Sinking & Reserve Funds – What Are They?

Purpose:

The purpose of a sinking fund is to allow for a gradual collection of substantial funds for cyclical works, such as the external and/or internal decorations of a building or estate, as dictated in the lease.

Generally, these large expenditure items are required every few years, as stipulated in your lease or as and when required. The costs of these works is typically above the Section 20 Major Works threshold and is quite costly, certainly above and beyond funds collected for day-to-day management.

The fund is build up over time and kept at certain levels in order to make it fair for all leaseholders so that when an item of works is to be funded, everyone has paid their fair share and the burden does not fall to those current leaseholders to foot the entire bill.

Physical Holding:

The sinking fund is typically held in a separately designated bank account, which allows for the funds to be ring-fenced as a client account. These funds are held in Section 42a trust accounts but at the moment do not generate any interest due to current low interest rates.

How Is It Collected?

Generally, the reserve fund is set in your budget and twice a year we make a transfer of that half of the fund, once everyone has paid their service charge, into your separate sinking fund bank account.

Can You Take Your Contribution Back Out?

Once contributions are made they cannot be taken out by any outgoing leaseholder. It is sometimes frustrating for leaseholders who are selling who have made substantial contributions over the years but those funds belong to the estate and/or management company in trust. Hopefully the healthy balances in those accounts will be a testament to the efficient management of the estate which in turn will help your property sell for the maximum value.

Accounts Surplus, Deficits & Sinking Funds:

You can keep track of your sinking fund balance on your annual accounts but you can always call us and we would be happy to confirm the balance, after all the funds are held on your behalf.

In your service charge accounts, every year there will be a bottom line figure as to whether the building required a spend more or less than the funds collected in the budget. If there is a deficit, i.e. the service charge is in effect overdrawn, sometimes your lease allows this to be funded from the reserve.

Equally if there is a surplus, the lease will dictate if this surplus can be transferred to your sinking fund as an extra boost to the balance. That decision will be down to your landlord or Directors and is usually taken bearing in mind likely future spends. This is agreed at your AGM so if you are invited and wish to comment on this, please attend as this is your opportunity to be heard.

How Much Should Be In There?

The amount that should be in your reserve fund varies on building to building and the state of repair as well as what is stipulated in your lease, however as a general rule of thumb there should ideally be £1000 in there for every flat it applies to, in this case a block of 6 flats should ideally have £6000 for the cyclical works required.

What Can Be Funded From It?

The primary source for this is your lease, it should stipulate what can be funded from it. Some leases are quite simple and state anything can be funded whereas some specifically state exactly what works and when. If the definition is broad, then the decision is taken by your landlord or Directors. Above all, any funds spend have to be properly incurred and reasonable.

Can We Have A Sinking Fund?

This will be specifically set down in your lease and there are a large number of sites where reserve funds are not allowed or not mentioned. If it is not mentioned in your lease then you are strictly not allowed one however if it allows for a surplus in your accounts to be held over from year-to-year this could be a useful tool as long as the lease does not require surplus funds to be credited to leaseholders.

If you want to be allowed to collect into a reserve but have no way to do this, you can apply to the First Tier Tribunal via a simple application form and as long as no leaseholders object, it is usually given as the FTT see reserve funds as a very useful and fair tool. We can help you with the application and oversee this is we are instructed on your block and this is required.

Conclusion:

We hope that this has been informative but if you are an existing or prospective client and require more specialist advice on your particular circumstances, please Contact Us and we would be delighted to help