Q&A - Sinking Fund


Can you provide some information regarding sinking funds?  Can they automatically be instituted by a head lease or must provisions be provided in the sublease?




Many thanks for your question.

It is common for leases to allow the landlord to collect sums of money from leaseholders to create a sinking fund. This allows sums of money to be built up, which will then be used to cover the costs of irregular and expensive works.  The process avoids the “spikes” that would otherwise occur when these irregular and expensive works are undertaken.

Collecting a healthy sinking fund allows landlords to even out annual charges by helping to avoid large one off bills and is in the interests of good estate management.

In order to collect contributions towards a sinking fund, there needs to be a provision in the lease which allows those contributions to be collected.

The RICS Service Charge Residential Management Code suggests that where there is no provision in leases for a creation of a sinking fund, that consideration should be given to a variation to the leases to allow for a reserve fund to be set up.

In the situation you have described, it appears that there is a headlease between the superior landlord and intermediate landlord, and then a number of underleases between the intermediate landlord and residential tenants.  It seems the intermediate landlord is required (under the terms of the headlease) to contribute towards a sinking fund.  These costs would then generally be recharged by the intermediate landlord to the residential tenants under the terms of those underleases.

There should, in turn, be a clause(s) in the underlease which enables the intermediate landlord to recover those contributions.  It may be that this clause is drafted widely, referring for example to all costs and expenses payable to the superior landlord under the headlease.

You will need to look carefully at the terms of your lease to establish if there is a clause which entitles your landlord to recover contributions towards the sinking fund required by the headlease.  Whether this is permitted will depend on the terms of the leases.


Cassandra Zanelli, Solicitor and Partner at PM Legal Services


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