If you're an owner of a condominium, you may sometimes be in for a surprise that can be costly and frustrating.  It’s two dreaded words that any condo owners hope to never hear.  A special assessment.

A special assessment is an additional fee that is levied by a condominium association on top of regular condominium fees to cover unexpected expenses or make up for a shortfall in the reserve fund. Special assessments are typically used when there is not enough money in the reserve fund to cover unexpected repairs, replacements, or other unforeseen expenses related to the common areas and elements of the condo complex.  

As buildings can be very expensive to repair and maintain, a special assessment can commonly be in the range of thousands or tens of thousands of dollars, so it usually not insignificant.

For example, let's say a condo complex experiences severe water damage due to a burst pipe that floods several units and causes significant damage to the common areas. The cost of repairs exceeds the available funds in the reserve fund, and the condo association needs to take immediate action to fix the damage and prevent further deterioration of the property. In such a situation, a special assessment may be imposed on all condo owners to generate the additional funds needed to cover the emergency repairs. The decision to impose a special assessment is typically made by the condo association. The amount of the special assessment is usually determined based on the total cost of the unexpected expense and the number of units in the condo complex. It can be a one-time payment or spread out over several months or years, depending on the decision of the condo association.

Do I have to pay the special assessment?

The short answer is yes, you do. Special assessments are legally binding obligations for condo owners, and failure to pay them can result in penalties, late fees, and even legal action. Condo associations are required to provide timely and transparent communication to condo owners regarding special assessments, including providing detailed information about the reason for the special assessment, the amount and duration of the assessment, and the timeline for payments.

I’m already paying condo fees, why is there a need for special assessment?

Sometimes special assessments are due to unforeseen circumstances, but often, they are necessary because the condominium’s reserve fund was not budgeted for properly. Reserve funds are set up by condo associations to ensure that there are sufficient funds available to cover major repairs, replacements, and unexpected expenses related to the common areas and elements of the condo complex. As buildings get older, there is considerably more maintenance and repairs that may be required to keep the building and common facilities in good repair.  For example, that incredible roof-top pool that was so attractive when you first bought the place, has now sprung a leak and is flooding the entire building.  Repairing it, can be tens of thousands.  Those funds would come from the condo’s reserve funds.

What are Condo Reserve Funds?

Condo reserve funds are essentially a savings account for the condominium association. Each month, condo owners pay a portion of their condominium fees into the reserve fund, which is then used to cover major repairs, replacements, and other unforeseen expenses related to the common areas and elements of the condo complex. Common areas and elements can include things like the roof, building exteriors, elevators, hallways, swimming pool, and other shared amenities. Condo associations are responsible for managing the reserve funds and making decisions about how the funds are used. Typically, condo associations conduct regular reserve studies to assess the current state of the property and estimate future repair and replacement costs. These studies help the association determine the appropriate amount to allocate to the reserve fund to ensure that it remains adequately funded.

What Happens When the Reserve Fund is Low?

In some cases, the reserve fund of a condo association may become low or depleted. This can happen due to poor financial planning, unexpected repairs or replacements, or inadequate funding from condo owners. When the reserve fund is low, it can pose several challenges and potential consequences for condo owners.

1. Delayed Repairs or Replacements: With a low reserve fund, condo associations may need to delay or defer necessary repairs or replacements to common areas and elements. This can result in further deterioration of the property, reduced functionality of shared amenities, and decreased property values.
2. Special Assessments: To make up for the shortfall in the reserve fund, condo associations may levy special assessments on condo owners. A special assessment is a one-time fee that is charged in addition to regular condominium fees to cover unexpected expenses. Special assessments can vary in amount and can be a significant financial burden for condo owners, especially if they are not prepared for them.
3. Borrowing: In some cases, when the reserve fund is low, condo associations may need to borrow money to cover the cost of repairs or replacements. This can result in additional interest expenses and debt for the association, which may impact the financial health of the condo community in the long term.

It's important for condo owners to be aware of the financial health of their condo association and the status of the reserve fund. If the reserve fund is low, it's essential to understand the potential consequences and how they may impact your investment as a condo owner. Communicating with the condo association and participating in decision-making processes can help ensure that the reserve fund remains adequately funded and the property is well-maintained.

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How can I avoid buying a property that may be subject to a special assessment?

If you’re in the market for a condominium, co-op, or strata property, having a real estate lawyer review the condo/strata docs as a condition of your purchase is a crucial step.  Essentially, within your offer to purchase, you will request a few days for a lawyer to review the strata docs, or status certificate, as it is commonly called in Ontario.  A condo status certificate, also known as an estoppel certificate or strata certificate, is a document that provides important information about the status and financial health of a condominium corporation. It typically contains the following information:

1. Legal Information: This includes the legal name and address of the condominium corporation, as well as its registration number.
2. Unit Information: It specifies the details of the unit being sold or inquired about, including its unit number, size, and type.
3. Financial Information: This section includes details about the condominium corporation's financial status, such as the current operating budget, reserve fund balance, and any special assessments or pending litigation that may affect the financial health of the corporation.
4. Common Elements and Exclusive Use Areas: It outlines the common elements and exclusive use areas associated with the unit, including any parking spaces, storage lockers, or other amenities.
5. Condominium Bylaws, Rules, and Regulations: It includes copies of the condominium corporation's bylaws, rules, and regulations that govern the conduct of unit owners and residents.
6. Insurance Information: This section provides details about the insurance coverage carried by the condominium corporation, including the types and amounts of insurance coverage in place.
7. Maintenance and Repair Obligations: It outlines the responsibilities and obligations of the unit owner and the condominium corporation regarding maintenance, repairs, and alterations to the unit and common elements.
8. Pending or Proposed Special Assessments: It includes information about any pending or proposed special assessments that may be levied by the condominium corporation for repairs, improvements, or other purposes.
9. Meeting Minutes: It may include copies of recent condominium corporation meeting minutes, which provide insight into recent decisions and discussions related to the management and operation of the condominium corporation.
10. Other Disclosures: It may include other disclosures or information required by local laws or regulations, such as environmental assessments, reserve fund studies, or other relevant documents.

A proper review can reveal any potential issues such as a low reserve fund, or even potential litigation against the condo that can result in a future special assessment, however, a review of a condo’s financial health is always based on a moment in time and can’t guarantee everything about the building and its financial management will always be in great shape.  

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At Deeded, we’ll happily match you with an experienced real estate lawyer who can provide you with a review and opinion of a condo’s health.

The Bottom Line

In conclusion, understanding condo reserve funds and special assessments is vital for condo owners. A well-funded reserve fund ensures that there are sufficient funds available to cover major repairs, replacements, and unexpected expenses related to the common areas and elements of the condo complex. However, when the reserve fund is low, it can result in delayed repairs, special assessments, or borrowing, which may have financial implications for condo owners.Before buying a condo or strata, it is crucial to have the condo documents reviewed by an experienced real estate lawyer.  To protect your investment as a condo owner, it's important to actively participate in the decision-making processes of your condo association, stay informed about the financial health of the association, and plan for potential unexpected expenses. This includes being prepared for special assessments and understanding your obligation to contribute to them. By maintaining open communication with the condo association and being proactive in managing financial matters, you can help ensure that your condo community remains well-maintained and financially sound.