How much should be in a sinking fund?

MissCreative

Hello :hello:

My husband and I, and the owners of the other 3 flats in our building, now own the freehold with a management company we've created.
We've received all the money from the previous management company.

I was wondering if there is a law, or maybe there's usually a clause in leases, about how much there should be in the sinking fund?
Or is it just an agreement between the directors of the company?

I couldn't find anything online that specified an exact amount, or any calculation to do with the value of the building etc.

Thanks for any help

davidmcn

There doesn't need to be a sinking fund at all, so (in the absence of any specific agreement for your property) it's up to you.

Harryp_24

well, nothing. but beware if you need to change anything expensive. Just keep the fixed rate that you were paying before, get all services/cleaning done and put the rest into a pot. When something big needs doing youll have to invoice the others (and yourself) to make up any shortfall.

eddddy

MissCreative wrote: »

I was wondering if there is a law, or maybe there's usually a clause in leases, about how much there should be in the sinking fund?

It might say something in the lease. But if you all agree, you can ignore the lease. (But if one of the leaseholders insists on doing whatever the lease says, the others can't override them.)

MissCreative wrote: »

Or is it just an agreement between the directors of the company?

More accurately, it can be an agreement between all the leaseholders and the Freehold company.

(Are all the leaseholders also directors of the Freehold company? How are decisions made by the Freehold company? Do they need unanimous agreement, or is a 2 to 1 majority good enough?)


But bear in mind that a sinking fund is just like a 'joint savings account' for future maintenance etc. Each leaseholder could equally easily have their own individual savings account for future maintenance etc.

And then you don't have to worry about things like who's allowed to make online payments (and potentially 'steal') from the sinking fund.

Whilst you may not be too worried about your current joint freeholders making dodgy online payments - what if somebody sells their flat to a somebody who turns out to be a convicted fraudster?

G_M

Just to add that it's probably wise to take into account the age/condition of the property.

If you think it likely it will need a new roof in the next 5 - 10 years, or external painting with scaffolding etc, then it makes sense to build up a reserve.

But unless the leases specify something, no, there's no law.

moneyistooshorttomention

I must admit that, in your position, I wouldnt want there to be a sinking fund - as I'd fear I'd pay my money into the groups sinking fund and the person administering it would find a way to steal the groups money for themselves.

I suspect there isn't yet suitable legal coverage to safeguard peoples money when paid into a sinking fund.

3mph

The problem is the number of flats. Large purposes built ones have professional management companies with audits and comprehensive leases and clear explanation what happens. also with a large number of tenants costs of a big problem get diluted.

When it's just a house split up very few tenants so can't really afford all the formal arrangements but anything happens and each has a big share.

As a minimum it needs a clear legal agreement between everyone as to what happens and comprehensive insurance. Much easier now when it's just theoretical.

moneyistooshorttomention

Agreed - get it all clearly sorted out now. On the basis of every unit of housing has an equal say as to exactly what happens (1 vote per unit of housing - regardless of how many people live in that unit). Don't live any gaps for "awkward types" to try and say that they have more people in their unit of housing so they should have more of a say - that is NOT how things work. It's one vote per household - regardless of household size.

Work everything out in detail and based on equal partners. That way - if in the future a bossyboots moves into one of the units and tries to start issuing diktats about how things will be - it won't be possible - as it will all be laid down clearly and exactly in writing that everyone makes the decisions jointly.

Lay down formal provision for regular meetings and what is said at those meetings is what counts and the only thing that counts (say once a year?). "Chats over garden fence" don't count.

AlexMac

Wow; the three "self-managed" little blocks I've owned a leasehold flat in (of 6, 13 and 6 flats respectively) have all had a sinking fund and not only has on-one ever stolen from it, but I'd never even considered that risk. In fact I managed / manage the funds as DIY treasurer in a past and current shared freehold and never even considered heading for the pub. Bookies, or Las Vegas with the fund. Maybe I'm missing a trick here?

Anyway, returning to the Q, there's no "rule" and in none of our 3 blocks did our leases prescribe a sinking fund. They did helpfully suggest the varying % split of common costs to a formula based on differences in floorspace or rateable value, except in the one where costs were shared equally as all flats 6 were the same. But in each case we agreed a fund made sense, and set the annual (or monthly) service charge at a level which produced a surplus after insurances and other routine payments.

So, as we had past experience of recurrent costs like external decorations every 5-7 years, we aimed to anticipate and cover these from surpluses built up in advance, rather than waiting till the need for expenditure cropped up. If there was a bigger bill than the kitty would cover, we leveid a shared one-off extra service charge (we all coughed up £200 per flat last year for some unexpected gutter replacement as there wasn't quite enough for this and the scheduled external decorations).

This seems fair, as you'd feel sore if someone owned a flat for, say, five or six cost-free years, then they sold it to you and you copped a big bill for a new roof a year later? And when buying a leasehold flat I (or my solicitor) always ask detailed Qs about accounts, service charges, scheduled repairs or planned maintenence and who decides on this; and I'd walk away if that was fudged or unaccountable, whereas a well-managed shared freehold would my ideal.

The problem might occur that other leaseholders might not agree, in which case ... Tea and Cake... (with acknowledgements to G_M)

G_M

Just to add again, that I took it as read that there'd be a formal agreement eg a registered company with each flat owning a share (and hence a vote), with Articles of Association, with an appointed treasurer (and one other Director's signiture required for withdrawals?), and with annual accounts.

It also never occurred to me that there'd be such an informal arrangement that one guy could wait 6 years and then just trot off to the Carrabean with the sinking fund, or blow the whole lot on a massive tea party.........

3mph

The Lease of the flat I am attempting to buy merely states that "such sum as shall be considered necessary by the Manager (whose decision shall be final as to question of fact) to provide a reserve fund or funds ..." and also that the Reserve fund is kept in a separate trust account. Nothing about amounts. Looking at past accounts the overall maintenance fund seems to have run at a surplus with big'ish repairs making a small loss in that year. But I have only 4 yrs of accounts to look at. There isn't any reserve fund. Maintenance charge varies, seems to have a loose connection with the valuation and reality. Typically £3500 per year.