Large properties can fall into disrepair without maintenance.
This applies to both residential and commercial buildings.
A sinking fund is useful for keeping everyone in a property safe.
What is a sinking fund?
A sinking fund is a financial reserve for the potential use on on rare, unforeseen maintenance-related projects.
This is why it’s often used interchangeably with ‘emergency fund’ or ‘reserve fund’.
These often mean the same thing, but not always. Each person has a different definition, so double-check to avoid confusion.
Sinking funds are commonly seen in leasehold properties. Especially when all leaseholders contribute to the fund (i.e., where each holds a share of freehold).
Sinking funds and service charges
In many cases, service charge fees will cover sinking fund contributions.
But not always.
You should double-check your lease agreement to be sure. Sinking fund contributions are usually paid annually by leaseholders.
Property owners can create a sinking fund – not just leaseholders. You may designate one for yourself, even living in a detached property alone.
And commercial premises may demand this from companies renting their offices.
Your lease agreement should outline everything, including how much you contribute per year and what the money will be used for.
Expenses sinking funds are typically used for
1. Foundations
Fixing the foundations of a building is one of the most common examples.
This is an expensive task due to the complications involved with a high-rise property.
It can take several weeks, even when carried out by qualified experts.
2. Roofs
The sinking fund often covers problems with the building’s roof.
This may involve a hole in the roof or an ongoing leak. This could also apply to fixing gutters or solar panels or even damage caused by lightning.
3. Lifts
Accessibility is of utmost importance for lots of people across the UK.
A lift could be the only way to reach higher levels in a residential or commercial lobby.
When this breaks down, the sinking fund will help fix the situation.
4. Doors and windows
The sinking fund may cover doors and windows.
Especially if they pose a security risk, unfriendly visitors could break in.
When all the doors and/or windows on the property are the same, one detected issue could imply multiple occurrences.
5. Carpark barriers
Carpark barriers can be expensive to fix. Automatic ones may cost between £2 – 3,000 on average.
Leaving them unfixed can put the cars in the carpark at risk of theft. Or put the carpark itself at risk of unwelcome visitors!
What is a sinking fund not allowed to be used for?
This varies on a case-by-case basis. Your written agreement should outline the rules. Usually, it only applies to one-off expenses.
Improperly using a sinking fund is referred to as misappropriation of funds. Leaseholders contributing to the funds can take legal action on this.
Can I be forced to contribute to a sinking fund?
When you sign a lease agreement, you agree to the terms of that contract.
This applies to both residential and commercial properties.
If your lease states that you must contribute to a sinking fund, and you’ve signed it, then you must do so.
Your freeholder could take action if you don’t. Or, you could try to move out as soon as possible.
If you’re unsure whether your lease states this, get advice from a solicitor.
