Effect of the Real Estate Services Act on Management of Strata Corporations with Sections
An Information Guide for Strata Councils and Section Executives
The Real Estate Council of BC is responsible for licensing individuals and brokerages engaged in trading services, rental property management services and strata management services. All services that require licensing under the Real Estate Services Act (RESA), including the provision of strata management services, must be provided through a brokerage. A brokerage that provides strata management services may be a company, partnership or a sole proprietorship. In this guide, brokerages providing strata management services will be referred to as strata management companies.
The Council also enforces entry qualifications, establishes ongoing education requirements, investigates complaints against licensees and imposes disciplinary sanctions for failure of licensees to comply with RESA and the Rules. For a complete explanation of the licensing structure, readers may wish to refer to Working With a Strata Management Company.
Licensees providing strata management services are required to comply with RESA and the Rules. As part of an ongoing education program for licensees providing strata management services, the Council presented a program to licensees to explain how the requirements of RESA apply to strata corporations with sections. As a result of the education program, licensees providing strata management services to a strata corporation and sections may now be aware that the manner in which strata management services have been provided may need to be modified. To assist strata corporations and sections to understand how the requirements of RESA apply and thus, why changes may be necessary in the manner in which strata corporations and sections are managed, the Council has prepared the following guide.
In this guide you’ll find information on:
- Requirements of the Strata Property Act
- Application of RESA
- Requirements of RESA
- Compliance with RESA
Although the Real Estate Council does not enforce the Strata Property Act (the “SPA”), to appreciate how the requirements of RESA and the Rules apply to strata corporations with sections, it is helpful to understand the provisions of the SPA that govern the creation of sections.
Creation of Sections
The SPA permits the creation of sections in order that the different interests of owners of residential and non-residential strata lots, owners of non-residential strata lots used for different purposes, and owners of apartment style, townhouse style or detached strata lots may be represented. Sections are created by bylaws established by the developer at the time the strata plan is filed, or subsequently by an amendment to the bylaws approved by a 3/4 vote of each of the groups of strata lots intending to form a section and a 3/4 vote of the strata corporation.
Notwithstanding the creation of sections, the strata corporation retains its powers and duties in matters of common interest to all owners. Thus, even if sections are created, the strata corporation continues to exist and is required to function in the same manner as any other strata corporation by holding general meetings, electing a strata council, approving a budget, and collecting strata fees for those expenses that are common to all strata lots. The items for which a strata corporation will be responsible and for which it must collect strata fees will vary depending on the structure of the development, however, at a minimum, the strata corporation will be responsible for obtaining insurance as required by SPA and collecting strata fees to pay the insurance premium.
Powers and Duties of a Section
The SPA provides that once created, a section is a corporation and has the same powers and duties as the strata corporation in respect of matters that relate solely to the section. As a result of this provision, once the bylaws creating sections are filed in the land title office, each section identified in the bylaws is a separate corporation. Thus, each section is a separate legal entity. The fact that each section is a corporation and thus a legal entity, is extremely significant. Because each section is a separate legal entity, the section is equivalent to a strata corporation in respect of matters that relate solely to the section as set out in section 194 of SPA. Sections are often referred to as “mini” strata corporations. The SPA sets out that a section has the power and duty to:
- Establish its own operating fund and contingency reserve fund for common expenses of the section
- Budget and require section owners to pay strata fees and special levies for expenditures the section authorizes
- Sue or arbitrate in the name of the section
- Enter into contracts in the name of the section
- Acquire and dispose of land in the name of the section
- Enforce bylaws and rules
Once a section is created, the SPA contemplates that the section will operate independently of the strata corporation. The section must establish a budget for expenses the section authorizes and must establish its own operating and contingency reserve fund.
Administration of a Section
The SPA provides that the eligible voters of a section may call and hold meetings and pass resolutions in the same manner as the eligible voters of the strata corporation. This provision is further evidence that a section is to operate as a “mini” strata corporation.
