Question 1

Sinking Fund

Accepted Answer

Q: As business managers to our company we have been asked to contact you regarding a matter that has arisen in connection with the terms for charging the service charge. The master lease (attached) says in Schedule 4 that service charge should be calculated by reference to the previous year’s cost and balanced at the end of the year in question with either an additional payment or a refund. However, for as long as we can currently trace back through the records (approx. five years) this has not been the case. The service charge has been calculated based on expected expenditure for the year and agreed at the AGM. The company year end is 30 June, the AGM is usually held in November and after agreement the new service charge is applied from January for the following calendar year. In preparation for the November 2016 AGM we prepared a forecast of long-term expenditure and a proposed service charge was calculated to provide for larger occasional items required by the lease (for example external decoration). At the AGM it was agreed that this method would be adopted and that a Sinking Fund be set up to hold the charges in advance of the work being carried out. A separate bank account has been set up. Our question is, will the company need to amend the master lease to change the terms or is the agreement of the leaseholders (those present) at the AGM sufficient to allow this revised charging method? FPRA Hon Consultant Cassandra Zanelli replies I tend to agree with their interpretation of the lease so far as the service charge mechanism is concerned in that the interim service charge for the year ahead is based on the last years expenditure. This does create obvious issues if there is a large project of works planned for the forthcoming year because obviously that level of expenditure will not have been expended in the previous year. It seems that the management company is currently collecting a sinking fund. Having read the lease, I cannot see that the management company is entitled to collect a sinking fund. Normally, the lease provides for contributions towards a sinking fund to be collected. Obviously, service charge monies can only be expended in the manner prescribed by the lease. I take the view that a leaseholder could challenge the element of the service charge which comprises the sinking fund and, if challenged, is likely to be successful. I tend to agree that a sinking fund is beneficial for the successful management of a development. This is why the RICS Code suggest that if leases do not provide for the collection of monies towards a sinking fund that consideration is given to varying those leases. Leases cannot be varied by vote at an AGM, but must either be varied by consent (in other words by all parties agreeing to the variation) or, alternatively, by determination of the Tribunal. In this kind of variation, at least 75 per cent of the parties would need to agree to the variation and not more than 10 per cent disagree. That level of agreement would need to be garnered before an application is made to the Tribunal under section 37 of the Landlord and Tenant Act 1987. Therefore, the short answer to their question is that to collect the monies towards the sinking fund a variation of all leases is required. Question submitted July 2018

Question 2

Sinking Fund

Accepted Answer

Q: As business managers to our company we have been asked to contact you regarding a matter that has arisen in connection with the terms for charging the service charge. The master lease (attached) says in Schedule 4 that service charge should be calculated by reference to the previous year’s cost and balanced at the end of the year in question with either an additional payment or a refund. However, for as long as we can currently trace back through the records (approx. five years) this has not been the case. The service charge has been calculated based on expected expenditure for the year and agreed at the AGM. The company year end is 30 June, the AGM is usually held in November and after agreement the new service charge is applied from January for the following calendar year. In preparation for the November 2016 AGM we prepared a forecast of long-term expenditure and a proposed service charge was calculated to provide for larger occasional items required by the lease (for example external decoration). At the AGM it was agreed that this method would be adopted and that a Sinking Fund be set up to hold the charges in advance of the work being carried out. A separate bank account has been set up. Our question is, will the company need to amend the master lease to change the terms or is the agreement of the leaseholders (those present) at the AGM sufficient to allow this revised charging method? FPRA Hon Consultant Cassandra Zanelli replies I tend to agree with their interpretation of the lease so far as the service charge mechanism is concerned in that the interim service charge for the year ahead is based on the last years expenditure. This does create obvious issues if there is a large project of works planned for the forthcoming year because obviously that level of expenditure will not have been expended in the previous year. It seems that the management company is currently collecting a sinking fund. Having read the lease, I cannot see that the management company is entitled to collect a sinking fund. Normally, the lease provides for contributions towards a sinking fund to be collected. Obviously, service charge monies can only be expended in the manner prescribed by the lease. I take the view that a leaseholder could challenge the element of the service charge which comprises the sinking fund and, if challenged, is likely to be successful. I tend to agree that a sinking fund is beneficial for the successful management of a development. This is why the RICS Code suggest that if leases do not provide for the collection of monies towards a sinking fund that consideration is given to varying those leases. Leases cannot be varied by vote at an AGM, but must either be varied by consent (in other words by all parties agreeing to the variation) or, alternatively, by determination of the Tribunal. In this kind of variation, at least 75 per cent of the parties would need to agree to the variation and not more than 10 per cent disagree. That level of agreement would need to be garnered before an application is made to the Tribunal under section 37 of the Landlord and Tenant Act 1987. Therefore, the short answer to their question is that to collect the monies towards the sinking fund a variation of all leases is required. Question submitted July 2018

Sinking Fund

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