'Legal Landscape' - What is a "Sinking Fund" and do I have one?

Darren Donnithorne and Stephanie Matthews from Marshall Diel & Myers Limited Property & Estate planning team answer your property related questions and issues in this fourth monthly edition of 'Legal Landscape' with Marshall Diel & Myers Limited.

Question: What is a “Sinking Fund” and do I have one? 

You love your new condo! You get on with your new neighbours, dare I say it, like a house on fire.  Your budgeted maintenance payments contribute to the upkeep of the development, which is well cared for.  Condo living suits you and is the best move you made.  But here is an unwelcome surprise that you just found on your doormat….

A letter from your Board of Directors informs you that the elevator in your building needs to be replaced.  At a cost of several thousand dollars!!  What?  But you just moved in!  You’ve hardly used the elevator!!  How much of this are you expected to pay for?  You read on.  You are informed that there are sufficient funds in the “Sinking Fund” to pay for a replacement elevator.  The “Sinking Fund”?   Well, thank goodness for the “Sinking Fund”!  But, what is this “Sinking Fund”?

The Sinking Fund, as you have now discovered, is there to protect the condo owners.  It should be put in place to take care of all of those big ticket item expenses that can pop up out of the blue at the worst of times. It’s there so that when the development’s elevators have to be replaced, or the roadways have to be repaired, the Managing Agent doesn’t have to call everyone up and ask for a several hundred dollar contribution. Just like saving for your own expenses, your Managing Agent should be doing the same for the development by creating a “Sinking Fund”. Often times it is funded using a portion of each year’s maintenance fees. 

This is the development’s “rainy-day fund” and should never be touched for day to day expenses. It should not be confused with service charges, which are meant for the general maintenance and management of the common property and for the other services the Landlord/Managing Agent has agreed to provide.  For example, here is a list of items that the Sinking Fund could be spent on.  

  • Fire Alarm System
  • Pumps
  • Water Tanks
  • Roofs
  • Guttering repairs
  • Re-carpeting of common areas
  • Painting of common areas
  • Repair works to curbstones and footpaths

This work may involve repairs while others may need to be replaced entirely to ensure better service.  Condo owners need to appreciate that without a Sinking Fund, the development could deteriorate resulting in a decrease in value in the units and an unpleasant place to live.  It might be helpful to think of maintaining the development like maintaining a car. Spending on regular maintenance such as changing the engine oil, filter and spark plugs, is akin to paying the monthly maintenance charge of the condo. However, as car owners know, they will also need a reserve fund to replace parts as the car gets older and for unplanned occurrences such as a broken windshield, replacement batteries, air-conditioning repairs or even repainting and body work.  The Sinking Fund is such a reserve fund.  

The two golden rules of Sinking Funds are:

1) No matter how bad the development’s finances are, it should set up and maintain a Sinking Fund. 

2) No matter how well the Sinking Fund is doing, resist the temptation to spend it on low priority projects.  Murphy’s Law ensures that just after it has spent on new plans or new signs, the roof will blow off!  

If you are in the process of purchasing a condominium unit, we recommend that added to your checklist should be finding out (a) whether there is a Sinking Fund; (b) the current balance of the sinking fund and (c) what portion of maintenance fees is put aside to apply to the Sinking Fund each month.  Coping with unwelcome hurricanes is quite enough to deal with!  Knowing you and your fellow condo owners can cope with unwelcome expenses is one item you can keep under control.

This article was written by Darren Donnithorne (Senior Associate & Head of the Property and Estate Planning Team) and Stephanie Matthews (Associate of the Chartered Institute of Legal Executives). 

This column is for general guidance only. It should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.

Got Questions? 

If you have any property questions or issues, please contact us at darren.donnithorne@law.bm or stephanie.matthews@law.bm. We would be happy to work with you to help you navigate the legal landscape in Bermuda, and you may even find your question featured on propertyskipper.  We look forward to hearing from you!  

 

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