Contingency fund: Its purpose

 

With the adoption of the Civil Code of Québec in 1994, to fill a void in the Law, the Quebec legislature introduced the obligation upon a syndicate of co-owners to fund a "contingency fund”. Prior to the enactment of the Civil Code, it was a frequent occurrence for co-ownerships to have a "reserve fund", although the Civil Code of Lower Canada was mute on this issue. Most of the time, this fund was inadequate, due to the low level of contributions paid into it.

 

Its objectives

The contingency fund’s purpose is to provide in advance anticipate for the financing of some of the work to be carried out in the common portions of the co-ownership. The amounts that will eventually be needed are accumulated therein, based on the cost estimates and the foreseeable life expectancy of the common elements. Long-term planning of the major work to be carried out within a co-ownership, allows large expenses to be paid over time. By collecting funds each month, the co-ownership will build up a fund that will finance (in whole or in part) the necessary work.

The “contingency fund" concept is also based on the principle of equity between the successive co-owners of the immovable. It will not be only the co-owners on title during the work that will bear alone the cost, while the previous co-owners have benefited from the property without contributing.

An obligation

It is compulsory by Law that the syndicate constitutes this reserve. It cannot avoid this legal requirement. The Law compels each syndicate of co-owners to establish a contingency fund, according to the estimated cost of major repairs and the cost of replacement of the common portions. It should also be noted that the amounts accumulated therein belong to the syndicate. These amounts are not to be reimbursed by the syndicate to the seller upon the sale of his private portion.

Contingency fund study

Although the law requires that the contingency fund be financed by a financial contribution from the co-owners, which cannot be less than 5% of their contributions to the common expenses, the amounts paid therein are very often lower than the actual financial needs of the Co-ownership. Please keep in mind that the word "contingency" refers to concepts such as forecasting, calculations and care. For this reason, preparing a contingency fund study is essential - although not compulsory – to properly evaluate  the amount of future expenditure. Thus, when major work needs to be carried out in the co-ownership, the co-owners will not be caught unprepared.

 

The duty of the Board of Directors

The Board of Directors exercises executive powers. Its prerogatives are fixed by Law and the declaration of co-ownership. Being in charge of  the preservation of the immovable, it must prepare the budget forecast of the co-ownership. In doing so, it will determine the amount of the common expenses (condo fees) to be paid  by the co-owners, including without fail the amounts  to be provisioned in the contingency fund to ensure the proper management of the immovable.

The Board of Directors is responsible for the judicious use of the contingency fund. Under no circumstances it should be used to finance the maintenance and day to day expenses of the co-ownership! It should be used only to pay for major repairs and replacements of the common portions.

 

 WHAT YOU SHOULD KNOW ! The contingency fund cannot be seized following a judgment rendered against the syndicate, unless the decision concerns the payment of work to be funded by the contingency fund.

WHAT TO KEEP IN MIND : To avoid confusion between the amounts paid into the administration fund (for day to day operations) and those paid into the contingency fund, a separate bank account should be opened for each fund.

 WARNING ! The contingency fund of a co-ownership is very often insufficient, because of minimal co-owners contributions and / or its inappropriate use by directors, whether through ignorance or negligence.

  CONSULT THE PUBLICATION: Travaux en condo: Tout ce qu’il faut savoir  at pages 127 and following. (Condo work: everything you should know)

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