The SPA also provides that each section must elect an executive for the section. The executive has the same powers and duties with respect to the section as the strata council has with respect to the strata corporation.
Practical Effect on Governance
Once bylaws have been filed creating sections, each section is a legal entity. Each section must hold (or waive) an annual general meeting to elect an executive and to approve a budget for the common expenses of the section that are authorized by the section.
Although it is often common practice for strata corporations with sections to have one AGM for the strata corporation, and for the budget approved by the strata corporation to contain expenses for the sections, such a practice does not conform to the SPA. To comply with the SPA each of the strata corporation and sections must hold (or waive) the AGM at which time the budget for the legal entity that called the meeting must be approved and a strata council or executive, as appropriate, must be elected.
Section 1 of RESA includes the following definition of the term “strata corporation” (emphasis added):
“strata corporation” means a strata corporation within the meaning of the Strata Property Act and includes a section within the meaning of that Act.”
The definition of a strata corporation in RESA, which considers a section to be the same as a strata corporation, is consistent with the SPA which establishes each of the strata corporation and the sections as separate legal entities. As a result, all the requirements of RESA and the Rules relating to the provision of strata management services apply when those services are provided to either a strata corporation or a section of a strata corporation.
The application of RESA and the Rules to sections, is further confirmed when the definition of client is considered. Client is defined in the Rules as
“in relation to a licensee, the principal who has engaged the licensee to provide real estate services to or on behalf of the principal”
This means that if either the strata corporation or a section has engaged the licensee to provide strata management services, each of the strata corporation and the section is a client of the licensee. The Rules apply to a licensee’s relationship with “clients”.
The result of the provision of the SPA that establishes that each of the strata corporation and a section are separate legal entities the provision of RESA that a section is included in the definition of a strata corporation, and the definition of client which makes it clear that each of the strata corporation and section are clients of a strata management company if the strata management company provides strata management services, is that a strata management company must treat each of the strata corporation and a section completely independently of each other. From the perspective of RESA and the Rules, it is as if each section is simply another strata corporation client.
Separate Service Agreement
Section 5-1 of the Rules requires a written service agreement with each client unless waived by the client.
The strata management company must have a written service agreement (unless waived) with the strata corporation and each of the sections on whose behalf the strata management company provides services.
Section 5-1(5.1) of the Rules requires that all strata management service agreements must contain a minimum of the information specified in subsection 5.1 which includes:
- an indication of the funds that the strata management company will hold
- the circumstances in which the agreement may be terminated
- the strata management company’s authority relating to the transfer of trust funds
- the scope of authority to sign cheques, enter into contracts, and invest money held by the strata management company
- the timing, frequency and nature of the accounting statements to be provided
- a description of the records to be kept
- a provision respecting the use and disclosure of strata corporation and personal information.
The requirement in the Rules for the inclusion of specific provisions in a service agreement, is to ensure that the strata management company’s clients are informed regarding key matters such as the strata management company’s obligations in respect of holding, transferring and spending the client’s funds, the authority that the strata management company will exercise as agent of the client and what the client can expect in regard to financial reporting.
Where a strata management company acts on behalf of a strata corporation and one of the sections within the strata corporation, the written service agreement will also likely address matters that could present a conflict of interest for the strata management company.
Separate Trust Accounts
Prior to the introduction of licensing in respect of strata management services, strata management companies often pooled the funds received from the various strata corporations that the company managed in one bank account. Such a practice made it impossible for the company to demonstrate to each strata corporation that the strata corporation’s funds were held and accounted for.
The introduction of strata management licensing prohibited the practice of pooling funds belonging to different clients.
Section 7-9 of the Rules requires that a strata management company must maintain separate trust accounts for each strata corporation on behalf of which the strata management company holds or receives money. Because RESA defines a strata corporation to include a section, a strata management company is required to maintain separate trust accounts in respect of the strata corporation and each of the sections for which the strata management company receives funds.
