Sinking Fund Meaning: What Is A Sinking Fund In Property?

There’s a lot of terminology associated with property ownership. In this guide, I answer a common query – what is a sinking fund?

Sinking funds help spread the financial burden for major repairs or replacements for parts of the building that wear out over time. But why is it called a sinking fund?

It comes from the idea of steadily setting aside money so that a large future expense can be ‘sunk’ or paid off without difficulty when the need arises. The fund ‘sinks’ the cost gradually over time rather than requiring a large lump sum payment all at once.

Find out everything you need to know about the use of sinking funds below.

Key takeaways: Sinking funds in property

• A sinking fund is money that leaseholders set aside gradually for future major repairs or replacements of building parts that wear out over time – such as roofs or lifts.

• The fund spreads the cost of large, infrequent expenses so that leaseholders avoid sudden, large lump sum payments, with contributions typically collected regularly as part of the service charge.

• The sinking fund is managed by the property management company or landlord, often held in a separate interest-bearing account.

• However, if the sinking fund falls short for major repairs, the management can request extra contributions from leaseholders following a formal consultation process.

• Check the property’s lease or management documents when buying to find out if there is a sinking fund. Freehold properties usually do not have sinking funds.

Sinking fund meaning: What is a sinking fund?

A sinking fund is a pool of money set aside over time to cover a specific future expense at a later date. Leaseholders owning property in a block of flats are often required to contribute regularly towards a fund that pays for ad hoc major maintenance projects.

They pay fixed amounts at regular intervals, often as part of the service charge. The service charge pays for routine upkeep, while the sinking fund saves for large, planned expenses to maintain the building’s long-term condition and value.

In short:

• The service charge covers the cost of ongoing general maintenance and day-to-day repairs to the property or communal areas such as cleaning, gardening and small repairs.
• The sinking fund covers the cost of major, infrequent repairs or replacement works for communal aspects of the building such as repairing the roof, replacing the windows or maintaining the lift.

The property management company usually calculates contributions using a schedule of potential future repairs, estimated costs and inflation rates, outlined in the lease agreement.

They usually collect these payments on behalf of the owners and hold them in a separate, interest-bearing bank account dedicated to the sinking fund.

Beyond property, businesses also use sinking funds to save for large payments or to repay bonds without disrupting ongoing cash flow. For example, a company may put aside a fixed amount each year to repay bonds at maturity.

Advantages and disadvantages of sinking funds

Advantages

Sinking funds can:

• Help to spread the cost of significant future expenses
• Reduce reliance on borrowing or credit, avoiding interest or accumulating debt
• Improve budgeting and long-term financial planning, allowing for better management of cash flow

Disadvantages

However, drawbacks include:

• Regular additional costs for leaseholders, which can feel frustrating if no major works take place soon
• If the sinking fund balance is insufficient for major projects (e.g. roof replacement works), leaseholders may be required to make additional payments on top of their regular contributions.
• Potential disputes over how funds are used or managed between leaseholders and managing agents or the freeholder

Who controls the sinking fund?

The sinking fund usually falls under the control of the property management company or the landlord responsible for the building’s upkeep. They manage the collection of contributions from leaseholders or residents and oversee the fund’s use for major repairs or improvements.

In some cases, a residents’ or owners’ association may have oversight of the sinking fund, or a role in deciding how to use it – especially for leasehold or commonhold properties. Learn more about these in our recent guide, Commonhold meaning: What is Commonhold Property Ownership?

Leaseholders have a right to request information about the sinking fund and may influence decisions through consultations or votes, depending on the terms of their lease.

How to find out if a property has a sinking fund

Sinking funds tend to be a feature of leasehold properties or residential developments with communal areas, where there will eventually be a need for major repairs or replacements. Freehold properties do not usually have a sinking fund, with owners handling any ad hoc maintenance costs themselves.

To find out if a property has a sinking fund, check the lease agreement or the property’s management documents. These documents typically outline the existence of a sinking fund, the contribution requirements and how the fund is managed.

When buying a property, your conveyancer or solicitor will be able to tell you if there is a sinking fund. You can also ask the property management company, landlord or managing agent whether a sinking fund exists and how it operates.

What happens if there isn’t enough money in the sinking fund?

If there isn’t enough money in the sinking fund to cover necessary major repairs or replacements, the property management or landlord usually requests additional contributions from the leaseholders. In these situations, the landlord should issue a Section 20 notice from the Landlord and Tenant Act 1985.

This is a requirement to consult with leaseholders on proposed major works or long-term agreements that will result in significant costs.

In some cases, landlords or management companies might seek external financing or loans to cover urgent issues, but this can lead to future costs being higher due to interest payments.

FAQs

What does ‘sinking fund’ mean?

In short, a sinking fund is a pool of money collected over time from property owners, specifically set aside to cover future major repairs or replacements in communal areas or shared buildings.

This fund helps ensure that sufficient capital is available for significant works – such as replacing roofs or lifts – without needing sudden, large payments from residents when the need arises.

Who pays into a sinking fund?

Leaseholders within a building or estate tend to pay into a sinking fund. Each owner contributes a regular amount, which can be monthly, quarterly, or annually, often set out in the lease agreement or service charge documents.

What happens if I sell my property?

If the seller has paid a lump sum or holds a credit in the sinking fund, this usually remains with the property and is not refunded when it is sold.

Final thoughts: Sinking funds

If you’re buying a leasehold property and want to know more about whether there is a sinking fund in place, questions to consider asking include:

• Is there a sinking fund?
• If so, how much is currently in the fund?
• How are contributions calculated for each leaseholder?
• Are there any major works planned?
• If so, will the sinking fund cover these works?

The last question is particularly important. If there isn’t enough money in the sinking fund to cover necessary major repairs or replacements, the property management company or landlord may request additional contributions from leaseholders following a Section 20 notice.

I hope you found this article useful and informative. For other guides, take a look through the Fine Living blog.

Popular articles include:

• How Do I Find Out What Restrictive Covenants Are On My Property?
• Buying Property Through A Limited Company
• Do I Need A HMO Licence For 3 Tenants?
• Non Resident Landlord Scheme (NRLS)

If you have any queries or would like to enquire about a property in the Fine Living portfolio, please don’t hesitate to get in touch.

Want to discuss the advice on this blog - or anything else?