Sinking Fund

A sinking fund (also called a reserve fund) is money accumulated over time by a freeholder or management company through service charge contributions to fund future major works on the building. Examples of major works funded from a sinking fund: roof replacement, lift refurbishment, external decoration, communal boiler replacement, and structural repairs.

The purpose of a sinking fund is to spread the cost of large periodic expenses over many years rather than requiring large one-off demands from leaseholders when the work becomes necessary.

A well-managed block will have a funded sinking fund that grows over time and is sufficient to meet foreseeable major works without requiring significant additional demands. A poorly managed block with no or minimal sinking fund will hit leaseholders with large Section 20 demands when major works cannot be deferred further.

Before purchasing a leasehold property, ask for the current sinking fund balance and a schedule of any known or anticipated major works. A building where the sinking fund is near-zero and the roof, lifts, and common area electrics all need significant work in the next five years is a significant financial risk for all leaseholders, including you as the new owner.