Section 7-9(7) of the Rules requires a strata management company to arrange to receive monthly statements for each account that the strata management company maintains. The statements must be reconciled monthly and a copy of the account statement and the reconciliation must be provided to the strata corporation no later than six weeks after the end of the month for which the statement was issued.
The requirement for separate trust accounts and the provision of the account statements to each client is a significant means of ensuring that the public funds held by strata management companies are identifiable and accounted for. If a strata management company was permitted to hold both a strata corporation and one or more section’s funds in the same account, it would be impossible for the strata corporation or the section to confirm that the funds being held were correct. Moreover, as the account would only be in the name of one of the legal entities, the other contributors to the account would not have access to the account and would have to rely on the party in whose name the account was established to pay the bills of and withdraw funds for the other contributors.
The Real Estate Council has however recognized that on occasion, owners may wish to pay the fees owing to the strata corporation and the fees owing to a section in one payment. The Real Estate Council has recently amended the Rules by adding section 7-9.1 which permits a strata management company to receive strata fees belonging to a strata corporation and a section as one payment. Such amounts are referred to as a “blended payment”. Once a blended payment is received by the strata management company, the portion belonging to the other legal entity must be transferred to the other legal entity within seven days of the receipt of the funds.
Separate Books of Account
Section 8-7.1 of the Rules requires a strata management company to maintain separate books, accounts and other records with respect to each strata corporation to or on behalf of whom the strata management company provides strata management services. As noted above, because the term “strata corporation” is defined as including sections, section 8-7.1 of the Rules also applies to require the strata management company to maintain separate books and accounts in respect of each section for which services are provided.
Conflicts of Interest
Section 3-3 of the Rules requires strata management companies and licensees to:
- act in the best interests of the client
- follow lawful instructions of the client
- act only within the scope of the authority given
- maintain client confidentiality
- avoid conflict of interest
When a strata management company acts for a strata corporation and one or more sections within the strata corporation, it is not difficult to imagine that issues may arise which prevent the licensee from complying with section 3-3 of the Rules and which put the strata management company and licensee in a conflict of interest. For example, if a strata management company acts for both the strata corporation and the residential section, the strata corporation as the client may instruct the strata management company to carry out certain repairs at the strata corporation’s expense. The residential section client may believe that the work is the responsibility of the commercial section. The residential section, as client then instructs the strata management company not to carry out the repair. The strata management company is caught between conflicting instructions and would not be able to comply with both clients’ requests.
Strata management companies that act for strata corporations and sections must be alert to the potential for conflicts and must find a way to address them.
The agreement to modify the duties must be in writing or preceded by a written disclosure and must clearly indicate which duties have been modified and how they have been modified, and which duties, if any, have been made inapplicable.
When negotiating an agreement to modify or make inapplicable some of the strata management company’s duties, each of the affected clients may wish to obtain legal advice in order to fully appreciate how the modification will impact the work and decisions that the strata management company must make on that client’s behalf.
The requirements of RESA set out above are not optional for licensees. As a result, strata management companies must comply with the requirements of RESA by entering into a separate written service agreement with each client (unless the written agreement is waived by the client) and by maintaining separate trust accounts and books of account for each client and by avoiding conflicts of interest. Compliance with RESA is enforced by the Real Estate Council. Strata corporations or sections that wish to engage the services of a strata management company cannot therefore instruct the strata management company in a way that would result in the strata management company contravening the requirements of RESA or the Rules. The requirements of RESA and the Rules are intended to provide protection to the public in the transactions with licensees. Because each of the strata corporation and a section is a separate client of the strata management company each is entitled to the same level of protection.
In circumstances where either the strata corporation or a section is of the view that continuing as separate legal entities is unnecessary for the effective governance and management of the strata lots, the strata corporation and sections should seek legal advice to determine the other options that exist in the SPA. However, as long as sections exist, strata management companies will be required to apply the provisions of RESA and the Rules to each of the strata corporation and sections that engage the licensee to provide strata management services.