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In contrast, a “Sinking Fund” provides for expenditure that might only be incurred once or twice during the lease term on specific terms. A good example of such an item of expenditure would be the replacement of lifts or re-roofing of the block.

Over the years the distinction between the two types of funds has become rather blurred, however, regardless of its type, such funds are useful as they do help to avoid huge service charges being demanded in the years in which major expenditure has been planned too. The idea behind the funds is illogical as it aims to spread the cost of works evenly over time.

For the reasons set out already, such funds are most definitely a good idea. Leases that do not have provision for such fund(s) will almost invariably leave leaseholders and landlords alike in a difficult position as they will need to find large sums of monies to carry out necessary works often on very short notice. If leases do not contain such provisions then a lease variation would be advisable.

Funds Held on Trust

Reserve/Sinking Funds are treated as service charges and Section 18 of the Landlord and Tenant Act 1987 requires reserve/sinking funds to be “held on trust”. This basically means that any sums paid by the leaseholders by way of service charges must (together with any accruing income) be held by the landlord (or other person to whom the service charges are paid) either as a single trust fund or in two or more separate trust funds. This requirement does not apply to “exempt landlords” who are generally landlords such as local councils, development corporations, housing action trusts, charitable housing trusts, registered housing associations and unregistered fully mutual housing associations.

If disputes arise over payments of the reserve/sinking funds an application may be made to the Leasehold Valuation Tribunal. The Leasehold Valuation Tribunal cannot however order payments out of such funds in respect of certain items and in such situations, an application can be made to the County Court.

Reserve/Sinking Funds are indeed very useful as they certainly spread the cost of works evenly over time. If leases do not contain provision for the collection of such funds, the possibility of varying the leases should be considered.
Where leases do however make provision for the collection of such funds and landlords and/or managing agents are not collecting these due to bad management or other reasons, consideration should be given to the possibility of making an application to the Leasehold Valuation Tribunal for the appointment of a new manager and/or receiver!?

For further information regarding this article, contact Roger Hardwick, Head of Leasehold Enfranchisement, Brethertons Solicitors.