A sinking fund, also called a reserve fund, is money collected from leaseholders through the service charge and saved for major or infrequent work, such as replacing a roof, refurbishing a lift or redecorating the outside of a building. It can soften a future bill, but it rarely covers everything.
How a sinking fund works
Leaseholders pay into the fund as part of their service charge. The landlord, housing association, management company or managing agent holds it and spends it on work the lease allows. The lease also sets out how each home’s share is calculated.
If the landlord is a private freeholder or a management company, the money is generally held on trust, separate from the landlord’s own funds (Landlord and Tenant Act 1987, section 42). Councils and housing associations are “exempt landlords” and aren’t covered by that section. Their leases may still protect the money, so ask your conveyancer how the fund is held.
Either way, the money stays with the building. You won’t usually get your contributions back when you sell.
Not every building has a fund. Newer developments often do. Some older or self-managed blocks don’t.
A worked example
Take a block of 20 flats that needs a £200,000 roof replacement, with the cost split equally. The extra cost per flat depends on the fund balance:
- £0 in the fund: the shortfall is £200,000, so each flat pays an extra £10,000.
- £60,000 in the fund: the shortfall is £140,000, so each flat pays an extra £7,000.
- £200,000 in the fund: there is no shortfall, so there is no extra cost per flat.
A £60,000 balance looks healthy in the accounts but covers only 30% of this job. If no roof work is due for 20 years, though, the same balance could be plenty. So the question to ask is whether the fund is big enough for the work this particular building is likely to need.
Sinking fund or service charge?
The sinking fund is part of the service charge, not a separate payment. The rest of the charge covers day-to-day costs such as buildings insurance, cleaning, gardening, communal electricity and management. A small roof patch would normally come from that general budget. A full replacement would come from the sinking fund, with any shortfall billed to leaseholders.
If there’s no sinking fund
Big jobs are then paid for as they arise, through one-off bills. That isn’t automatically a red flag, but it changes what you need to find out:
- Does the lease allow the landlord to collect contributions in advance?
- How was the last major job paid for?
- Is any major work due soon?
Fire safety and cladding
Building safety work can dwarf routine maintenance costs. Ask whether the building has any known fire-safety or cladding problems, and how the cost is being handled. Some leaseholders are protected from these costs under the Building Safety Act 2022. Whether you are depends on the building and your lease, so get your conveyancer to confirm.
What to check before you buy
Your solicitor or conveyancer will request the details, mainly through the leasehold information form (TA7) and the Law Society’s leasehold enquiries form (LPE1). Make sure you get:
- The balance and its date. Accounts can be months out of date, so ask what has been paid in or out since.
- The planned work. Ask for the maintenance plan or building condition report, and whether any costs have been estimated.
- The recent record. Look at the last two or three years of service charge accounts and any notices for proposed work.
- Your share. Find out how your contribution is calculated and what you’ll pay each year. Service charges change from year to year, so ask how much they have risen recently.
- Any commitments. Some of the balance may already be earmarked for specific work.
Don’t rely on what the seller or estate agent tells you. Ask for the documents.
Section 20 notices
Before major work, landlords in England usually have to consult leaseholders. This is called a Section 20 consultation. It applies when any leaseholder would pay more than £250 towards qualifying works, or more than £100 a year under a long-term agreement.
A notice tells you work is coming, not whether the fund will cover it. If the seller has received one, ask your conveyancer for the estimated cost, how it will be funded and your likely share. Also ask how the sale contract deals with any bill issued around completion.
Shared Ownership and sinking funds
Shared Ownership buyers usually pay service charges too, including any sinking fund contribution, even if they own only part of the home.
On qualifying new-model homes, the landlord is responsible for certain external and structural repairs during the ten-year initial repair period. It shouldn’t charge those costs to the service charge or reserve fund. This doesn’t apply to every Shared Ownership home, so check your Key Information Document.
Include the sinking fund contribution when you work out your total monthly cost. Our Shared Ownership costs guide explains the other charges.
Before you exchange contracts
- Get the fund balance and the date it was reported.
- Ask what major work is planned and what it’s likely to cost.
- Work out your likely share of any shortfall.
- Add the regular contribution to your monthly budget.
- Ask your surveyor which parts of the building they can inspect. Roofs and plant rooms are often out of reach.
Leasehold rules are changing. The government has said it plans to make service charge accounts more standardised and is considering mandatory reserve funds. Check GOV.UK for the current rules before you commit.
Looking for a new home? Explore Guinness Homes developments for Shared Ownership and private sale.
This article gives general information for buyers in England. It isn’t legal, financial or surveying advice. Terms vary between properties, so ask your solicitor or licensed conveyancer to review the lease and service charge information before you commit.