Sinking funds are common in the management of commercial property. Increasingly they need to be considered in residential developments when dealing with the sale and purchase of the property.
There are for example,
- FF & E Reserves (for replacing furniture, fittings and equipment). These are held in connection with apartments leased to hotel or serviced apartment operators.
- There can be sinking funds where an incorporated society has been established to look after common property in a rural subdivision.
- Under the Unit Titles Act 2010, there may now be a long term maintenance fund, contingency fund or a capital improvement fund established by a body corporate as well.
As a general rule, sinking funds are not apportioned on settlement between a buyer and a seller. The payments are made by the seller as part of the ongoing cost of ownership and are not viewed as an annual expense that should be shared.
In a contract for the sale of a commercial building where there is a sinking fund, you commonly see an express clause making clear how the sinking fund is to be dealt with. For example it may provide that the balance of any unexpended sinking funds will be paid to the buyer on settlement. A credit will be given to the seller in respect of those funds paid.
In the residential setting, commonly the underlying documents make the liability of the owner of the property, to pay into the sinking fund, clear. They will also deal with what happens on the sale of a property. Unfortunately this is not often covered in the agreements for sale and purchase. Instead it becomes a matter for the respective lawyers to deal with in the run up to settlement.
Body corporates hold sinking funds created under the Unit Titles Act 2010. As a general rule, they will not be refunded to a seller on sale or contributed to by a buyer on settlement (by way of apportionment) without more. The pre-contract disclosure statement should identify the balance held by the body corporate in the respective sinking funds, as at the date of the last financial statements. Both the seller and the buyer then have relevant information pre-contract, so they can consider the position.
Consider sinking funds. Particularly if you are a seller, whether of commercial or residential property. Build them into your price or include an express clause and be clear what the position is. It will be useful if this is addressed in the new agreement for sale and purchase.
[Postscript: The 9th Edition Agreement for Sale and Purchase of Real Estate now makes clear that the long-term maintenance fund, capital improvement fund and any contingency funds established under the Unit Titles Act 2010 are not apportioned on settlement.]