Sinking Fund Reality Check
by HBA, NST Property Times 5-March-2002
Current legislation does not provide much guidance on the collection
and use of this money, unfair practices are emerging
Hisham has been living in a condominium he purchased eight years ago.
All of a sudden, the developer came round one day and told him that he
has to pay a separate monthly charge to what was described as a
"sinking fund".
Naturally, Hisham was upset, for according to his documents, the
sinking fund "is part of the maintenance fee", which he had been
promptly paying ever since taking possession of his unit.
What upsets him, he said in a complaint to us at the National House
Buyers Association (HBA), is that he was not told what proportion of
the maintenance fee was to go to the sinking fund, or the purpose of
the fund, when he bought the unit.
All he knows is that if he does not pay promptly the additional sinking
fund fees that has now been imposed, penalty charges would be added to
his bill. His query to the developer brought the response that "at
present there is no money at all" in the sinking fund.
In the case of Param, the developer of his condo unit had been
collecting contributions to the sinking fund, but the swimming pool and
common areas are in a state of neglect.
In yet another case, a group of owners were upset that the developer
had used part of the sinking fund to offset "current liabilities".
These are some of the grouses that we frequently hear from owners of
strata property who are not satisfied with the way developers are
handling the sinking fund. Let us now examine this issue.
What is "sinking fund"?
Both Section 46 of the Strata Titles Act, 1985 and Schedule H of the
Housing Developers (Control and Licensing) Regulations 1989 (amended in
2002) stipulate that the sinking fund (called "special fund") in the
Strata Titles Act) be used to meet major liabilities of the strata
estate.
Some developers collect this fund by way of governing documents, such
as a Deed of Mutual Covenants, prior to the establishment of a
management corporation for the development, while others rely on the
provisions of the Schedule H.
Unit owners in a strata title development must contribute to this
sinking fund, which is kept as a reserve fund to meet major replacement
of parts of the common property.
The collection of the sinking fund 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 developer has agreed
to provide.
As a building ages, parts need to be replaced and without a sinking
fund, it will deteriorate. It is easy to understand this if you compare
it with the maintenance of 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 occurances such
as new tyres, a broken windshield, or even repaint.
Permitted uses of the fund
Both the Strata Titles Act and Schedule H require that a sinking fund
be set up for:
Painting or repainting any part of the common property, which is a
building or other structure;
Acquisition of any movable property for use in relation with the common
property;
Renewal or replacement of any fixtures of fittings in any common
property and any movable property vested in the body corporate; and
Any other expenditure, not being expenditure incurred under subsection
5 or section 43, to meet a liability for maintenance or for settling
any defaults in payment by a proprietor (Section 43(5) empowers a
management corporation to recover monies due to it for work, repairs or
any act done on behalf of parcel owners through court action.)
What is inadequate?
Unfortunately, current legislation do not provide much guidance on the
collection and use of the sinking fund, and unfair practices as well as
unintended results are emerging, as seen from the frequent grouses of
strata property owners.
The HBA believes that we must be guided by its intent; that we must
pursue equity and fairness and that the best way to achieve the
objectives of a sinking fund is through transparent management and
accountability to the people contributing to the fund.
Developers who are managing property pending the issuance of strata
titles should start the ball rolling by having regular meetings with
the buyers.
With use and age, major items or fittings in a building will
deteriorate and need to be replaced. Owners expect their management
corporation to fulfill its obligations to replace worn or obsolete
items. This will ensure that the aesthetic qualities of the development
are maintained, thereby also enhancing property value.
In some instances, owners of strata title property may desire a better
security system than the one originally provided by the developer. Such
a move would mean additional expenditure, which unit owners would have
to pay for, either through a special assessment or from the sinking
fund.
If there is no trust that the sinking fund has been correctly used,
then it would be nearly impossible to get owners to contribute more.
Similarly, if a condo or apartment block requires a fresh coat of
paint, tenders should be invited and owners should be consulted and
their consent obtained.
Sinking fund study
As the amount appropriate for a sinking fund is often difficult to
establish, the first party to manage the strata property should project
the cost of repairs that could be expected in say, the first five to 25
years.
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 unit owners. If the building is to be repainted every
five years, what would the projected cost be? This study has be a
long-term one and needs to be reviewed, updated and revised annually.
Role of owners
If there has been no information about the sinking fund nor any plans
made for its utilization, it's about time the unit owners
get-in-the-know.
Strata title owners should play an active role, right from the time
they receive vacant possession of their units, by forming pro-tem
committees or residents' associations, while those intending to buy a
unit in an older strata estate should demand to see the sinking fund
and plans.
Misappropriation of fund
Clause 20 of Schedule H stipulates that the money accumulated in the
sinking fund is to be held by the vendor in trust for all purchasers
until a management corporation for the property is established. The
vendor or his agent shall be obliged to provide purchasers with a copy
of the annual audited accounts for services paid for with this fund.
The sinking fund is, in fact, a trust fund that is entrusted to a
trustee, who plays the role of "stakeholder". If the fund is not used
for a reasonable period of time, it should be placed in an
interest-bearing account, such as a fixed deposit with an established
bank or financial institution.
Stakeholders who unilaterally dig into the fund without proper
authorization should be held responsible and accountable. This fund
should at all times be transparent to all parties that contribute into
it. Misappropriation of the fund is tantamount to criminal breach of
trust, which is a crime punishable by imprisonment.
It would make things clearer if the Ministry of Housing and Local
Government comes up with a directive to all strata estate developers
and managers of properties sold before Schedule H was revised in 2002
to comply with the new provisions.
The National House Buyers Association is a voluntary,
non-profit, non-political organization manned by volunteers. Email:
info@hba.org.my; Website:
http://www.hba.org.my