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The Contingency Fund (Myths, Rights and Obligations)

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The Contingency Fund (Myths, Rights and Obligations)

Écrit par Me Sébastien Fiset , LL.B., B.A.A.
Mardi, 16 Février 2010 14:08

THE RESERVE FUND DEMYSTIFIED (CONDO LAW)

Sébastien Fiset, LL.B., B.A.A (avocat, FISET Légal inc.)

David Ménassé (director, Propri-Gestion inc.)

Contact the author :  s.fiset@fisetlegal.com

It would not occur to someone who purchased a new vehicle to resell it three or four years later for a higher amount or even for the same price.

Also, it would not occur to a home owner to replace and do major repairs to his home because of lack of budget or just to save that expense.

With this in mind, we report below some myths relating to the contingency fund that we identified through the exercise of our specialty. Following is the list of the syndicate’s obligations relating to the contingency fund.

THE MYTHS

“The contingency fund is the co-owners”

FALSE. The contingency fund is not the co-owners’. It is in fact the most important patrimony of a syndicate of co-ownership(1).

The common portions, where the contigency fund is affected, are the syndicate’s.”

FALSE. Contrary to the contingency fund, the common portions of a building are the property of all the co-owners(2). Therefore, they are not the syndicate’s.

To determine the exact nature of the common and private portions elements of a condominium, we will refer to the constitution act, to the description of the fractions in the declaration of co-ownership as well as to the cadastral maps of the building. In case of silence in the declaration of co-ownership, the Civil Code of Quebec provides that certain parts of the building will be then presumed common(3).

The contingency fund is used for all major expenditures.

FALSE. The contigency fund does not need to be used to offset the major financial costs that may arise.

Nor should the contingency fund be used to pay unexpected expenses, the property manager or professional fees (architects, engineers, notaries, lawyers, etc.) incurred for any purpose other than « major repairs » or « replacements » of the common areas of the building.

Indeed, this is not the objective importance, the extraordinary nature or the costs of an intervention on the building that determines if the sum falls within the contingency fund, but the intrinsic nature of the expenditure that qualifies as replacement or major repair of a “common portion”.

“The budget of the contingency fund must be approved by the general meeting of co-owners.

FALSE. Under the Civil Code of Québec, the collectivity of co-owners is, on registration of the declaration of co-ownership, a corporation that aims(4) to preserve the building, to maintain and administer the common areas, to protect the rights related to the immovable or condominium, as well as all operations of common interest.

Under the terms of certain declarations of co-ownership, the “approval” of the general meeting of co-owners is required to determine the contributions to the contingency fund and to common expenses.

But since the introduction of the new Civil Code of Quebec in 1994, we are of the opinion that the legislator has clearly and absolutely granted this authority to the board of directors of the syndicate.

Indeed, according to the law(5), it is the board of directors and not the general meeting of co-owners that will establish (after “consultation” of the general meeting of co-owners) the co-owners’s contribution to the contingency fund and to the common expenses(6). But this “consultation” should not be taken as a decision(7).

In addition, the board of directors is a decision making body whose members, directors, are clearly identifiable. Their decisions are written down under the form of minutes, where the disagreements between directors appear as well(8). This is not the case of the general meeting of co-owners.

The directors are personally accountable for the sustainability of the building. They cannot be the subject of the subjective intentions of the co-owners, since these change periodically during the life of the building. It is difficult to establish the co-owners’ responsabilities and to meet their requirements individually, considering that their intention is often to minimize the contribution to the common expenses. Therefore, the directors cannot be suvjected to the individual intentions of the co-owners because this would lead to a deadlock.

Should a general meeting of co-owners divert the syndicate from its mission, it’s up to the general meeting to elect directors who will accept to be held personally responsible in this sense.

However, pending a ferm jurisprudence from the Court(9), if a declaration of co-ownership provides that formal approval of its budget by the general meeting of co-owners is required, the board of directors of the syndicate should continue to have them approved, as a precautionary measure.

The amount to be accumulated by the syndicate in the contingency fund must be 5% of the annual budget.

