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Sinking Funds: The Call for Accountability

After living in his condominium for eight years, Hisham is suddenly informed that he has to pay a sinking fund contribution. According to his documents, the contribution is supposed to come from the maintenance fees that he has been paying promptly. Param tells us that his developer has been collecting sinking fund contributions, but yet the swimming pool and common areas are in a neglected state. Another group of buyers is upset that the sinking fund has been used to offset ‘current liabilities’. Yet another group of owners complains that their developer had allegedly passed the sinking fund to a now defunct managing agent.

There are the grouses we frequently hear from strata property owners who are not satisfied with the way their developers are handling the sinking fund. Here, we highlight some issues on the fund.

What is it?

Both the Strata Titles Act, 1985 Section 46, and the new Schedule H (since Dec 1, 2002) of the Housing developers) Control and Licensing) Regulation, 1989, stipulate that the sinking fund (called ‘special fund’ in the Strata Titles Act) be used to meet major liabilities of the strata titles estate. In other words, it is a provision for a reserve fund to meet the major repairs and replacement of parts of the common property. With use and age, major items deteriorate and need to be replaced so that the aesthetic qualities of the community can be maintained, thereby enhancing property values.

The collection of a sinking fund, however, should not be confused with the service charges meant for the general maintenance and management of the common property. To illustrate the difference monthly service charges can be likened to the regular maintenance costs of your car, such as for changing motor oil, filter and spark plugs.

The sinking fund is akin to a reserve fund to replace auto part and for unexpected happening for example a punctured tyre, a broken windscreen, a repainting job or a piston overhaul.

Permitted uses of the fund

According to the law, the sinking fund can be used for:

a)     painting or repainting any part of the common property, which is a building or other structure;

b)     the acquisition of any movable property for use in relation with the common property;

c)     the renewal or replacement of any fixtures or fitting comprised in any common property and any movable property vested in the body corporate; and

d)     any other expenditure not being expending incurred under subsection (5) of section 43 to meet a liability for maintenance or for settling any defaults in payment by a proprietor.

(section 43(5) ) id the subsection on the duties and powers of management corporation to recover monies in an action in court for monies due to the management corporation for work,  repairs or act done on behalf of parcel owners. )

 What is inadequate here?

 Unfortunately, the present legislations do not provide much guidance on the collection and the study of the fund leading to frequent grouses by strata property owners. Where the laws are unclear, HBA believes that we must be guided by its intent, that we must pursue equity and fairness with a sinking fund that is transparent and accountable to its contributors.

Developers who are managing strata estate pending the issuance of strata titles should

start by having regular meeting to communicate with buyers. When repainting works are required, for example, tenders should be invited and owners should be consulted for their consent. Owners should play an active role by forming a pro-tem committee or residents association upon vacant possession.

Sinking fund study

As the exact amount appropriate for a sinking fund is difficult to establish, the first management party should project the cost of repairs expected over the next 5 to 25 years. If the building is going to be repainted every five tears, what is the projected cost?

A detailed study of all the common property, an estimate of the life of each asset and the cost and timing of replacement should be prepared and presented to the owners. It should also be reviewed, updated and revised annually.

Misappropriation of Sinking fund

The sinking fund is in fact a trust fund entrusted to a trustee who plays the role of a ‘stakeholder’ who should provide owners with a copy of the annual audited accounts. Such funds not used for a reasonable period of time should be placed in an interest-bearing account. Those stakeholders who unilaterally dig into the fund without proper authorization should be held responsible and accountable. Misappropriation of the fund is tantamount to criminal breach of trust (CBT) and is punishable by imprisonment. It would make things clearer if the Ministry of Housing and Local Government can come up with a directive to all strata estate developer- managers of the same for those strata estates sold before the enforcement of the new Schedule H.