Question 1

Sinking Fund

Accepted Answer

Q: I am the secretary of our residents association. Currently there is an amount in the service charge to go to a reserve fund, but, in the first year, it barely covers cost incurred. We have just received a long term maintenance plan (LTMP) from the managing agent and that would need the annual reserve fund contribution to be increased five-fold for the LTMP to be adequately funded. In your experience, should the reserve fund contribution levied through the service charge be such that the long term plan is adequately funded? FPRA Committee Member Amanda Gourlay replies: In general terms, the purpose of a reserve or sinking fund is to build up sufficient money in a savings account to be in a position to pay for major works, decorations or repairs that need to be done on a regular basis. To that end, a property manager will probably obtain a PPM (a planned preventative maintenance) programme, and would then incorporate the figures from that programme into what is known as a CAPEX (capital expenditure) plan. Under the terms of your lease, the landlord is entitled to recover the costs of services that it may incur. I take the view that it is entitled to set up a reserve fund and to collect the money for that fund as part of the service charge. As to the amount demanded, it may be that the managing agent needs to spend a large amount of money on works to make up for a period of past failings to maintain the building. It may also, however, be that the managing agent is being over-cautious, building in provision for more income than is required, and that the reserve fund budgeting should be reviewed and reduced. I would suggest that the RA asks for a meeting with the managing agent so that the reserve fund can be explained and justified - or reduced. [Submitted June 2017]

Question 2

Sinking Fund

Accepted Answer

Q: I am the secretary of our residents association. Currently there is an amount in the service charge to go to a reserve fund, but, in the first year, it barely covers cost incurred. We have just received a long term maintenance plan (LTMP) from the managing agent and that would need the annual reserve fund contribution to be increased five-fold for the LTMP to be adequately funded. In your experience, should the reserve fund contribution levied through the service charge be such that the long term plan is adequately funded? FPRA Committee Member Amanda Gourlay replies: In general terms, the purpose of a reserve or sinking fund is to build up sufficient money in a savings account to be in a position to pay for major works, decorations or repairs that need to be done on a regular basis. To that end, a property manager will probably obtain a PPM (a planned preventative maintenance) programme, and would then incorporate the figures from that programme into what is known as a CAPEX (capital expenditure) plan. Under the terms of your lease, the landlord is entitled to recover the costs of services that it may incur. I take the view that it is entitled to set up a reserve fund and to collect the money for that fund as part of the service charge. As to the amount demanded, it may be that the managing agent needs to spend a large amount of money on works to make up for a period of past failings to maintain the building. It may also, however, be that the managing agent is being over-cautious, building in provision for more income than is required, and that the reserve fund budgeting should be reviewed and reduced. I would suggest that the RA asks for a meeting with the managing agent so that the reserve fund can be explained and justified - or reduced. [Submitted June 2017]

Sinking Fund

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