Contingency Fund study

 

To establish an adequate contingency fund, the board of directors must  estimate the cost of major repairs  and replacement of common portions. Bill 16  amended the Civil Code of Québec to subject the syndicate of co-owners to certain additional obligations, including obtaining a contingency fund study establishing the sums necessary for this fund to be sufficient to pay for major repairs or the replacement of common elements. This study  must be made available to the co-owners.

Setting up a sufficient Contingency Fund

The Contingency Fund study is an essential step in the sound management of an immovable held in co-ownership. You should be aware that the amounts paid into this fund are often insufficient, taking into account the amounts required for the necessary work to be carried out on the common portions of the immovable. This study should provide, over a 30 year period, the financial resources necessary to carry out the work in the co- ownership. A shorter horizon could distort the data because it may exclude some components from the calculation, such as the roof and windows. However, in Quebec, about half the syndicates of co-owners do not have any management tools at their disposal to insure the Contingency Fund is adequately funded. This proportion drops significantly when the immovable is managed by a condo manager.

The Contingency Fund study: a must

Yet, the Contingency Fund study is a must at the outset of the co-ownership, because it allows the creation of a short-, medium- and long-term financing plan, so that the repairs or replacements of the common portions may be carried out. In order to do so, this study will specify what the syndicate will have to save annually, to ensure a sufficient Contingency Fund.

Adequate planning requires thorough forecasting. Article 1071 of the Civil Code of Québec stipulates that the calculations must take into account the needs of the co-ownership, "according to the estimated cost of major repairs and the cost of replacement of common portions".

Methodology

The Contingency Fund study has a physical component and a financial component. The condition and life expectancy of the various components of the immovable should be assessed and the repair and replacement costs estimated.

This study generally comprises four steps:

  • A visual inspection of the immovable's major components to determine their physical condition and expected useful life expectancy (e.g. mechanical components of the ventilation system);
  • Sequencing the work to be carried out;
  • An appraisal of the common portions repairs and replacements costs, based on their useful life expectancy;
  • The analysis of the various financial co-owners contributions scenarios, taking into account the inflation rate and the income generated by the fund.

At the end of the exercise, a report will be produced, identifying the various components reviewed in the Contingency Fund study, the estimated cost of the work and the financial contributions required, depending on the scenario retained.

Update

Even if the study of the Contingency Fund has been prepared in accordance with the rules of the trade, unforeseen events may occur. Some occurrences may distort the data, such as, a component failing prematurely, a loss or an economic disturbance (e.g. inflation dramatically increasing the cost of the work). It is therefore necessary to re-evaluate the study on an ad hoc basis so that a cost update could, for instance, be carried out every three to five years following a prior inspection.

Legislative reform

Article 1071 of the Civil Code of Québec was amended in December 2019 by  Bill 16  . It now includes 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 a regulation of the Government that will determine the form, content and manner of holding and revising this contingency fund study and the persons authorized to establish it. Although this article is not yet in force, it is in the interest of any syndicate to put such a management tool in place immediately.

Time to fund the contingency fund

If the contingency fund study reveals that the fund is insufficient to cover the estimated cost of major repairs and replacement 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.

Periodicity

Under this legislative reform, every five years, the board of directors will have to obtain a contingency fund study establishing the sums necessary to ensure that this fund is sufficient to cover the estimated cost of major repairs and replacement of the common portions. The study must be carried out in accordance with the standards established by a regulation of the Government, which designates, in particular, the professional orders whose members are authorized to make such studies.

The amounts to be paid into the contingency fund will be determined on the basis of the recommendations made in the contingency fund study and taking into account the evolution of the co-ownership, in particular the amounts available to the contingency fund.

Entry into force of the legislative reform

The changes described above have not entered into force. They shall be carried out 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.

Who can carry out this study?

The Contingency Fund study is a complex exercise requiring actuarial and technical expertise. For the time being, the law does not specify who is the qualified professional to carry it out, and what is the methodology to be followed. However, the Regroupement des administrateurs 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. Any syndicate should provide this information to its co-owners to avoid them losing a sale.

WHAT 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.

 CONSULT THE PUBLICATION: Fonds de prévoyance Gage de réussite en copropriété (Contingency fund a guaranty of success in co-ownership).

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