Contingency funds under the new Law 16
In order to prevent possible damage to the common constructions, the new Law 16 modifies the Quebec Civil Code, by subjecting the co-owners to the obligation to obtain a study of the contingency fund. This fund must be sufficient to pay for major repairs or replacements of the common areas. More details on the law 16 contingency fund in this article.
Creation of the contingency fund
The contingency fund was created to facilitate the correct management of a multi-owner building. It is an effective means of repairing construction damages. A study of this fund is now mandatory, because the sums of money that are paid into it turn out to be insufficient to cover all the necessary expenses. Therefore, it is essential that experts in the field take care of it for a good inspection.
It is a study that predicts, over a period of 25 years, the necessary financing for different works to be carried out in a building held in co-ownership. To resolve the lack of management tools for syndicates of co-owners in Quebec, this study was created to ensure that the fund is sufficiently supplied.
The importance of a contingency fund study
A contingency fund study is now, according to Law 16, an essential step in the process of starting a co-ownership. Indeed, this study allows the creation of a short, medium and long term financing plan for the smooth realization of repairs and possible replacements of the common areas. Its purpose is to define not only the participation of each co-owner in the syndicate, but also the amount of the contingency fund required to cover the expenses.
Let us recall that this study is concomitant to well-defined preparations. In this regard, article 1071 of the Quebec Civil Code stipulates that the calculations must take into account the needs of the co-ownership. In accordance with this article, any contingency fund study must comply with the standards established by the State of Québec.
Steps in the Contingency Fund Study
The contingency fund study is generally done in four main steps:
A visual inspection of the building's major components in order to determine its physical condition, as well as its foreseeable life length.
A scheduling of the work to be done.
Evaluation of the repair and replacement costs of the common areas, according to their useful life.
The analysis of the different scenarios of financial contributions by the co-owners, taking into account the inflation rate of the moment and the revenues generated by this fund.
Once the procedure is completed, a final report must be produced mentioning the different components that were the object of the study, the estimated cost of the work, and the financial contributions required according to the scenario selected. It should be noted that this study is available for the co-owners.
However, the conclusions could be distorted. Indeed, there are unforeseen circumstances that may appear, such as the premature deterioration of a part of the building or the occurrence of a disaster. These factors can alter the data already collected. It is therefore necessary to re-evaluate the study so an update can be made. Thus, the contingency fund study must be updated every 5 years.
Capitalization of the contingency fund
Once the study is completed, it may result in an insufficiency in the funds available to cover expenses. The management must meet to determine the shares that need to be paid to compensate for this deficit. These shares are to be paid annually over a period of not more than 10 years after the first study is made.
For new constructions, the condominium developers must obtain a study within six months to be transmitted to the syndicate. But before that, the co-owners must pay a minimum of 0.5% of the reconstruction value of the building per year.
Competent actors for the realization of the study
This study is a very complex exercise which requires extremely precise technical and actuarial skills. It is for this reason that the law does not yet specify the professional(s) authorized to carry out the study.
The contingency fund is based on a principle of equity between successive co-owners of a building. It is a prudent and efficient way to cover not only the expenses of repairs to the common areas in normal times, but also those that arise in case of unforeseen events