Sinking Fund For Leasehold Property

When it comes to leasehold properties, you may have heard of a fee called the "Sinking Fund." This fund receives contributions from all leaseholders, but what exactly is the sinking fund for leasehold property?

In this insight, we will cover what you need to know about your sinking fund.

Key Takeaways

• The Sinking Fund for leasehold property is a financial safety net to cover significant future repairs and maintenance. It is funded by contributions from all leaseholders through the service charge and is held in Trust, separate from the property management company's ownership.
• A fixed percentage of the service charge is set aside for the sinking fund and deposited into an interest-bearing account. The accrued interest adds to the fund, allowing it to grow over time and provide a larger cushion for future property-related expenses.
• The sinking fund contribution is not refundable. Each leaseholder contributes on a pro-rata basis, depending on their tenure as a leaseholder. If a lease is sold, the new owner will continue contributing but won't receive any money back.
• The primary benefit of the sinking fund is that it allows for planned expenses, avoiding unexpected financial burdens. Leasehold properties with a sinking fund may also be more attractive to buyers. However, contributing to the fund can increase annual costs, and disputes over its usage and management may arise. In case of disagreements, leaseholders can seek resolution through the residential property tribunal.

What is a Sinking Fund for Leasehold Property?

A Sinking Fund for leasehold property is a financial safety net that ensures there is always money available to keep the property in the best condition. Should any significant work be needed, this fund is collected within the service charge, often included in leasehold property agreements and can be used for repairs.

The Sinking Fund is like a special bank account for future repairs in a property. Every leaseholder contributes to it through their fees. The money is saved separately, not controlled by the property management company. It's there to pay for big repairs when needed later on.

How Does a Sinking Fund for Leasehold Property Work?

The Sinking Fund works simply like this: Every time you pay your fees, a certain amount is put aside for the fund. This money goes into a special account that earns extra money over time (interest). The interest is also added to the fund, making it grow bigger. So, when there are big expenses for the property later on, there's enough money in the fund to cover them.

Do You Get Your Sinking Fund Contribution Back?

The sinking fund contribution is not refundable, it is an ongoing contribution made by all members on a pro-rata basis depending on how long they stay as leaseholders. If you sell your lease you stop contributing but do not get any money back

What Happens to The Sinking Fund?

The fate and purpose of the sinking fund depend on the leasehold property's management and the terms outlined in the lease agreement. Typically, the sinking fund is specifically designated for covering major repairs, maintenance, and capital expenditures related to the leasehold property.

The management of the sinking fund is usually overseen by a body or committee responsible for the leasehold property's upkeep. They carefully manage the funds, ensure they are used appropriately for the intended purposes, and keep a transparent record of all transactions related to the fund.

The sinking fund can be used to pay towards major repairs or replacing such things as:

• External doors, windows, roofs, guttering, walls
• External drains and plumbing systems
• Footpaths, parking areas, fencing, signboards
• Communal electrical systems, TV aerials, and lighting
• Door entry phone systems
• Communal carpets

If the fund is not used, it keeps earning interest and growing over time.

How Is The Sinking Fund Calculated?

The service management company of the property decide how much money should be saved in the sinking fund. They think about how much it might cost to replace things like the door entry system and how long it will last before needing repairs. Then, they figure out how much money is needed each year and divide that amongst all the residents. They also think about other common repairs like drainage, lighting, footpaths, and roads when calculating the amount. This way, everyone contributes a fair share to the sinking fund to cover future expenses.

Advantages of the Sinking Fund for Leasehold Property

The primary benefit of a sinking fund is that it allows for planned, rather than unexpected, expenses for repairs. This pre-planning can be a financial relief to leaseholders, who might otherwise be caught off-guard by a large, sudden expense.

Furthermore, leasehold properties with a sinking fund may be more appealing to potential buyers. This is because the existence of a sinking fund may alleviate the buyer's concerns about significant future expenses related to property maintenance.

Disadvantages of the Sinking Fund

On the flip side, contributing to a sinking fund can increase annual costs. If the property does not require significant repairs or replacements, the money in the sinking fund may be seen as being underutilised. There may also be difficulties in retrieving the money if it has been paid into the fund but remains unused.

Disputes over sinking funds may also arise, where leaseholders question the management costs charged by the Managing Agents or allege that the funds have been utilised for unnecessary expenses.

Disputing a Sinking Fund

If you are not happy about the amount you have been asked to pay towards a sinking fund, and cannot agree with the freeholder on a fair amount. You are able to apply to the residential property tribunal. The tribunal is made up of experts such as solicitors and surveyors who have the power to settle disagreements about services and service charges.

Final Thoughts

While the Sinking Fund for leasehold property has advantages and disadvantages, it can be a valuable tool for managing property maintenance and repairs costs. It provides a degree of financial predictability and planning, which can be particularly beneficial in the context of property ownership.