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Sinking Fund What Is The Fund For?

Strata property owners are often unaware on the existence of Sinking Fund and some of them might be confused and mistakenly thought the funds as part of their maintenance fees.

What is Sinking Fund and why do we need to have a separate fund which can be quite burdensome’ to the property owner?

According to a law firm, Darlingtons Solicitors LLP via its website, wwwdarlingtons.com, a property Sinking Fund is an amount of money which is set aside to cover any major work which is needed on a property in the future.

Property Sinking Fund is quite common with leasehold properties and the fund is usually part of the service charge that is payable by each leaseholder.

Property Insight reached out to Honorary Secretary General of National House Buyer Association (NHBA), Dato’ Chang Kim Loong to get his view on this matter.

Chang says, he has heard enough grouses from strata property owners who are not satisfied with the way their developers, Joint Management Body (JMB) and Management Corporation (MC) are handling the Sinking Fund.

‘There are some pertinent issues on the fund that should be highlighted. Sinking Fund is not to be taken literally to mean that it is a fund that will sink, sank, sunk and disappear!

“However, in some stratified development areas, it is found that their Sinking Funds literally sink, sank, sunk and totally disappeared due to misappropriations of monies by either the illegal management company or kleptomaniac office bearers and/or members of the joint management committee or management committee.

“Here, I provide three real cases happened to house owners which made them came to us (NHBA) to file complaints. First case is about Hisham and after living in his condominium for eight years, he is suddenly informed that he must 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 and now he is confused.

“Second case is about Param and he told us that his developer has been collecting sinking fund contributions previously, yet the swimming pool, gymnasium, security system and common areas are in a neglected state of repairs.

“Another group of buyers is upset that the Sinking Fund has been used to offset ‘current liabilities’ by their JMB.

“The third case we received from John Cheah and he told us that his sinking fund is ‘zero’ and it seems that MC has utilized it for a certain purpose that he is not aware of, and another group of owners.

Rationale of Sinking Fund

Chang further explained on the rationale of having Sinking Fund and why it is important to educate the home buyers to ‘religiously’ pay for the fund when it is due.

“Sinking Fund contribution is separate and shall be equivalent to ten percent of the Charges (i.e. general maintenance charges) under the management period by the developer or equivalent to at least ten percent of the Charges under the management period by the NB or MC.

“Sinking Fund Account is a mandatory account to be opened and maintained by a developer, JMB or MC under the law.

“In other words, it is a provision for a capital expenditure fund to meet all actual or expected capital expenses in the common property such building repainting, installation of main water filter system, replacement of water tanks and pumps, upgrading of building surveillance system, replacement of gymnasium equipment, etc.

“With wear and tear from use, major items will deteriorate and need to be replaced so that the property market value can be maintained, sustained or enhanced based on the safety, security and aesthetic qualities of the building and its common property including the facilities therein.

“Hence, the importance of the Sinking Fund. Owners paying monthly Sinking Fund contributions to the Sinking Fund Account is similar in concept to owners paying regular health insurance premiums so that there will be money for capital expenses such as hospitalization or surgery in the later years as they age and grow old.

“The collection of a Sinking Fund, however, should not be confused with the Charges meant for the general maintenance and management of the common property.

“To illustrate the difference, monthly maintenance charges can be likened to the regular maintenance costs of your car, such as for car wash and periodic servicing involving changing of motor oil, filter and spark plugs.

“Whereas the changing of your car’s carburettor or car engine or the re-spraying of your car will be a capital expenditure akin to sinking fund: he elaborates.

Unfortunately, according to Chang, the present legislation does not provide enough transparency and accountability of the fund leading to frequent grouses by strata property owners.

‘When the laws are unclear, additional by-laws could be formulated to reflect its strict usage. HBA believes that we must be guided by its intent and that we must pursue equity and fairness with a sinking fund that is transparent and accountable to its contributors and entrusted to the stakeholders.

“Developers and JMBs, who are managing strata developments pending the issuance of strata titles, and MC, after strata titles are available, should start by having regular meetings to communicate with owners.

‘For example, when repainting works are required, open tenders should be invited, and owners should be consulted for their consent via an extraordinary general meeting.

“To have a good corporate governance and transparency, the joint management committee or MC should form a procurement and tender committee that is independent of the office bearers. At least three tenders must be submitted; comparisons must be made to ensure that the most suitable contractor is selected for the job with regards to experience, competency, track record, product specification, product quality, manpower, completion period, liquidated and ascertained damages (LAD) and warranty period.

