The guide to sinking funds
A sinking fund is a long-term savings account that homeowners contribute to every month through service charges. This builds up every year and should pay for any major works that are required over a period of time - such as the painting of communal areas or replacement of a roof.
Why have a sinking fund?
If a sinking fund is not set up, payment for any required works are due from a homeowner on completion of the works. This can mean that homeowners will receive large bills that they need to pay. A sinking fund should mean that no additional payments are due when major works are required.
How do you work out how much I have to pay towards the sinking fund?
When the property is built the builder will provide L&Q with a cost list of all component parts of the building (such as windows, roof, lifts, pumps, fire safety systems etc.) and approximate life expectancies for these. From this information L&Q can work out how much is needed from each property to pay for the works when required. This information is then placed into L&Q's system so that reminders are provided when works are expected. Other factors such as independent condition surveys, works to similar properties and inflation are also taken into account.
What if no works are required?
No works are started until a qualified surveyor has inspected the property and assessed the condition. If it is deemed no works are required a reassessment will be scheduled for the following year. Alternatively, if a component such as a pump fails and is beyond repair this will be replaced when required.
Will I be consulted about any works that are required?
Yes, L&Q must consult with you for any single item of works that will cost more than £250 per property and you'll be contacted by letter. If you have any comments, wish to nominate a contractor or have a query with the costs or works you should contact L&Q as soon as you receive this letter. More information about consultation legislation can be found at www.lease-advice.org (This is a free Government-funded service that provides independent advice to homeowners).
What happens if there is not enough money in the sinking fund to pay for the works?
L&Q try to avoid this scenario where possible, however unexpected works can occur. You'll receive formal confirmation of the final amount of works and any likely shortfall. L&Q will pay for the contractors bill, make the contributions due for tenants, deduct the sinking fund and any amount still left will be payable by homeowners. Payment options are available of periods up to three years depending on the amount owing and are interest free.
Who looks after my sinking funds contributions?
All contributions are held by L&Q in a central bank account and accounted for separately. Interest is earned on the monies that are held and is added to the sinking fund balance every year.
I live in a mixed block of flats; do I pay for the tenants works through my sinking fund?
No, you only pay for your contribution due. For example, if you live in a block containing ten flats, five of which are owned and five tenanted, each homeowner will pay a contribution of 1/10th of the cost of the works. L&Q would pay 1/10th for each of the tenants as a contribution. This is paid for through the tenants rent.
Can I take my sinking fund contributions with me when I move? No, the contributions that you make will remain in the account and be used when works are required. You may wish to make an informal arrangement with your buyer to take this into account. A buyer's solicitor will always write to L&Q and ask about the sinking fund balance. From experience, a sinking fund will improve the saleability of a property as the repair burden on the buyer is reduced.
What do I do if I think the sinking fund contributions are too high?
If you want clarification of what you are paying you can get this from L&Q's rent and service charge team. This includes items covered, life expectancy or the balance in the account. If you are still not satisfied you will need to provide reasons why you think the charge is too high that are supported by evidence. L&Q may commission an independent survey report to review the charges that is supported by your evidence. The result of the report will be binding on both sides, this could mean that the sinking fund contributions decrease or increase depending on the report findings.
What if I do not pay into a sinking fund?
All new build properties have a sinking fund set up as a matter of course. Older properties, particularly those transferred as part of stock transfers from local authorities do not normally have a sinking fund. This means that no monies have been put aside by homeowners for works that will be required and full payment will be invoiced once works have been completed. Full consultation on the works will be carried out and payment options will be available after the final bill is known.
Can I start a sinking fund at our property?
Yes, if everybody is agreeable in the building L&Q will work with you to agree suitable contributions and remaining life expectancies on parts of the building that will require work in the future.