OMCs: Service Charges and Service Charge Budgets
Annual service charges are billed to members of an Owners’ Management Company (OMC) to cover the expected annual costs that will be incurred. As we noted in a previous post on OMCs, it was highlighted that these companies are set up as not-for-profit.
As such they are not trading for a gain, and any surplus or deficit incurred in one year is typically offset against reserves forward in residential developments. In a very limited number of companies, we would see a balancing charge or credit being issued to members depending on the surplus or deficit for the year. A balance charge or credit is the difference between the budgeted service charge billed to the member at the start of the year and the actual service charge when the final accounts are prepared, and the overall costs known.
Section 18 of the Act outlines several requirements as to how and where the approval of the annual service charge budget should take place. It gives expense headings that should be included in the budget, including insurance, general maintenance, and waste management to name a few.
A key point and one that can sometimes result in issues arising is that they must be calculated on a transparent basis and equitably apportioned between members based on actual or expected expenditure for the year. Issues can arise where there are different sizes or types of units in a development (e.g., apartments, duplexes, and houses) and the split of costs may not always be clear.
Where a budget put to the members is disapproved by not less than 75 percent of the members voting, the budget shall not take effect and the previous year’s budget shall be charged out until the proposed budget is amended and approved.
The Act also defines when a developer/builder is considered a member and is required to pay a service charge for unsold units in line with the other members.
There is guidance relating to expenses that may be the responsibility of the developer/builder but for which approval can be given by members to pay. There are conditions that would need to be met for this to occur (subsection 7).