What is a Sinking Fund

Bigger than usual repair bills will inevitably arise during a building’s life. Hopefully, the routine factors fees, budgeted at the start of each financial year, will be sufficient to cope with foreseeable maintenance and repairs, but canny owners are well advised to plan for the “bigger hits”.

This is where sinking funds (also known as Building Reserve Funds, which is becoming the more “official” name) come in. They’re all about being prepared for the inevitable major costs of looking after a building over the long term.

Collective savings pot

Of course the financially savvy owner can squirrel away some money each year in anticipation of being asked to fund bigger building repairs every few years, but realistically how many of us do that? And the other problem is that the probability is almost zero that every owner on a tenement or development will have been so sensible. So when those “bigger ticket” items arise there will almost inevitably be owners who will find it really difficult to stump up the cash and may be driven to object and vote against the work. Not a great situation.

So building reserve funds are a form of “enforced savings pot“, to save us from ourselves. They are usually established to fund major, future common repairs (like a new roof, replacing lifts, or external stonework restoration), not for day-to-day maintenance.

Key differences from floats & routine costs

Highlight the key difference from a standard ‘float’ or ‘maintenance account’: the money belongs to the building itself, not the individual owner, and is not refundable when a property is sold. This helps spread the cost of major works across generations of owners.

When you move into a property that has some responsibility for common maintenance and repairs, you’ll probably be required to lodge some funds in a float (maybe one or a few hundred pounds). When you sell the property, you’ll get this float refunded. Similarly, when you sell a property, a decent factor will apportion charges to your property up to your exit date. You aren’t responsible for, and shouldn’t be paying factors fees etc, after the new owners date of entry.

But funds you’ve paid in to a sinking fund (building reserve fund) are effectively “owned” by the property, rather than you, so you won’t get any refunds from a sinking fund on selling the property. Maybe you’ve paid £1,000 into the fund and not a penny has been used whilst you’ve owned the property – the “big ticket” item hasn’t arisen. Sorry, you aren’t getting a refund, the new owner of your property, and all the other owners, are getting the benefit of your previous contributions. Thank you.

So you can imagine that whilst as a concept they are generally accepted as a good thing, when it comes to the detail, they can be controversial. How much will be required each quarter or each year? What can the fund be used for (and what can’t it be used for)? Where will the funds be banked and who will administer them? What decision making processes are needed to authorise the release of funds to certain projects?

The vagaries of AGMs with their potential difficulties of shifting power, people with more or less powerful voices etc means that much of the setup and administration of building reserve funds needs to be done in the more sober, conservative (small c) and legally appropriate forum of the Title Deeds.

Title Deeds (again!)

Sinking Funds are not mandatory under current general Scottish property law (like the Tenements (Scotland) Act 2004), but are recommended.

The authority for a fund must be written into the Title Deeds of the property/development. This is the only way to make contributions compulsory and binding on new owners. If your Deeds are silent (or unclear) about sinking funds then this does not give owners associations, factors or anyone else, the right to set up a compulsory sinking fund. It must be in the Deeds. And amending the Deeds is a legal process which is perfectly possible, but the easiest way is to get 100%, total agreement of all owners. Note, all owners, not just those owners who turn up to a meeting.

It’s most likely that your tenement or development uses a property factor (after all that’s what this website is all about) and they will know that the Property Factors (Scotland) Act 2011 Code of Conduct (see link below) requires factors to hold any sinking funds in a separate, interest-bearing account and to provide clear financial statements to owners at least annually.

Sinking funds are good, but a challenge if they aren’t already written into your Title Deeds. If it isn’t in the Title Deeds all owners must unanimously agree to set one up, and the title deeds must be formally amended (registering a new title condition), which involves legal costs.

Releasing funds

The rules for deploying money from a building reserve fund should be dictated by your Title Deeds. Typically, the fund can only be used for the specified major common works. Hopefully, you will also find that the Title Deeds lay out what voting arrangements apply to using monies from the fund. For those tenements/developments which have adopted the “Development Management Scheme” approach (which is essentially a more modern approach, somewhat being encouraged by the Scottish Government) any decisions to deploy sinking funds can only be made by a “special majority”, which means a majority of all of the owners, not just those who turn up to vote. So in a development of 100 properties, a “special majority” will only be achieved if 51 owners vote in favour.

Setting a funding level

A good factor will manage the process of establishing a maintenance plan or condition survey to inform the calculation of required contributions, ensuring the fund is building up enough for anticipated future costs.

Some useful links

• Under One Roof – Building Reserve Funds (Sinking Funds)
• Scottish Government – Report into provision of building reserve funds
• Property Factors (Scotland) Act 2011: Code of Conduct (Section 3 – Financial Obligations)
• The Title Conditions (Scotland) Act 2003 (Development Management Scheme) – Special Majority Vote

A great idea, worth progressing, but as with so many things, check the Title Deeds.