Sinking funds - Here is everything you should know about it

Posted 14 August 2017 by Helen Christie

What is a sinking fund and how does it work? All your questions about sinking funds answered by an expert...

Sinking funds may not be something you’ve had to consider before, but when you live in a leasehold property you may be required to pay into a sinking fund through set monthly charges.

WhatHouse? has spoken to experts, including Mike Carter, head of conveyancing at Paul Crowley & Co, and put together a guide of everything you need to know about sinking funds.

What is a sinking fund?

By definition, a sinking fund is a long-term savings account which ensures that there is capital set aside to cover one-off expenses in the future.

Having a sinking fund in place is not only essential to the upkeep of your home, but also maintains the value and saleability of the property.

Why is a sinking fund needed?

A sinking fund is put in place to cover the cost of repairs, renewals and replacements, from the upkeep of fencing to the replacement of roofs. 

For example, if a tile were to fall off the roof the service charge would cover the cost of repairing the tile, whereas the sinking fund would cover the cost of replacing the entire roof when the time comes.

Having a fund in place ensures that the cost of major but infrequent repairs are paid for equally by all generations of residents, rather than leaving large expenses to be footed by future occupants. This means that you will avoid having to pay large bills when work does need to be carried out, as there will already be funds in place.

The fund will also help to maintain the value of your home, as future resident’s solicitors will be sure to check the adequacy of the sinking fund before buying.

How is the amount I will be charged calculated?

When the property is first built your housing provider will receive a list of costings from the builder, with expectancies of when certain areas of the build (i.e. windows, roofs and fire safety systems) will need to be updated.

Your housing provider will then be able to create a schedule for works, complete with estimated costings which will be used to calculate how much you need to pay into the fund each month.

This figure will be stipulated in your lease agreement and your solicitor should advise you on this when you first purchase your home. Your housing provider will be able to assist you with any questions that your solicitor might have about the sinking fund.

What if I think the monthly payment rates are too high?

If you are unhappy with the level of contribution required, you can contact your housing provider. They will then instruct an independent surveyor to reassess the charges, which would be considered alongside supporting evidence from yourself. If the costs of any intended work are more than £250 per property, with such costs being shared with other co-owners, then you should be consulted by the housing provider before the work is undertaken. If no agreement can be reached, you may be able to apply to the First-Tier Tribunal (Property Chamber), who handle property disputes, to resolve the problem.

What happens if no major works are needed when scheduled?

Before any major repairs or renewals are undertaken a surveyor will be instructed to assess the property and determine whether any work is needed at that time. In the case that no action is required another survey will be scheduled for the following year.

The capital in the sinking fund will be carried over and used as and when repairs are needed.

Can I take my sinking fund with me when I move?

If you decide to sell your property, the money you paid into the sinking fund will be retained as capital to cover any repairs which have resulted from general wear and tear while you were in residence at the property.  

This ensures that future residents will avoid having to foot large bills for works which are required as the result of wear and tear over time. It should also make your property a more attractive proposition to a potential buyer and help in retaining the value of your home.

What is the difference between a reserve fund and a sinking fund?

If drafted correctly, residential flat leases will contain a provision for each flat owner to pay a service charge to the landlord or management company. As part of the service charge payments, the landlord may also collect some additional funds to put into a reserve account.

A reserve fund is usually built up over a short period of time of two or three years, to an amount the landlord believes is needed to cover any unexpected shortfall.  No one likes the idea of being hit with a large bill they cannot afford. Leases sometimes say how much is to be contributed each year, but usually they do not and it is left to the landlord to determine the contributions.

However, they must be reasonable and just and just like the service charges payments, the flat owners have the same rights to challenge these charges, if they believe they are unreasonable.

Some leases also stipulate flat owners are to make a contribution(s) to a sinking fund. The sinking fund is designed to build up monies to cover future major works and repairs.

What are the key advantages and disadvantages of a sinking fund?

The important difference between a sinking fund and the reserve fund is that monies in the sinking fund are generally used to cover specific costs which might only occur once or twice during the length of the lease term such as replacement of lifts or the roof. Often in leases, the contribution to the sinking fund is made on the sale of a flat by the outgoing owner. The contribution to the sinking fund is normally a percentage of the sale price.

It may be seen as a disadvantage to make this contribution when you are actually selling the flat as you will not have any benefit of the payment. On the other hand, your buyer will hopefully be reassured by the fact that is a healthy sinking fund that can be used for major expenditure to protect them against high unanticipated contributions.

The landlord should place sinking funds in a trust account. The sinking fund should be held in a separate bank account to the service charge monies to comply with section 42 of the Landlord and Tenant Act, 1987.

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