Sinking and Reserve Funds in Commercial Property
Written by Scott Jones, founder of CommercialPropertyKiln · Last updated
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In a multi-let building, sinking and reserve funds spread the cost of big future works across the years. They are useful, but only work if the lease allows them and they are held correctly.
What they are
- A reserve fund smooths regular but irregular costs, such as periodic redecoration, so tenants are not hit with a spike in one year.
- A sinking fund builds up over time towards a major future item of capital expenditure, such as replacing a roof or a lift.
Both spread cost and make service charges more predictable.
The lease must allow it
You can only collect a sinking or reserve fund if the lease permits it. Many older leases do not, and collecting one without authority invites a dispute. Check the wording before setting one up.
Holding the money
Contributions to these funds are held for the benefit of the tenants, so they should be held on trust in a separate, identifiable account, in line with the RICS code, and not mixed with the landlord's own money. Interest and the treatment of a tenant's contributions when they leave should follow the lease.
Practical point
For a small parade of shops a modest reserve for redecoration can be sensible, but only if the leases support it and the money is ringfenced. Take advice on the lease wording and the accounting. See commercial service charges.
Can a landlord collect a sinking fund?
Only if the lease permits it. Many older leases do not, and collecting one without authority invites a dispute.
How should sinking and reserve funds be held?
On trust in a separate, identifiable account, in line with the RICS code, not mixed with the landlord's own money.