“There should be no room for favoritism, cronyism and persons having vested interest. Corruption should be eradicated at all cost otherwise there will forever be a stigma of mistrust amongst fellow owners: he insists.

He adds that the Sinking Fund Account is in fact a trust fund entrusted to a trustee playing the role of a ‘stakeholder’ who should provide owners with a copy of the audited annual account every year.

‘Such funds not used for a reasonable period 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.

‘They should be held fully responsible and liable. Misappropriation of the fund equals to criminal breach of trust (CBT) and is punishable by imprisonment: Chang further explained.

With a very thorough explanation on Sinking Fund and how the structure works, it is clear now that as a home buyer (with strata title), one has to be prepared for this extra costs but they have to understand that this fund is beneficial to help preserving the beauty and functionality of the buildings they are living in.

It takes two to tango and this means, home buyers need to maintain good communication with NB or MC of their buildings so that everyone will be satisfied on how the fund is being managed and most importantly, the money that are collected for the fund is being put to good use.

SINKING FUND STRUCTURE

  • During the management period by the developer, it is easy to establish the amount of the Sinking Fund contribution as the law provides that such contribution is equivalent to 10 percent of the Charges.
  • After the management period by the developer, the law provides that the JMB or MC shall determine its Sinking Fund contribution that shall be equivalent to at least 10 percent of the Charges. This means that the Sinking Fund contribution can be at a higher rate at 15 percent or 20 percent or 25 percent or 30 percent of the Charges depending on the type of building and its common property therein.
  • In a simple nutshell, the amount of sinking fund contributions is computed from the amortization of the estimated periodic building repainting cost and the estimated replacement costs of all major building parts and components over their life spans with inflation factor considered.
  • As the above computation of sinking fund contributions will be difficult for a layman to establish, it is best that the JMB or MC seek out the expertise of registered property managers to establish the appropriate amount of sinking fund contributions to be imposed on owners.

‘SINKING FUND’ CURRENT LEGISLATIONS

  • Housing Development (Control & Licensing) Regulations, 1989 (amended 2015) Under the new Schedule H and Schedule J: Sale & Purchase Agreement (since June 1, 2015) of the HD Regulations, stipulated in Clause 19 that:
    • From the date the Purchaser takes vacant possession of the said Parcel, the Purchaser shall pay to the Developer the charges, and the contribution to the sinking fund for the maintenance and management of the building or land intended for subdivision into parcels and the common property in accordance with the Strata Management Act, 2013
    • The Purchaser shall pay the charges, and the contribution to the sinking fund for the first four (4) months in advance and any payment thereafter shall be payable monthly in advance.
  • Strata Management Act, 2013 (Act 757) and permitted uses of the Sinking Fund Section 11(1) A developer shall open one sinking fund account in respect of each development area with a bank or financial institution —
    • if vacant possession of a parcel was delivered before the commencement of this Act, on the date of commencement of this Act (ie 1.6.2015) or
    • if vacant possession of a parcel is delivered after the commencement of this Act, at any time before the delivery of vacant possession, but in any case, before the contribution to the sinking fund is collected from the purchaser of any parcel in the development area.
  • Section 11(4) Notwithstanding any other written law to the contrary, all moneys in the sinking fund account shall —
    • not form part of the property of the developer;
    • be held in trust for the purchasers; and
    • be used by the developer solely for the purpose of meeting the actual or expected capital expenditure necessary in respect of the following matters:
      • the painting or repainting of any part of the common property;
      • the acquisition of any movable property for use in relation to the common property; or
      • the renewal or replacement of any fixture or fitting comprised in any common property

After the JMB is formed and has inherited from the developer, Section 24(2) applies.

  • Section 24(2) The sinking fund account shall be used solely for the purposes of meeting the actual or expected capital expenditure in respect of the following maters:
    • the painting or repainting of any part of the common property;
    • the acquisition of any movable property for use in relation to the common property;
    • the renewal or replacement of any fixture or fitting comprised in any common property;
    • the upgrading and refurbishment of the common property; or
    • any other capital expenditure as the JMB deems necessary
  • Section 51(2) applies after the MC has been established and the permitted uses are the following:
    • the painting or repainting of any part of the common property;
    • the acquisition of any movable property for use in relation to the common property;
    • the renewal or replacement of any fixture or fitting comprised in any common property and any movable property vested in the MC;
    • the upgrading and refurbishment of the common property; or e. any other capital expenditure as the MC deems necessary

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