For Residents’ Management Company (RMC) directors, few responsibilities are as essential to long term building health (and leaseholder harmony) as managing the sinking fund. A well planned sinking fund ensures that you can handle major repairs or replacements without relying on sudden, unexpected contributions from leaseholders.
But how much is enough? How often should it be reviewed? And how do you get everyone on board?
In this article, we will look at the importance of sinking funds, how to plan realistic contributions and how to communicate their value to leaseholders so you can avoid disputes and ensure financial stability for your block.
What Is a Sinking Fund?
A sinking fund (sometimes called a reserve fund) is a savings pot used by RMCs to cover large, infrequent costs in a block’s life cycle. This can include roof replacements, lift overhauls, external redecoration or replacing communal boilers. These are not emergencies but foreseeable expenses that come around every 5, 10 or 20 years.
Unlike the regular service charge (which covers annual or day-to-day maintenance) the sinking fund is about future proofing. It ensures that when those big bills arrive, the money is already there.
Why a Sinking Fund Matters
Without a sinking fund, RMCs face two undesirable options: delay essential works, or issue a large one off demand to leaseholders. Neither option is ideal.
Delaying works can lead to further damage and higher repair costs down the line. But issuing surprise bills can cause financial stress for leaseholders and spark disputes – especially if there has not been clear communication.
A robust sinking fund has several benefits:
- It ensures timely completion of major works.
- Reduces financial shock for residents.
- Makes budgeting and financial forecasting more accurate.
- Enhances property values and marketability.
- Demonstrates responsible block management.
Increasingly, mortgage lenders and prospective buyers ask for details of a block’s sinking fund when assessing leasehold properties. A healthy reserve is a sign of good governance.
How Much Should You Be Saving?
There is no ‘one size fits all’ answer here. It depends on the size, age and construction of your building. A large block with a flat roof, lifts and aging construction may require more aggressive saving than a small conversion with fewer shared features.
The best place to start is with a thorough and professional long term maintenance plan (LTMP) or planned preventative maintenance schedule (PPM). These assessments outline expected major works over a 10 to 30 year period, with cost estimates and timelines.
From this, you can calculate:
- The total cost of anticipated works over a given period.
- The annual sinking fund contribution required to meet that target.
Contributions are then divided among leaseholders according to their lease terms (usually by percentage or number of units).
It is also good practice to review your sinking fund forecast every few years or more often if works are completed early, costs change significantly or inflation accelerates.
Communicating with Leaseholders
Talking to residents about sinking fund contributions can sometimes be tricky, especially if costs are increasing or if funds have been neglected in the past. But transparency is the best policy.
Start by helping leaseholders understand:
- What the sinking fund is for.
- What major works are planned (and when).
- What it would cost to pay for them without a reserve.
- How regular contributions make budgeting easier for everyone.
Consider presenting this information at your AGM, via newsletters or on digital noticeboards. Using real, costed examples of past works can help residents understand why proactive saving matters.
Framing contributions as a way to avoid large, sudden bills in future is usually well received. Most leaseholders would rather pay a little more now than face a large, unexpected demand down the line.
Common Pitfalls to Avoid
Some RMCs underfund their sinking fund because they fear resistance from leaseholders or because they simply have not taken a long term view. This often leads to bigger problems later. A few issues to watch out for include:
- Setting contributions too low – A token sinking fund may not be enough to cover actual future needs.
- Not ring-fencing the funds – Sinking fund contributions should be kept separate from the general service charge.
- Failing to review regularly – Inflation, regulatory changes or new risks (such as cladding) can increase future costs.
- Not following the lease – Always ensure contributions are collected and spent in line with the lease terms.
While the sinking fund is for planned works, it is also wise to consider a contingency buffer. Not everything can be predicted and unexpected costs may emerge.
A well-managed sinking fund should have enough flexibility to absorb minor surprises without requiring immediate additional contributions.
Final Thoughts
A healthy sinking fund is one of the strongest tools an RMC has for maintaining the fabric of a building, avoiding financial shocks and preserving positive relationships with leaseholders.
By regularly reviewing your maintenance plan, commissioning realistic forecasts and building trust through transparency, you can ensure your block is financially secure – not just for today, but for the years to come.
