An important aspect of the insurance of a divided co-ownership is the fact that the legislator has seen fit to entrust a third party with managing the reconstruction of the building, and the indemnity paid by the insurer of the syndicate in the event of a major disaster.
Indeed, Section 1075 of the Civil Code of Québec provides that:
“1075. The indemnity owing to the syndicate following a substantial loss is, notwithstanding article 2494, paid to the trustee appointed in the act constituting the co-ownership or, where none has been appointed, designated by the syndicate. The indemnity shall be used to repair or rebuild the immovable, unless the syndicate decides to terminate the co-ownership, in which case the trustee, after determining each co-owner's share of the indemnity according to the relative value of his fraction, pays the prior and hypothecary creditors out of that share according to the rules in article 2497. For each of the co-owners, he remits the balance of the indemnity to the liquidator of the syndicate with his report.”
It is here an exception to the general scheme of insurance law under the Civil Code of Québec, which provides in Section 2494 of the C.c.Q. that the insurer, subject to the rights of priority creditors and mortgagees, reserves the right to repair, rebuild or replace the insured property.
So, in case of a major disaster affecting a building in divided co-ownership, the ability to repair, rebuild or replace the insured property is entrusted to the insurance trustee named in the constitution of the deed of co-ownership, or by default designated by the syndicate.
The obligation to have an insurance trustee is meant to protect the interests of the co-owners and those of their mortgagees who have an interest that the building be repaired or rebuilt in the event of a major disaster, or of its total loss. The duty of the trustee is to manage well the compensation paid by the insurer, which must be used for the repair or reconstruction of the building, unless the co-owners by a decision of the general meeting of co-owners decide to put an end to the co-ownership. In the absence of such a decision, the syndicate, through the insurance trustee, must repair or rebuild the building as appropriate.
The decision to terminate the co-ownership is described as extraordinary and should be taken according to the special double majority laid down in Section 1108 of the C.c.Q, that is to say, by a majority in number of three-quarters of the joint owners of the building representing a minimum of 90% of the votes of all the co-owners of the building. In this case, the trustee will determine the share of compensation of each co-owner according to the relative value of his fraction, and will pay, on this share, the priority creditors and mortgagees according to the requirements of the law 1. Priority creditors or mortgagees have claims, the title of which gives them a direct claim against a fraction of the co-ownership, and it should be understood that once this fraction is damaged or completely destroyed, these creditors see their warranty diminished or destroyed.
If there is a balance of compensation, the trustee shall deliver it to the syndicate with his report on the management of the compensation.
If the co-owners do not decide to terminate the co-ownership following section 1108 of the C.c.Q., the trustee must ensure that the compensation paid by the insurer is only meant for the repair or reconstruction of the building.
The trustee shall pay the cost of the materials and labour required for the work. The trustee releases the payments following the written instructions of the board of directors of the syndicate, which must obtain written certification of an architect, engineer or a professional technologist certifying the performance of the works and that these are in conformity.
It is essential to conduct this procedure to avoid two potential problems, or a contractor is paid when the work is completed, only partially or in a non-compliant manner, or a payment is issued to the wrong contractor, because the insurer will not pay a second time if there is an error in the payment of funds.
The trustee will require from the contractor a release in favour of the syndicate of co-ownership up to the amount paid. In the case of a full or partial payment, the trustee will require the contractor to sign a full or partial waiver of the right to register a legal construction hypothec on the fractions of the building for the added-value made to the building by the work done and the materials supplied.
The trustee named in the deed of co-ownership
In some cases, the trustee is appointed in advance in the deed of co-ownership. However, we note that the trust companies so named and that offered this kind of service are no longer active in this area. If the trustee named in the deed of co-ownership is no longer active in the area, the syndicate of co-ownership may designate one by a decision of the Board of Directors, unless the deed of co-ownership provides the authority of this to the co-ownership’s general assembly. In any case, the syndicate must enter into a contract explaining the mandate of the trustee, his powers and duties, and the terms of his remuneration.
The natural or legal persons authorized to act as trustee are the financial institutions, other than a bank, with operations of “trust”, as well as notaries and lawyers.
In all cases, make sure that the trustee holds a professional insurance covering errors and omissions that he may commit in exercising his mandate.
If in doubt, do not hesitate to contact our team of lawyers specializing in the field, and real-estate law in general.