Sectioning: Operating A Divorced Strata
Disclaimer: This is not a legal opinion and should not be relied upon as such. Members of the public are encouraged to seek legal opinions on their specific circumstances before acting.
Living in strata is complicated enough as an owner. However, the concept of sections adds a whole other level of complexity and confusion. We highly recommend before you operate or live in a sectioned strata you consult with professionals. Although it may be the best solution under certain circumstances, it may not always be the case when it comes to a matter of dollars and cents…
The concept of sectioning was introduced in the Condominium Act of British Columbia and expanded to include different residential sections styles in the Strata Property Act of British Columbia. What does it do? It essentially allows unit owners with different interests to get a divorce and retain joint custody of the common property; creating multiple legal entities within the strata corporation. It then allows independent operation of all the entities but not without costs.
The easiest examples of owners with different interests are Commercial units versus Residential units. In the case of residential units, the different interests may be Townhomes, Low-Rise, High-Rise, Bare Land. The aforementioned are obvious, although different interests within commercial units could include Retail, Offices, Restaurants, Vacation Rentals, Storage Units, etc…
I was a strata property manager in New Westminster for a strata with sections. This strata contained Residential and Commercial sections. To administer this building the Strata Corporation, The Residential Section, and the Commercial Section were required to each establish:
- Operating Accounts
- Contingency Reserve Fund (“CRF”) Accounts
- Produce financial statements
- Hold separate council and general meetings
- Retain management (separately)
Although I managed all three entities, on several occasions it created a conflict of interest forcing me to become a neutral party and cease advising my clients. This made it that much harder on the council and executives (executives = section council). Managing this conflict can become very difficult for most people and it is now being better enforced by the Real Estate Council Rules due to changes being implemented December 2014. Councils and Section Executives should seriously consider hiring separate brokerages/managers to ensure proper representation of their interests.
Amongst other benefits Sectioning’s main advantage is separating capital expenditures. Specifically large projects requiring money to be spent from the CRF or a special levy to be collected. Sectioning allows for one section to pay only for items they have responsibility and use of. This sounds appealing and may present an advantage. However, you need to weigh it against the continual administration cost of operating the section. Strata Managers are now required to have separate management contracts with the Strata Corporation and each Section independently, and to maintain separate financials and accounts for each… thus additional administration costs.
Two scenarios to consider:
- I was the strata manager in White Rock for a smaller low-rise condo with first floor commercial units. The developer attempted to assist by sectioning the building into residential and commercial units upon filing the initial bylaws. However, the items that were excluded from the commercial budget were two lobbies, interphones, and elevators… the rest was common property. This building actually decided by ¾ vote to repeal the section bylaws and return to being just one legal entity. The main factor in the decision was that the management fees over time far outweighed the periodic cost of replacement and repair of these items. But each case is unique…
- My building I managed in New Westminster however was comprised of 298 residential units and 18 commercial units. The six elevators, forty-five floors of common hallways and three entries, hot water boilers, HVAC on the roofs of the three residential towers made it feasible to consider sectioning for the building… in fact the commercial units insisted on it for obvious reasons.
Before considering operating a sectioned strata do the following:
- Talk to a professional regarding your options. This could be an experienced strata manager, or with legal counsel.
- Do the math. Figure out what the costs will be for administration and compare it to the savings on the replacement and major repair of capital items. This should be easy if you have a depreciation report.
For more information the Real Estate Council has released a few publications on the matter at www.RECBC.ca.
As usual please feel free to contact me regarding this or any other strata matter.