Reserve Fund Studies (RFS) - Bill 16
Since 1994, the Civil Code of Québec has made it compulsory for syndicates of co-ownership to set up a reserve fund, also known as a contingency fund. This fund, distinct from the administration fund, is set up to cover the estimated costs of major repairs and replacement of common areas (article 1071 of the C.c.Q). Its purpose is to ensure that the syndicate has the necessary funds to deal with future repairs.
However, it is widely recognized that the minimum percentage of 5% of common expenses imposed by the Civil Code of Quebec is insufficient to cover expenses related to major repairs and replacement of common areas at the end of their useful life. That's why it's essential to carry out a contingency fund study to determine the minimum contribution required, thus avoiding costly bills when major work becomes necessary.
The contingency fund study carried out by Vicat Consultants follows a rigorous methodology, comprising five key stages:
Physical inventory: A complete inventory is carried out, listing all components of the building's common property, such as the exterior envelope, internal systems, plumbing, electricity, mechanical equipment, etc.
Condition analysis: Each common property component is evaluated in terms of its current condition, actual age, remaining economic life, and current and future replacement costs.
Estimation of required reserves: An assessment is carried out to determine the level of reserves required to cover anticipated future expenses.
Analysis of current contingency fund: The current balance of the contingency fund and the history of contributions from the syndicate of co-owners are analyzed.
Financing models: Financing models are developed to help the condominium achieve its financing objectives.
It's important to note that a contingency fund study is not the same as a preliminary inspection of the common areas or a building condition certificate for a syndicate of co-owners.
Setting up a contingency fund
Under Law 16, which was passed in December 2019 and comes into force in 2022, syndicates of co-ownership are now required to maintain a building maintenance log and carry out a study of their co-ownership's contingency fund. The purpose of the contingency fund study carried out by VICAT CONSULTANTS is to determine the amounts necessary and sufficient to finance major repairs to the building and the replacement of common parts. It also enables us to determine the monthly contribution of co-owners to the contingency fund.
Creation of contingency funds
Under Law 16, which was passed in December 2019 and comes into force in 2022, condominium syndicates are now required to maintain a building maintenance log and carry out a study of their condominium's contingency fund. The purpose of the contingency fund study carried out by VICAT CONSULTANTS is to determine the amounts necessary and sufficient to finance major repairs to the building and the replacement of common parts. It also enables the monthly contribution of co-owners to the contingency fund to be determined.
The main purpose of the contingency fund study is to assess the condition of the building's assets in the light of the work and expenditure planned for the short, medium and long term, and to draw up a plan for maintaining these assets. In order to determine the appropriate amounts to be paid into the pension fund, simulations taking into account the rate of inflation over 25 years as well as the return on investment are carried out, enabling realistic projections to be made to meet future real estate needs.
The study is also based on an examination of the plans, information and documents provided by the customer, including an analysis of work carried out and not carried out, any discoveries made during this period, and new investments planned for the next 5 years within the pension fund.
It's essential to understand the provisions of the contingency fund:
For co-ownerships established before January 10, 2020, compliance must be achieved no later than three years after the regulations come into force.
For co-ownerships established after January 10, 2020, compliance is required as soon as the by-law comes into force, which could be as early as the end of 2022.
One of the Quebec legislator's objectives in studying the contingency fund is to ensure intergenerational equity. In fact, it was found that condominium fees were lower for the first purchasers of a building, resulting in a higher contribution for subsequent purchasers, because the contingency fund was not sufficiently funded.
By examining in detail the expenses required for the contingency fund over the next 25 years, we ensure that the amounts needed for maintenance and replacement are calculated from the very first years of the building's life. For older condominiums, this ensures that the reserve is sufficient to cover the necessary repair and replacement costs, thus avoiding depreciation of the real estate asset.
Benefits of a contingency fund
A contingency fund enables the syndicate of a building to carry out major repairs and replacement work on the common areas without having to impact the personal finances of each co-owner. The aim is to keep the building in good condition and protect the community of co-owners.
Monthly and special contributions by co-owners to the contingency fund
Depending on the recommendations made during the contingency fund study, the syndicate determines the amount to be paid into the fund, taking into account the amount already available in the account. In this way, part of the common expenses paid by the owners each month goes into the reserve fund.
When the amount in the contingency fund proves insufficient to cover expenses related to major repairs or replacement of common areas, the syndicate may request a special contribution from co-owners. However, any decision concerning a special contribution must be submitted to the general meeting of co-owners for approval, after prior consultation with the directors.
Use of the reserve fund
The contingency fund must be used exclusively for major repairs to items designated as common portions of the co-ownership, in accordance with the clauses set out in the declaration of co-ownership. It is therefore essential that co-owners always refer to the contents of the declaration of co-ownership to find out how the fund is to be used.
Contact us today for a personalized quotation.