The sinking fund is money that is put aside every year from the service charges budget to cover the cost of major long-term expenses. While the service charges budget is generally used to fund the costs of the day to day maintenance of the common areas, a portion of the budget should also be set aside to cater for periodical or long term structural repairs. Before you buy, you should enquire from the estate agent or your solicitor if a sinking fund is in place/planned for the development.

What do sinking funds cover?
As regards the fundamental items that management companies should consider as part of their sinking fund calculations, it is difficult to be precise or definitive on the key elements required. This is largely because factors such as the management company/surveyors views, building age & condition, usage, location, type of materials used will vary significantly from development to development. Amongst some of the most common areas a sinking fund may cover are repair, refurbishment or replacement of: Building structure; Windows and walls; Roof and roof finishes; Internal partitions; Floor structure; Internal and External Decoration; Plumbing and Water services; Heating and Ventilating; Lifts and Escalators; Mechanical and Electrical Services and infrastructure.

Why should a sinking fund be established?
If no sinking fund is established, or, the level at which it is set is too low, the costs of any major refurbishment or repair work may have to be added to the annual service charge and may represent a very large once off payment for all owners. It is in all owners’ interests to have regard to the importance of a sinking fund. A well financed management company with a sufficient sinking fund should ensure that the development is well maintained and represents an attractive prospect to any potential purchaser.

How should a sinking fund be calculated?
The management company should obtain professional advice on the necessary sinking fund contribution each year. A member of an appropriate suitably qualified professional body, e.g. an architect or a chartered surveyor, should estimate the sinking fund. While the managing agent may assist in arranging consultation services with a professional to undertake a sinking fund estimate, unless they are qualified as a relevant construction professional, they will not be in a position to estimate the sinking fund level.

Where should sinking fund monies be held?
The sinking fund contribution is generally paid by owners as part of their service charge fee . While there are no specific rules regarding a company’s banking operations, it is considered good practice for the directors to open and operate separate bank accounts for the service charges (current account) and the sinking fund (interest bearing account). These accounts should be operated in the name of the management company.