FALSE. This is another myth often heard in the corridors of condominiums. It is wrong to believe that a syndicate of co-ownership will need for its contigency fund not more than 5% of the annual contributions to meet its legal requirements.

This percentage is in fact the minimum required. Depending on the type of building and on the expected major repairs and replacements of common elements, the contribution to the contingency fund could conceivably be even more important than the contribution of co-owners for common expenses arising from the co-ownership and operation of the building.

THE OBLIGATIONS OF THE SYNDICATE

Since its establishment, the syndicate has the duty(10) to establish and accumulate in a proportional increase with the wear of the components of common areas of the condominium, a contingency fund earmarked solely for major repair and for replacement costs. The sums of the contingency fund should be liquid and available short-term.

In determining the contribution of co-owners to the contingency fund, the Civil Code of Québec provides that the co-owners’ respective rights on the common portions for restricted use may be taken into account. But this last option is very dangerous because of the difficulty to establish it.

Given the foregoing, the establishment of a contingency fund should be done attentively. As the elements of the common parts of a condominium are useful for a particular amount of time, after which they will no longer be functional and should be replaced, the establishment of a contingency fund should be assigned to the joint intervention of experts from both the construction and management fields. It would also be wise for the syndicate to keep in the register a maintenance book, prepared by such experts, evaluating the overall intrinsic lifetime of each of these elements of the common portions.

The establishment of a provident fund is not anecdotal. It should not be subject to the whims or subjective priorities or be constrained by budgetary considerations of the syndicate and / or the co-owners. A director who does otherwise can be sued for not having performed in a prudent and diligent way.

Like in the fable of the grasshopper and the ant, in divided co-ownership, it is not permissible to sing all summer without worrying about the obligations relating to the contingency fund. For the wind came, the payment must be made, with interest … If it is not too late.

The information provided on this page is general in nature and cannot compensate for the need to obtain legal advice specific to a particular situation.

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(1) Article 1071 of the Civil Code of Québec.

(2) Article 1043 of the Civil Code of Québec.

(3) According to article 1044 of the Civil Code of Québec, the following are presumed to be common portions: the ground, yards, verandas or balconies, parks and gardens, access ways, stairways and elevators, passageways and halls, common service areas, parking and storage areas, basements, foundations and main walls of buildings, and common equipment and apparatus, such as the central heating and air-conditioning systems and the piping and wiring, including what crosses private portions.

(4) See particularly articles 321, 322, 335, 337, 1039 and 1077 of the Civil Code of Québec.

(5) Article 1072 of the Civil Code of Québec.

(6) Marsolais c. 906 Saint-Louis (Syndicat de la copropriété), C.S. Terrebonne, 700-17-003241-063, j. Benoît Emery (motion to dismiss granted).

(7) See particularly: Syndicat de la copropriété 4478 Laval c. Hurtubise, B.E. 2002-545(C.Q.), Gagnon, C., La copropriété divise, Cowansville, Les Éditions Yvon Blais Inc., 2007, pages 367 to 369, R. Comtois, Le droit de la copropriété selon le Code civil du Québec, (1994) 96 R. du N., pages 446-447.

(8) Article 337 of the Civil Code of Québec.

(9) Article 985 of the Civil Code of Québec.

(10) Articles 1071 and 1072 of the Civil Code of Québec.

Mise à jour le Samedi, 16 Août 2014 17:45

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ABOUT FISET LÉGAL

FISET LÉGAL inc. is a law firm located in Montreal and specialized in real estate and in commercial litigation. We are especially active in Condominium Law and in Construction Law.

We represent many syndicates of co-ownership and many co-owners located in Montreal and its surroundings. We provide legal advising to our clients and their property managers in the fields of Real Estate Law, Condominium Law and Commercial Litigation.

Our Law firm is able to intervene in complex files as well as in simpler files. We adapt the solutions offered and our services depending on the nature and complexity of the case.

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  1175 Bernard Ouest, Office 301
Outremont, QC H2V 1V5

  514-277-1175
  514-277-1172

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