Sinking Fund

As managing agent, it is L&Q's duty to maintain a sinking fund (also known as a reserve fund) to accrue funds for major works within our apartment blocks. Following a review they have established that the current rate of accrual into the sinking fund is, in most cases, insufficient to meet expected needs and that for major works, residents could face additional demands for funds.

The initial review has provided numbers which in some cases are very high and would clearly be unacceptable. On this page we cover:

Costs identified and the assets likely to be included in sinking fund use.

The methodology L&Q used to produce the numbers so that you can test the thinking and assumptions.

The balance of risk (of sinking fund shortfall) vs in year accrual of funds.

It is important we all plan ahead for the more substantial repairs that will be required as the buildings age. Major works are a reality of managing any building over time. You to have a say in how we (as each block) prepare for these costs.

Its important to understand that this is not L&Q raising prices again, this review and analysis is a result of prudent management that is their duty to perform.

Sinking funds are held for the benefit of the block as a whole and not for individuals, whichever option is chosen, this will be applied to all the residents in a block and not to individual residents.

We recognise that the sinking fund is our money. Interest is added to the balance of the sinking fund at the end of each financial year. You will find the status of your sinking fund in your annual service charge reconciliation statement sent in September 2024.

We CMRA (Chobham Manor Residents Association) have been working with L&Q to explain the details of the review and calculations and to help to formulate some options for your consideration. See the following useful documents:

We have put together the spreadsheet for you to play specific options. To do this:

Download the spreadsheet to excel or make a copy and run it in GoogleSheets. download this to play specific options in the spreadsheet.
To "run" the options, go to the sheet for your block and use the drop downs to test the cash flow (spend over years). The red cells show when the fund will run dry. You can also safely change the cells in yellow - that will change the costs and expected life.
Take a look at the life of the asset - if there is low usage then the replacement cycle could be extended
Take a view on the cost - more difficult to assess but there are perhaps areas where replacement costs could be lower. We have put this together for you to run options to better inform your decision.

if you are finding this difficult come along to one of our surgeries. If you need help contact secretary@chobhammanor.org.

Also see the further review argument below.

L&Q Methodology

The review L&Q carried out was an accounting exercise using standard life expectancies and the pricing approach we currently use for calculating sinking fund contributions. Following this review, they engaged an external surveying firm to validate our assumptions, based on one of the blocks at Chobham Manor. They were instructed to carry out a desktop review of the sinking fund schedule to:-

Consider asset life expectancy

Cost allowances for replacement of those key components

Provide comment as to whether the life expectancy and cost allowances stated for a component is fair.

For some components they considered our allowances for life-expectancy and anticipated costs for replacement to be reasonable, for others, the life expectancy periods stated for each were longer than would be typically expected in their experience, and the cost allowances for replacement of some of the items were low. Unfortunately, the report indicates that the amount charged for the sinking fund within your service charges is too low so L&Q would recommend an increase.

Further Review

There were limitations to the desktop review. L&Q have not had a chance to review the current state of each and every asset, this would be a very big task, so they have made assumptions. Certain assets are driving costs e.g. lifts, it could be argued that in some cases on Chobham Manor, usage may be lower than industry standards and so their life could be longer, however, other assets e.g. doors and entry systems have a shorter life. They will assess the major items on the estate to reach a better understanding of their real lifespan in due course. L&Q will not replace any item unless there is a solid case for action.

L&Q have presented the details of the calculations so that you can assess the balance between building a pot of money to cover everything to taking or accepting the risk of a shortfall. The closer we get to the end of the life of an asset, the greater the risk of a shortfall if the sinking fund is too small.

L&Q have used industry standard models and prices. It seems likley that low usage lifts will last longer so the cost will be delayed. Also the costs used are standard costs. We are aware of other estates that have replaced lifts for lower costs. Its for each resident/block to asess the situation and the risks.

Consultation and Options

The full cost as recommended by the review is high and you may wish to take on more risk (of a shortfall in funds) in exchange for a more manageable annual/monthly contribution.

The fund will be adjusted on a block by block basis and the amount accrued could be open ended. To support your decision we have created and costed a series of options, you will see those in the spreadsheet. These are as follows:-

Option 1: Contributions remain unchanged from the current approach with annual inflationary increases. This is the highest risk of shortfall.

Option 2: Contributions remain unchanged from current approach with annual inflationary increases plus an additional % increase on block items only e.g. 10%.

Option 3: Amend contributions to the full estimated replacement cost of every component. (This is the highest cost option).

