Service Charge Deficit, Aged Arrears and an Unfunded Lift Refurbishment
You manage a 320-unit condominium completed in 2011. The JMB's 2025 budget projects expenditure of RM2.46 million against service charge income of RM2.05 million at the current rate of RM0.26 per sq ft per month. Arrears stand at RM612,000, of which RM190,000 is more than 24 months old and RM85,000 relates to 14 units whose owners are bankrupt or untraceable. The sinking fund holds RM880,000, but RM300,000 was used in 2023 to replace two lift motors without a general meeting resolution. A consultant says both passenger lifts need full refurbishment by mid-2026 at RM1.35 million. At the AGM, owners rejected any increase above RM0.28 and voted down a special levy. The JMB chairman wants to 'use the sinking fund and defer the lift works.' Collection costs are RM18,000 per year; the previous managing agent never issued formal demands.
1. Quantify the 2025 funding gap and identify which elements of the JMB's current approach are unlawful or imprudent.
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Gap: budget RM2.46m; billed income at RM0.26 psf = RM2.05m; structural deficit RM410,000 before collection losses. At a realistic 88% collection rate, cash received is about RM1.80m - a cash gap of roughly RM660,000.
Unlawful or imprudent elements:
- Sinking fund use. RM300,000 was applied to lift motors without a general meeting resolution. Even if the works were capital in nature, the absence of a resolution and of a procurement record is a governance breach and may be beyond the council's authority. It must be tabled, documented and regularised; it must not be repeated.
- Deferring the lift works. Lift failure creates entrapment and injury risk and breaches the JMB's duty to maintain. A known safety defect cannot be deferred for budgetary convenience.
- The AGM mandate. The rejection of any rate above RM0.28 is not a lawful excuse to run a deficit, but the council cannot simply impose a higher rate without authority. It must work within the mandate or return to owners with a proper case.
- No formal demands. Arrears have not been pursued; limitation and evidence weaken each year.
- Bad debts. The RM85,000 attributable to bankrupt or untraceable owners should be provided for, not treated as collectable.
2. Design a recovery and budgeting plan that closes the gap without breaching the owners' AGM mandate.
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Arrears recovery
- Segregate the book: RM527,000 is realistically collectable (RM612,000 less RM85,000). Set a 12-month target of 70%, about RM369,000.
- Issue formal demands, apply late-payment interest at the rate permitted by the by-laws, and file Strata Management Tribunal claims for sums within its jurisdiction, using instalment plans supported by written acknowledgments.
- The RM18,000 annual collection cost is trivial against RM369,000; consider a performance-based recovery agent for the RM190,000 aged tranche.
Budget
- Move to RM0.28 psf, producing about RM2.21m billed (an increase of roughly RM158,000).
- Re-tender security, cleaning and landscaping; target 8–10% savings on non-essential spend, about RM200,000–250,000.
- Defer non-critical repainting and landscaping enhancements; protect insurance, lift servicing, fire systems and water-tightness works.
- Introduce monthly cash-flow reporting, a bad-debt provision and a procurement policy requiring three quotations above RM50,000.
Do not use the sinking fund to plug an operating deficit - that is the clearest breach and will be obvious to any auditor or owner who inspects the accounts.
Residual gap: even after these measures the budget may not balance; present the shortfall openly to owners with a costed compliance case rather than hiding it.
3. Advise the JMB on funding the lift refurbishment and on the permitted use of the sinking fund.
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Funding arithmetic
- Cost: RM1.35m by mid-2026. Sinking fund RM880,000 plus 2025 and 2026 contributions at the prescribed 10% of service charges (about RM205,000 per year) gives roughly RM1.29m. That is tight and leaves no contingency for consultant fees, authority submissions or a second-phase failure.
Options
- Re-table a special levy with a costed lift-failure risk analysis and a phased collection schedule. The earlier rejection does not prevent a better-prepared proposal.
- Bank financing secured against future sinking fund contributions, with council and general meeting approval.
- Stage the works: one lift in 2025, one in 2026, if the consultant confirms interim safe operation.
- Reduce scope only if the consultant certifies that partial refurbishment meets safety and reliability requirements.
Permitted use
- The sinking fund is for capital and major repair purposes permitted by the strata legislation and the resolutions; it is not an operating reserve. Table a resolution supported by the consultant's report, three quotations and a 10-year plant replacement plan.
- Record the 2023 RM300,000 use; seek retrospective approval if the constitution permits, otherwise disclose it and restore the amount over time.
- Confirm all figures against the current Act and regulations before tabling - rates and procedures change.