All about sinking funds
Sinking funds. What are they and what do they mean for our leaseholders? Take a look at our answers to some common questions - from how they differ to a service charge, how we calculate them and what the money can be used for.
Our answers to your commonly asked questions
Up until now we have sent an invoice for the cost of all major works to leaseholders at the time the works have been completed.
A sinking fund is an amount of money which is set aside to cover any major work which is needed in the future. Such funds are quite common with leasehold properties.
Landlords are responsible for the structure of the building and all communal areas, including car parks and communal boundary walls/fencing. It is good practice for landlords to prepare and regularly update planned maintenance and capital expenditure plans.
Service charges relate to the services the block receives throughout the year. E.g. communal lighting, grass cutting, buildings insurance, minor repairs etc.
The sinking fund contributions (for major works) are not used to subsidise day to day service charge expenditure such as communal services or minor repairs.
Major works would typically be component replacement and structural works such as roofs, boundary walls and pathways where the existing component is removed and replaced with new. Cyclical decoration of properties and brickwork repointing works would also be included in this category.
Day to day (minor) repairs are generally unforeseen and do not usually result in a full replacement of that component.
This will vary block to block and will be dependent upon when your block's components are due for renewal and the expected replacement cost.
By components, we are referring to things like roof, boundary walls, paths and communal redecoration. This list is not exhaustive. Each block is different and as such will be made up of different components.
An annual statement will be sent detailing the movements on your sinking fund. Movements will include contributions into the sinking fund, accrued interest, and any expenditure from the sinking fund.
Yes. We will continue to consult with you in relation to all major works, the costs and the contractors used to carry out these works.
It should have been done historically and the new executive team at the Trust think it is the right thing to do.
It will enable leaseholders to better manage the costs related to homeownership by spreading the cost of any major works.
No. There are no issues with the cladding on the Trust's high-rise buildings.
It is important that you speak to us as soon as you think you'll struggle to pay. We're here to help. The Trust will discuss payment plans if required.
These are managed by the Asset Team. Most of the major works carried out will go through a consultation process. This consultation process is more commonly known as 'Section 20' and has two or sometimes three stages.
The first stage is a 'Notice of Intention' and the second stage is 'Notification of Estimates' obtained by the Trust. The third stage, where applicable, is the notification of award of contract. Leaseholders are invited to make 'observations' as part of the major works consultation.
On occasion, major works can become urgent and where it is not possible to wait for a full consultation, the Trust may apply to the First Tier Tribunal for a dispensation from the need to consult.
Your lease may refer to a 'reserve' fund, which is another name for a sinking fund.
In order to work out the contributions required, we:
- Look at each block/scheme and list the components.
- Identify the replacement cost and lifespan of each component.
- Each component is then costed, divided by the number of years to replacement and divided by the number of units in the block/scheme.
An illustrative example of a component replacement calculation:
- Roof is measured to be 120sq. metres.
- Current replacement cost of roof is £100 per sq. metre.
- Therefore, total cost to replace roof is £12,000.
- Roof needs to be replaced 10 years from now.
- Therefore, total contribution per year for roof is £1,200.
- There are 6 properties in the block, therefore the roof contribution per property per year is £200.
Whilst we aim to be as accurate as possible when calculating sinking fund contributions, the amounts are only ever an estimate.
When the survey is carried out, we estimate the year in which each component will need to be replaced. There is always the risk that a component may need replacing sooner than expected or indeed it may last longer than expected. The intention is not to 'ring fence' funds to each component.
The cost of each component is taken from industry recognised schedule of rates. The schedule of rates are accurate at the time the sinking fund is calculated, however there are no guarantees the price of materials/labour will remain the same.
If the sinking fund contributions are underestimated, leaseholders may still be required to make additional one-off payments if sufficient funds have not been saved at the time the works are required.
If the sinking fund contributions have been overestimated, future contributions will be lower. The Trust is committed to revising the sinking fund contributions every 5 years or sooner if needed.
The sinking fund contributions are held in a separate bank account to the service charge monies, in compliance with section 42 of the Landlord and Tenant Act 1987. This bank account is interest bearing and this interest will be added to the sinking fund balance every year.
The sinking fund is attached to the property and not the person. This way, the cost is spread amongst all leaseholders who have benefited from using the building and not met solely by one person who happens to own the lease at the time the works are being undertaken.
As a responsible landlord, we must not artificially lower current leaseholder contributions at the detriment of future leaseholders.
A buyer's solicitor will make enquiries about the adequacy and balance of the sinking fund. A sinking fund can improve the saleability of a property as the burden on the buyer is reduced.
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