance at the end of last year against last year's total contributions to the administrative fund. There are three bands:
- Band one, below 25%. The budgeted reserve contribution must be at least 15% of the total budgeted contribution to the administrative fund.
- Band two, more than 25% but under 100%. The reserve contribution must be at least the amount budgeted to be spent from the administrative fund on repairs and maintenance to the common property that year.
- Band three, 100% or more. There is no minimum contribution.
As worded, a balance of exactly 25% falls in neither band one nor band two. The regulation does not apply to the first budget, approved at the scheme's first general meeting.
Band three is where schemes get comfortable, and it is the wrong place to relax. A reserve equal to one year's admin levies can still be far short of a lift replacement or a full reroof due in year seven.
The target: the maintenance plan
Management Rule 22 requires a written plan for the common property. It must list the major capital items expected to need maintenance, repair or replacement in the next 10 years. For each it records the present condition, when the work is needed, the estimated cost and the expected life of the item after the work.
The rule then sets the annual reserve contribution for each item with a formula. It is the estimated cost, minus what has already been contributed for that item, divided by the expected life. For the formula, Management Rule 2(1)(f) defines "expected life" as the estimated number of years before the cost of maintenance, repair or replacement is expected to be incurred. The plan only takes effect once the owners approve it at a general meeting, and they may attach conditions to withdrawals from the fund. The trustees must report on progress against the plan at every annual general meeting.
What can the reserve fund be spent on?
The reserve fund may be spent on carrying out the approved maintenance, repair and replacement plan. Management Rule 24 also allows urgent spending when the trustees resolve that it is needed. The listed examples are complying with a court or adjudicator order, preventing danger or significant loss, repairs that could not reasonably have been foreseen, and adequate insurance.
Urgent spending must be reported to the members as soon as possible. It may not exceed what the purpose needs, or any limit the owners have set. Rule 24 also says what goes into the fund. That is the part of the levy designated for reserves, insurance payouts for damaged property the body corporate is responsible for, and interest on the fund's investments. Anything else the body corporate decides may be added.
A worked example
The figures below are our own round numbers, used only to show how the two tests interact.
- Last year the scheme collected R1 200 000 in administrative fund contributions.
- The reserve fund closed the year at R240 000. That is 20%, so the scheme is in band one.
- This year's administrative budget is R1 300 000. The floor is 15% of that, which is R195 000.
- The plan has one large item: a roof membrane estimated at R600 000, with R150 000 already set aside and the work expected in nine years.
- The Rule 22 formula gives R450 000 divided by nine, which is R50 000 a year for the roof alone.
On these numbers the floor is higher than the roof item, so the floor governs. Add a lift, the boundary wall and the pool plant, and the plan can quickly overtake the floor. Rule 22(1)(e) also uses "expected life" for how long an item lasts once the work is done, which is a different number. Ask your auditor which figure the scheme's plan uses before you set the contribution, because it changes the answer.
Why the estimate is the weak link
Every line of the formula starts with an estimated cost. A plan priced from a managing agent's guess, or from a quote that left out access, reinstatement and the certificate at the end, produces a reserve that looks compliant and is not. The owners approve a number that was never real.
The fix is to price the plan the way you would price the work: one written scope per item, priced by people who do that work. The approval rules for a quote and the checks before a contractor starts apply to the plan's estimates as much as to the job.
Arabella Infrastructure Solutions is a Johannesburg-based vetted contractor panel that can price a scheme's maintenance plan item by item from verified roofing, waterproofing, electrical and plumbing contractors. That gives trustees estimates someone will stand behind when the work is called. More on running a scheme's maintenance is in the property resources.
On Monday
Find last year's audited reserve fund balance and administrative fund contributions, and work out which band you are in. Then open the maintenance plan and look at the date on its cost estimates.
Any estimate more than two years old, or one nobody can trace to a quote, is the line to reprice before the next budget.
