Asking for service charge AND sinking fund fee?

PeachyZee

Hi All,

Potentially a silly question! I'm a FTB and looking at putting in an offer for a converted flat in London which is LH. I asked the estate agent for some information regarding fees and charges and they've come back with the following:

Leasehold - c164 years remaining

Service charge - £2,000 pa

Ground rent - £5 pa

Sinking fund - c£11,000

I was under the impression that the service charge would normally go into the sinking fund, is there any reason that they would have a charge for this separately? It's not something I've seen before during my property search and speaking to a few friends who have bought, it's news to them as well. Currently there are also no major works scheduled for the property and no works which happened recently.

What I was wondering is that that as the sellers have had to drop their asking price down by around 50k, could they be responsible for the sinking fund charge but are looking to make it the new buyers responsibility instead to make back some of their money? I'm really not wanting to pay an extra 11k especially as the service charge is pretty high.

AdrianC

Think of the sinking fund as a savings account towards future expenditure, while the service charge is paying for current expenditure.

Perhaps it means that there's £11k currently in that savings account, and you pay £2k pa towards current with some towards future?

NeverTooLate

Is that actually a charge or is it how much is in the sinking fund right now?

FaceHead

NeverTooLate said:

Is that actually a charge or is it how much is in the sinking fund right now?

That's my interpretation - it's not a charge, but actually an asset they you effectively would have a share of. One to clarify with the agent. 

PeachyZee

We've been told it's a separate lump fee, that it would have to be a separate contribution on purchase to go into the existing sinking fund in addition to our annual service charge.

Might be a misunderstanding from the agent but we're waiting to hear back from them

eddddy

PeachyZee said:

Might be a misunderstanding from the agent but we're waiting to hear back from them

It makes very good sense to hear what the agent says - but if you go ahead and purchase, your solicitor should double-check all the details.


Normally, the standard Service Charge would be for spending expected in the next 12 months - like buildings insurance, communal electricity bills, routine repairs and maintenance.


The sinking fund would be for bigger repairs and maintenance jobs that happen less often - like repainting the outside of the building, replacing the roof etc.


It would be very strange for all the leaseholders to be asked to contribute a lump sum of £11k to the sinking fund in one go (and it would be nonsensical to ask just one leaseholder - who happened to have just bought a flat.)


FWIW, the seller wouldn't be able to 'withdraw' their £11k contributions to the sinking fund before the sale.


My guess is it might be one of the following situations:

• The current leasehold owner is trying to do some fudge - to make the flat sound cheaper. e.g. The seller is saying "Pay me £x for the flat and pay me £11k for the money I've contributed to the sinking fund".
• (It would be a bit like saying pay me £x for the flat and pay me £11k for the fitted kitchen I had installed") 

• or there's major works in the pipeline (like repairing the roof) and your contribution would be c£11k.

• or the EA has got some info from the seller, but the EA doesn't understand it and is talking nonsense.

 

Grumpy_chap

The statement of the "sinking fund" as a one-off £11k lump payment is rather unusual.  AIUI, sinking fund is usually built up over time from remainder of the annual service charges that is not spent in current period.

Is it possible that the current owner has approached the management people holding the sinking fund account, established there is £11k per property and requested that the management people refund the balance to the current owner on the basis that the new owner will replenish the sinking fund £11k, so no impact to the remainder of the people in the block?

I don't think that is how it normally works, but you never know?

eddddy

Grumpy_chap said:

Is it possible that the current owner has approached the management people holding the sinking fund account, established there is £11k per property and requested that the management people refund the balance to the current owner on the basis that the new owner will replenish the sinking fund £11k, so no impact to the remainder of the people in the block?

TBH, that's very unlikely.

The 'replenishment' payment of £11k wouldn't be enforceable under the lease - so it would mean signing some kind of 3-way contract between seller, buyer and freeholder - with each party incurring legal fees etc.


And the freeholder has no obligation to enter into a contract like that, and has nothing to gain from entering into a contract like that, and perhaps takes on extra risk by entering into a contract like that - so I don't think any 'sensible' freeholder would do it.



(Plus it would negate the main reason for having a sinking fund - which is to spread the cost of big maintenance jobs fairly across a sequence of flat owners.)