Option 4: Amend contributions to the full estimated replacement cost of every component, but assume the replacement cost is 40% of the current ‘book’ replacement cost (this is akin to assuming that the asset life can be extended and spreads the cost).

Option 5: Amend contributions to the full estimated replacement cost of 5 main components (Roof, Windows, Fire Protection, Cyclical Decorations, Lift (where applicable), again assume the replacement cost is 40% of the current ‘book’ replacement costs.

To be clear, L&Q increase the sinking fund contributions by inflation each year to cover the inflationary increase of the asset replacement cost - ie the asset costs shown in the spreadsheet are present day, not future costs.

L&Q will review the responses received from each block to determine where a majority (51% or greater) has been achieved for one of the options detailed above and the residents in each block informed of the outcome.

Where no response is received from a resident, this will be viewed as wishing to continue with the current approach (Option 1).

You can contact L&Q with your views on whether you would like sinking fund contributions for your block to be amended. You can respond by emailing SCharges@lqgroup.org.uk.

What are major works?

Major works are normally defined as works that are required to a block/estate which are not expected to arise on a regular basis. Examples of major works are:-

Cyclical Decorations
Roof Recovering/Replacements
Window Replacements
Fire Protection System Replacement
Lift Replacement

Additional costs such as access (scaffolding) can also be included in the cost of major works.

Major works could include works at the Estate level such as replacement of paving or roads.

Major works do not include costs that occur more frequently which may appear on final service charge statements such as day to day reactive repairs/maintenance.

What is a sinking fund?

Sinking funds are long term plans to enable homeowners to spread the cost of replacing components when they reach the end of their life and major works. Contributions are paid as part of annual service charges.

When will any changes to sinking fund contributions be applied?

Where the residents of a block opt for one of the options, changes to contributions will commence in April 2025.

How much will the major works cost?

Due to their nature, major works can be expensive, and costs have significantly increased in the last few years due to inflation. It is impossible to know exactly how much major works to a block will cost.

The cost of major works is always subject to changes in the cost of materials and labour. Any estimates can quickly become out of date. Homeowners should keep this in mind when considering future service charge liabilities under the lease.

The cost of major works is managed through the relevant service charge provisions in your lease. This means the costs will be apportioned to the properties in a block which benefit from the component being replaced.

What happens if the sinking fund is not sufficient to cover the cost of major works?

Where there is not enough money in the sinking fund to cover the cost of any major works to a block, your lease requires you to make a one-off additional payment to cover your flat’s share of any shortfall. Depending on the works required, this can be a substantial amount.

Major works, because of their cost will be subjec to Section 20 consultation - see below.

Will an increase in sinking fund contributions reduce the risk of homeowners having to make additional payments?

An increase in contributions will reduce the risk of a shortfall. However, it will never eliminate the risk. Market conditions at the time major works are required could result in higher or lower costs.

Will I be consulted when major works are required?

There is a formal consultation process to be completed (Section 20) when any major works are to be carried out where the cost will be greater than £250 per unit (inc. VAT).

This process will still apply even if there is sufficient money in the sinking fund to cover the cost of the works.

Can I take my sinking fund contributions with me if I move?

Any contributions made by a resident into a sinking fund remain in the fund for the future benefit of the scheme. However, the existence of a sinking fund should enhance the value of the property being sold.

Does L&Q charge to 15% management fee on sinking fund contributions?

No, although leases do permit this. L&Q do make an administration charge for managing major works but that will be made clear when the Section 20 document is prepared.

Can we remove the sinking fund altogether?

In theory, you could but then properties in that block would become completely un-sellable as conveyancers check for the accrual of funds for major works.

Where can I find the current status of the sinking fund for my block?

You will find the current status on your final service charge reconciliation statement (the last one was sent in September 2024).

The number is also shown in the spreadsheet.

Do commercial properties make a contribution?

Yes, but for tax purposes (their tax), presenting that annually is very complex so we do not show it. When works are commissioned, the landlord of the commercial units would contribute towards applicable works.

Is there an estate sinking fund?

It’s all built into one pot. Freeholders make a contribution for the replacement of estate assets e.g. roads, pavements, lighting etc.

What about those blocks who have elected the Right to Manage (themselves)?

The majority of the fund for their block has been transferred to the new managing agent. As the managing agent for the estate, L&Q has retained funds for replacement of estate assets, it is the responsibility of the block managing agent to set the accrual of their own funds. L&Q will continue to levy charges for the estate proportion similar to freeholders.

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