Contingency Fund study

In Quebec, about half of the syndicates of co-owners do not have any management tools to adequately provision the contingency fund for major repairs or the replacement of common elements. This problem, which sometimes has disastrous financial consequences for some co-owners, should soon be solved by the obligation to obtain a contingency fund study to which the Syndicates of co-owners will be subject by the upcoming amendments to the Civil Code of Québec following the adoption of Bill 16  in December 2019.

 

Contingency funds: an obligation

Article 1071 of the Civil Code of Québec states :" The syndicate establishes, according to the estimated cost of major repairs and the cost of replacement of common portions, a contingency fund to be used exclusively for such repairs and replacement. ​The fund must be partly liquid and be available at short notice, and its capital must be guaranteed. The syndicate is the owner of the fund, and the fund’s use is determined by the board of directors.». Each Syndicate is therefore required to provide sums in anticipation of these major repairs and replacement of the common portions.

Setting up a sufficient Contingency Fund

Although the law currently requires that the contingency fund be funded by a financial contribution from the co-owners, which cannot be less than 5% of their contribution to the common expenses, the amounts of money paid are historically very often lower than the real financial needs of the co-ownership. The downside of this under-contribution to the fund is that on many occasions, several co-owners have found themselves financially caught off guard because of special assessments imposed by the Syndicate for the realization of major work in their co-ownership.

It is to correct this problem that article 1071 of the Civil Code of Québec will be amended by Bill 16 adopted in December 2019. Section 1071 will include a new paragraph that provides that " Every five years, the board of directors obtains a contingency fund study establishing the sums necessary for the fund to be sufficient to cover the estimated cost of major repairs and of replacement of common portions. The study is conducted in accordance with the standards established by a government regulation, which designates among other things the professional orders whose members are authorized to conduct such studies. ».

It is therefore a regulation of the Government that will determine the form, content and manner of holding and reviewing this contingency fund study and the persons authorized to establish it.

It is anticipated that these amendments to clause 1071 resulting from Bill 16  will come into force as follows:

  • For co-ownerships established before January 10, 2020, at the latest, 3 years after the coming into force of the first regulation made pursuant to the relevant provision of the Civil Code of Quebec;
  • For co-ownerships established after January 10, 2020, these obligations come into force at the time of the coming into force of the first regulation made pursuant to the relevant provision of the Civil Code of Quebec.

Although these amendments to section 1071 are not yet in force, it is in the interest of any syndicate to immediately implement such a management tool. Remember that the word "foresight" reflects notions of forecasting, calculations and prudence.

Study of the contingency fund: a must

To establish an adequate contingency fund, the board of directors must have the cost of major repairs  and replacement of common portions estimated by a competent professional. The Contingency Fund study  is intended to be the tool to accomplish this budgetary exercise essential to the sound management of a building held in co-ownership.

This study makes it possible to develop a contingency fund financing strategy that is intended to be fair to all co-owners, current and future, by avoiding one-off charge calls that only affect the co-owners in place at that time, while targeting the needs deemed necessary, without underfunding or undue surplus. The horizon of analysis of such a study should extend over a sufficient period to cover all major repairs and replacement of common portions. Experts normally consider a 25-year horizon, with a provision to finance major interventions that are expected to occur after the period under review. A shorter horizon could distort the data, as it would possibly exclude certain components of the calculation, such as roofs and windows.

Methodology underlying the study

The study of the contingency fund has a physical dimension and a financial dimension. The condition and foreseeable life of the various components of the building must first be assessed and then the costs of repair and replacement must be estimated.

Specifically, the physical dimension typically involves the following steps:

  • Identification of the building elements to be considered in the contingency fund;
  • Visual inspection of these components to determine their physical condition and foreseeable service life (e.g., mechanical elements related to the ventilation system);
  • An ordering of the work to be carried out.

As for the financial dimension, it usually involves the following steps:

  • Assessment of current costs of repair and replacement of common portions;
  • The indexation of these costs according to the planning of the planned work;
  • Financial analysis aimed at establishing a fund contribution strategy to accumulate the sums necessary to cover all planned expenses.

In the end, a report will be produced that includes:

  • Identification and assessment of the condition of the various components covered by the contingency fund study;
  • The presentation of a timetable for the replacement of these components according to their foreseeable service life;
  • Estimated costs of replacing these components;
  • A strategy of financial contributions to the contingency fund.

Study Update

Even if the Contingency Fund study was produced according to the rules of the art, there can nevertheless be imponderables. Some events could distort the data, for example, if a component deteriorates prematurely, or in the event of a disaster or economic fluctuations (e.g., an increased inflation rate that would skyrocket the cost of the work to be done). This study should therefore be re-evaluated periodically. According to the amendments made to article 1071 of the Civil Code of Québec by Bill 16 that will eventually come into force, this reassessment will be made at least every 5 years.

Time to fund the contingency fund

The amendments made to article 1071 of the Civil Code of Québec by Bill 16  that will eventually come into force provide that if the study of the contingency fund reveals that the fund is insufficient to cover the estimated cost of major repairs and replacement of common portions, the board of directors shall fix the amounts to be paid annually into the fund so that it is sufficient after a period of not more than 10 years from the date of obtaining the first study.

In addition, the developers of a newly built co-ownership must, within six months of the holding of the special meeting, produce and provide a contingency fund study to the syndicate. Until the developer obtains the study of the contingency fund, the amounts to be paid into this fund must correspond to 0.5% of the reconstruction cost of the building.

 Who can carry out this study?

The study of the contingency fund is a complex exercise that requires actuarial and technical skills. For the moment, the law does not specify who is the professional qualified to carry it out, and what is the methodology to be followed. However, these details will eventually be known by a government regulation that will designate, in particular, the professional orders whose members are authorized to carry out these studies.

For the time being, the Regroupement des gestionnaires et copropriétaires du Québec (RGCQ) has set out parameters that led to the creation of a Standardized Contingency Fund Study. It has also implemented a certification system available to building professionals. In short, the RGCQ has created a standard of practice to ensure a better protection of the syndicates of co-ownership built up heritage.

WHAT YOU SHOULD KNOW!​ Nowadays, prospective condo purchasers are more and more concerned about the deficient management of several immovables. Many of them will want to know if the amounts in the Contingency Fund are sufficient. In this regard, article 1068.2 of the Civil Code of Quebec requires the syndicate to provide the promising buyer with the documents or information enabling the latter to make an informed choice.

http://www.condolegal.com/images/Boutons_encadres/A_retenir.pngWHAT TO KEEP IN MIND: ​ The “Contingency Fund" concept is based on an equity principle between the successive co-owners of the building.  Amounts are gradually accumulated in the short, medium and long term, based on an estimate of costs related to the foreseeable life expectancy of some components of the immovable. All co-owners must contribute to this fund, in accordance with the user-payer approach, as long as they own it.

WARNING! ​ At least four out of ten syndicates of co-owners state, based on surveys, that they do not have enough money to finance this work. This number increases considerably in immovable built before the year 2000. To alleviate this situation, syndicates caught unprepared use special assessments.

 

Back to the mega-sheet: Contingency Fund