What is a property sinking fund?
It is simply a fund contributed to by those living in an apartment building or leasehold property to cover large, one-off future expenses.
If you own a leasehold property you may have to contribute to a property sinking fund. The funds accumulated are used to undertake any major work required on the property in the future. For example, if the foundations of your apartment building require repair, capital from the sinking fund can cover the costs.
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What is the difference between a leasehold sinking fund and a service charge?
The funds accumulated through a service charge are used to cover common, ongoing maintenance and repairs. For example, if damage occurs to a stairwell bannister, money from the service charge can be used to cover the cost of the repair.
In contrast, a sinking fund, however, ensures there is sufficient capital to cover major works in the future, for example, the replacement of the entire stairwell.
How is a sinking fund calculated?
When the initial building work on the property that houses your flat was completed, the builder may have passed on a schedule which sets out when certain parts of the structure will need to be repaired or replaced and approximate costs.
The management company will take these figures and add on a percentage for inflation (all these figures should be transparent). They will then be able to calculate how much each leaseholder needs to pay into the fund to ensure future works undertaken can be paid for. The relevant figures will be included in your lease agreement.
Some sinking funds require a lump sum to be paid from the proceeds when you sell your property others will require a monthly payment to be made. Again, this will be set out in your lease agreement.
What are the pros and cons of leasehold property sinking funds?
The benefits of a sinking fund are as follows:
· Current leaseholders do not have to bear the entire cost of large repair work. Previous owners of leasehold flats would have contributed equally to the fund.
· There is capital immediately available to pay for significant repairs such as replacing the building’s roof or major drainage works.
· Leasehold properties with a sinking fund are generally easier to sell.
The disadvantages of a sinking fund include:
· Contributing to the sinking fund increases the annual running costs of the flat.
· It can be difficult to get the funds released if they are not used.
· Disputes can arise between leaseholders and landlords/managing agents regarding how the funds are used and/or calculated.
Are my contributions to a sinking fund refundable if I sell my flat?
Unless it states otherwise in your lease agreement, the money you put into a sinking fund is not generally refundable. This is because having a this particular type of block management fund aims to ensure past leaseholders who have enjoyed the benefits of the building contribute to its future maintenance.
Major works will be scheduled by the management company/landlord and this schedule will be based on the information passed on from the original builders. If it turns out that scheduled work does not need to be carried out, the money set aside for it is likely to remain in the sinking fund to accumulate. After all, the work will need doing at some stage.
Is it compulsory to contribute to a sinking fund?
It depends on what your lease agreement says. If it states that contributing to a sinking fund is compulsory for all leaseholders you will either have to participate or rethink whether or not you wish to purchase the flat. Remember, having a sinking fund in place will make your property easier to sell and help retain its value so there are positives to contributing to such a fund.
Can I challenge the amount I have to pay into the sinking fund?
If you are unhappy with the amount being charged in terms of sinking fund contributions or how the money is spent, the first thing to do is contact the management company/landlord. They can appoint an independent surveyor to assess the sinking fund charge and consider any evidence you have.
If you and the landlord cannot reach an agreement, you may be able to apply to the First-Tier Tribunal (Property Chamber), which handles property disputes, to resolve the matter. You will need to instruct a solicitor to advise and represent you.
Our Solicitors regularly handle disputes between leaseholders and freeholders and Property Tribunal cases.
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Where are the funds held?
A sinking fund should be held in a trust account. To comply with section 42 of the Landlord and Tenant Act 1987 sinking fund levies should be held in a separate bank account from the service charge monies.
Can property sinking funds apply to both commercial and residential property?
Is there a difference between a reserve fund and a sinking fund?
Yes. As part of any service charge, a management company/freeholder may choose to collect additional funds to place in a reserve fund. This fund is allowed to accrue over two to three years to ensure it covers any shortfall in works covered by service charges.
The amount of money placed in a reserve fund must be reasonable and similar to service charges, the payment amount can be challenged if leaseholders deem it to be unfair or the funds are being mismanaged.
Does the managing agent/landlord have to notify leaseholders of major works?
Under section 20 of the Landlord and Tenant Act 1985, freeholders must consult with leaseholders if works that will cost more than £250 need to be undertaken. If leaseholders are not consulted in the manner set out under section 20, the cost of the works can be capped at £250 per leaseholder regardless of how much the freeholder has to pay.
What happens if a sinking fund is insufficient to cover particular works?
If there is not enough capital in the sinking fund to cover certain works, the reserve fund will be used to make up the shortfall.