Condo: All About the Contingency Fund
Last update : 2023-11-29 10:46:59
Owners of a co-ownership property must ensure that they have enough money to maintain not only their private portion but also the various common areas of the building. The contingency fund was created to provide a framework for this collective planning.
Since the entry into force of the Civil Code of Quebec in 1994, all condominium corporations in the province have been required to set up a contingency fund. The main purpose of this requirement was to make up for the lack of financial oversight in the past, which penalized many condominium owners.
Despite its introduction, the contingency fund has been ill-used for a long time, mainly because the syndicates didn’t build up an adequate reserve to meet the building's needs.
But what is a contingency fund? What is it used for? How much should unit owners contribute? Find all the answers you seek on the subject in this article.
What is the contingency fund for divided co-ownership?
The creation of a contingency fund allows the syndicate to maintain the building in good condition. It is a monetary reserve intended to anticipate the financing of certain works to be carried out in the short-, medium- or long-term in the common parts of the condominium. It is used to accumulate the sums that will eventually be required, based on the life of the elements and their repair costs.
The money in the contingency fund allows the syndicate to carry out the work necessary to keep the building in good condition, regardless of the financial situation of the condominium owners at the time when an urgent and costly renovation is needed.
At the same time, the co-owners benefit from the creation of this fund because, if it is sufficient, they will avoid having to pay a special assessment that could jeopardize their financial situation. By budgeting the amounts needed for the work, the costs can be spread over a longer period, thanks to the monthly payments, with less impact on the resident's finances.
What is the purpose of the contingency fund?
As mentioned above, the purpose of the contingency fund is to finance short-, medium- or long-term work on the building.
However, it is not intended to cover all renovation projects, but only major repairs or replacement of the common parts of the condominium. Therefore, the Board must determine and clearly define what is meant by these different terms:
- What qualifies as a major repair?
- What are the common elements of the unit?
To determine which areas are affected, the board must examine the declaration of co-ownership, which identifies the common areas of the building, and the cadastral plan, which shows the boundaries and dimensions of each lot.
A vague or inadequate identification could lead to ambiguity when deciding whether the work to be carried out allows the syndicate to use the contingency fund. It is therefore essential to define the common areas as precisely as possible.
Article 1152 of the Civil Code of Quebec describes major repairs as " those which affect a substantial part of the property and require extraordinary outlays". This may be the case for:
- Bearing walls;
- The roof;
- The envelope;
- Heating, electrical or plumbing systems;
The syndicate can use this definition and these examples as a basis for further clarification of the types of work for which the contingency fund can be used.
It is important to note that the contingency fund is only used to offset the cost of repairs that do not occur regularly. It cannot be used to pay for minor repairs, improvements or maintenance. Nor can it be used for any other purpose, such as paying a deficit, paying dues, etc.
How is the contingency fund established?
According to Article 1071 of the Civil Code of Quebec, the contingency fund must be established "according to the estimated cost of major repairs and the cost of replacement of common portions". These costs must therefore be evaluated to determine the amount to be accumulated.
The required amount must then be raised by the syndicate. This is a legal obligation that cannot be avoided. The accumulated funds become the property of the syndicate. If a unit owner decides to sell his or her unit, the money paid into the contingency fund will not be refunded.
Amounts paid into the contingency fund must be deposited in a financial institution. Regardless of the syndicate's investment strategy, a part of the funds must remain liquid and available in the short term, i.e., within 30 days.
If the accumulated funds are insufficient to make the necessary major renovations, the board may call for a special assessment. However, the general meeting of unit owners must be consulted before such a decision is made.
How much do the unit owners contribute?
Under Article 1064 of the Civil Code of Quebec, the contribution of each co-owner to the contingency fund, as well as to the other common expenses, is determined by the relative value of his or her share. This contribution is generally paid monthly, at the same time as the other condominium fees.
The Civil Code of Quebec requires that contributions to the contingency fund be at least 5% of the contribution to the common expenses. However, this percentage is only a guideline.
The cost of replacement and repair of common elements must be considered and added to the calculation to arrive at a realistic amount. Thus, the 5% minimum is insufficient, according to experts, although many syndicates have long been satisfied with this rule.
To change this unwise approach, the law has been amended. It now stipulates that the amounts to be paid into the fund must be determined based on the recommendations of the contingency fund study, which will be discussed later.
The amount to be paid must also take into account the development of the property, particularly the money available in the contingency fund.
The role of the Board of Directors in setting condominium fees
The Board of Directors is the principal governing body of the syndicate, with executive and decision-making powers. In particular, it is responsible for the upkeep of the building and the preparation of the condominium's preliminary budget. It determines the amount of common expenses to be paid by the condominium owners, including the amounts to be paid into the contingency fund.
The board is therefore responsible for calculating the amount of money to be invested in the fund, but it must also ensure that it is properly managed and used only for the purposes for which it is intended.
The contingency fund study (Bill 16)
Since 5% of the contribution to the common expenses is not sufficient to cover the real financial needs of the condominium, the government has made it mandatory, with the adoption of Bill 16, to conduct a study of the contingency fund.
The purpose of this study, which must be repeated every 5 years, is to help the syndicate plan for future expenses. This way, when major work needs to be done, the co-owners won't be caught off guard.
The contingency fund study has a physical dimension, assessing the condition of the building and the life expectancy of its components, and a financial dimension, estimating the cost of repair or replacement. It is generally conducted in four stages:
- Visual inspection of the building's major components to determine their condition and life expectancy;
- Prioritizing the work to be done;
- Assessing the cost of repair or replacement for common areas;
- Analysis of scenarios for financial contributions from co-owners.
A contingency fund study is not only important for maintaining the condition of the property but is also an essential step in creating a short-, medium- and long-term financial plan for a condominium.
Who can perform a contingency fund study?
The contingency fund study is a document that must be prepared by an authorized specialist, such as:
- An engineer;
- An architect
- A professional technologist.
Contingency, administration and self-insurance funds: what's the difference?
There are many condominium fees, and it's not always easy to understand the different funds to which a condominium owner must contribute. Each of these funds has its role to play. It's important to distinguish between them.
- The purpose of the administration fund is to manage the building and pay for day-to-day expenses, such as maintenance and administrative tasks. It is therefore used to manage the day-to-day operations of the condominium.
- The contingency fund, as we have seen, is used to pay for major repairs and replacements.
- The self-insurance fund, on the other hand, helps to pay the various deductibles following a claim. It should only be used in the event of a claim against the insurer.
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