Reserve & Sinking Funds

You will most likely notice, from your service charge estimate, that every year you are contributing towards a reserve fund or a sinking fund. But do you have any idea what these are used for? Why you are being asked to pay into them? And what the difference between them is? Well here is a basic introduction.

If you are being charged for this then this is most likely good news.When used properly both of these types of funds are very useful and effective block management tools. However they should only ever be used when a lease or transfer allows for such funds to be collected. Some of your legal documentation may state quite clearly “Reserve Fund” or “Sinking Fund”; some however may be slightly more cryptic. If in doubt ask your
property manager to highlight the specific section for you.

There is a clear difference between these two types of funds. A reserve fund is a fund which collects regular sums of money to meet recurring expenditure. The most common example of this would be redecoration to common parts such as painting. A sinking fund provides for expenditure which is much more infrequent and may only happen a couple of times throughout the term of a lease. This could be for an item such as lift replacement. Asking service charge payers to contribute to these funds on a yearly basis helps to ensure that funds will be available when the works are necessary. It is also a much fairer way of collecting the money rather than asking for a large one off payment when the works are due.

A good landlord or agent will have obtained a cyclical maintenance report to determine the level of reserve fund or sinking fund to charge each year. This means they have asked a qualified surveyor to identify the parts of your development that will need replacing over a certain timescale and most importantly how much it will cost. Without undertaking this exercise it is likely that the amounts you are being charge for are plucked out of thin air and therefore may not be adequate or you may even be paying too much.

If you do not pay into funds like these, but you quite clearly have communal areas, it would be worth asking your property manager or landlord why?  You may also want to be wary of agents who offer to save you money on your yearly service charge as they may just cut out the reserve fund. Most importantly when you buy a property with private communal areas make sure your solicitor enquires about these funds. The last thing you want is a large bill as soon as you move in.

If your lease does not allow for the collection of these funds it may be worth applying to the LVT for a lease variation. Discuss this possibility with you property manager and/or a solicitor.