Content area
Full Text
Introduction
A sinking fund is accumulated for the purpose of repairing or renewing major items of plant and machinery, and is directly funded through service charge payments by the occupiers (tenants) of a building to its owner (landlord). A service charge is defined as "the mechanism by which the landlord recovers from tenants that expenditure which the landlord expends in relation to the repair and maintenance of the building, plant and machinery and the provision of services" ([3] Forrester, 2008, p. 1). Section 18 of the Landlord and Tenant Act 1985, amended by the Commonhold and Leasehold Reform Act 2002 provides the legislative definition. Service charges are described as a consistent source of dispute between landlord and tenant, although whether this is fair is open to conjecture ([8] RICS, 2009a).
At core, the service charge is a means of the landlord claiming expenses from the tenant for works carried out in order to keep the building in operation for the tenant's use. Because of the annual variance in the sum, depending on what work might be done in any given year, this figure needs to be charged each year, and then predicted versus actual expenditure is later reconstituted. Of course, the issue of "improvements", long-term maintenance issues, sinking funds and the like adds further complexity. Additionally, a service charge is only payable if the lease specifically requires it.
In order to ameliorate the antagonisms within this process, the Royal Institution of Chartered Surveyors (RICS) published a Code of Practice, Service Charges in Commercial Property, which came into force in 2007 ([7] RICS, 2007). There is little doubt that the Code has improved practice, but the extent to which such improvement can be deemed to be the same as having created an acceptable level of practice is far less convincing (see for example [1] Eccles and Holt, 2009).
The following paper examines the specific issues concerning the treatment of sinking funds within the Code of Practice, its subsequent guidance, and what is actually happening in practice. Sinking funds are of special interest because they suffer a particular problem in that the average lease term is six years and a substantial number are shorter than this ([9] RICS, 2009b). Therefore, it is hardly surprising that owners...