Divided Co-Ownerships and the contingency fund, a guide to understanding!

To understand what a contingency fund is, you must first understand what a divided co-ownership actually means and stands for. The most important thing to know about co-ownerships is that there are two types. The first type of co-ownership is Divided co-ownership which is the most popular and common type of “condo”, and the second is an Undivided co-ownership which is less popular, and sometimes even frowned upon by financial institutions. For what concerns the contingency fund, it only truly applies to a divided co-ownership, so that is what we will focus on today!

The divided co-ownership simply means that each “co-owner” owns a certain percentage of the building (the percentage is dictated by the size/portion of their respective private unit) and they are responsible for their private portion as well as a fixed percentage of the total building expenditures. Think of it this way, if a condo building has eight units, all of the exact same size and divisions, meaning the percentage of ownership is divided equally amongst all eight co-owners, then their respective ownership should be 12.5% each. This means that all owners are responsible for their private units, as well as 12.5% of the total building. Now that we understand co-ownership and how it is divided amongst owners, we can move on to more important things.

In Quebec, since 1994 all divided co-ownerships are obliged to have a contingency fund, otherwise known as a reserve fund. The government obliged this to alleviate any legal issues seeing as not every co-owner can be expected to pay emergency repairs quickly all the time. The contingency fund is essentially a way to solve this issue, it is a bank account within the co-ownership (think of it as a savings account) and it is managed by the syndicate of co-owners or the management company that takes care of the building. It is used to manage and maintain the building in the short, medium and long term to finance the realization of renovations and major construction works that might need to be done within the common areas of a condo building.
The contingency fund is normally a cash savings account that is available immediately if need be, and a portion of it (if large enough) can be asset management to gain capital for the building, however there should be no risk and returns should be guaranteed. The contingency fund is used as a way to avoid special assessments in the building.
Normally, every condo unit has condo fees associated with it, and these fees are essentially a percentage of the total building expenditures (cleaning, landscaping, snow removal, building insurance etc.) as well as a certain portion that is dedicated to filling up the contingency fund. Now important to remember if you are thinking of buying a condo, whatever amount you put into the contingency fund over the years, even though not used by you or the building, is not returned to you at the time of your sale. This amount goes into the account and is attached to the unit and its contribution percentage, and does not follow the owner.
In order to determine what the contingency fund is used for, Condo buildings usually have an annual meeting where all co-owners discuss concerns, renovations needed and issues that must be resolved, it is during this meeting that the budget allocation for the coming year is proposed and all necessary repairs are to be accounted for. This can be an eventful meeting as not all co-owners always see eye-to-eye on how the money should be spent.
In order to make sure buildings in Quebec stay in good shape, the government introduced Bill 16 in 2020, which obliged buildings to perform a Contingency fund study every 5 years in order to forecast for upcoming repairs, and provide a budget for the building to follow in terms of how much they should collect and invest into their contingency fund. In some cases, this has significantly increased the amount of co-ownership (condo fee’s) fee’s that co-owners pay in Quebec, making the purchase of a condo sometimes less attractive to prospective buyers.
Now that you know what type of co-ownership uses contingency funds, what they stand for and how they work, we hope that this can help you make an educated decision when shopping for a condo! Remember, Groupe Baronello is always here if you need them!