Q&A - Maintenance Problems & Sinking Funds 

Can we borrow money from a financial institute to create a large sinking fund? We own the freehold, so would this count in our favour if we did apply for such a loan?

ANSWER

In answering this question we presume that each of the leaseholders is a shareholder in the company which owns the freehold reversion. You would need to speak to an independent financial advisor regarding borrowing money.

Ultimately what the company can and can’t do will be dictated by its Memorandum of Association. This may permit the company to borrow money. However, as you are no doubt aware, what can and cannot be charged to the individual leaseholders by the freeholder is dictated by the provisions of the leases of the flats.

The cost of further remedial works will likely be recoverable from the Leaseholders via the service charge (subject to the s20 Landlord & Tenant Act 1985 consultation procedure) but the interest and any fees charged on borrowing money to fund the works would likely not be.

You would therefore need to determine whether the company would be happy to foot the bill for this borrowing and whether the company has sufficient funds to pay for it. If the company does not have the money to fund the borrowing then the works can really only be carried out once the leaseholders can afford to pay for them through payment of the service charges to the freeholder.

The sinking fund had grown to cover the cost of the initial modernisation works and unless the further modernisation works are required immediately it may make sense in the circumstances to propose the further major works to see whether the leaseholders can afford to foot the bill now. If they cannot and the works can be delayed for now it may make sense to delay them thus allowing the sinking fund to build up again to fund those further works in the future.

Rob Denman, JB Leitch Solicitors