|That Sinking Feeling
01/11/2004 Published in Malaysian Business - Housing
& Property By National House Buyers Association of Malaysia
Funds: The Call for Accountability
After living in his condominium for eight years,
Hisham is suddenly informed that he has to pay a sinking fund contribution.
According to his documents, the contribution is supposed to come from the maintenance
fees that he has been paying promptly. Param tells us that his developer has
been collecting sinking fund contributions, but yet the swimming pool and common
areas are in a neglected state. Another group of buyers is upset that the sinking
fund has been used to offset ‘current liabilities’. Yet another group of owners
complains that their developer had allegedly passed the sinking fund to a now
defunct managing agent.
There are the grouses we frequently hear from
strata property owners who are not satisfied with the way their developers are
handling the sinking fund. Here, we highlight some issues on the fund.
What is it?
Both the Strata Titles Act, 1985 Section 46,
and the new Schedule H (since Dec 1, 2002) of the Housing developers) Control
and Licensing) Regulation, 1989, stipulate that the sinking fund (called ‘special
fund’ in the Strata Titles Act) be used to meet major liabilities of the strata
titles estate. In other words, it is a provision for a reserve fund to meet
the major repairs and replacement of parts of the common property. With use
and age, major items deteriorate and need to be replaced so that the aesthetic
qualities of the community can be maintained, thereby enhancing property values.
The collection of a sinking fund, however, should
not be confused with the service charges meant for the general maintenance and
management of the common property. To illustrate the difference monthly service
charges can be likened to the regular maintenance costs of your car, such as
for changing motor oil, filter and spark plugs.
The sinking fund is akin to a reserve fund to
replace auto part and for unexpected happening for example a punctured tyre,
a broken windscreen, a repainting job or a piston overhaul.
Permitted uses of the fund
According to the law, the sinking fund can be
painting or repainting any part of the common property, which is a building
or other structure;
the acquisition of any movable property for use in relation with the
the renewal or replacement of any fixtures or fitting comprised in any
common property and any movable property vested in the body corporate; and
any other expenditure not being expending incurred under subsection (5)
of section 43 to meet a liability for maintenance or for settling any defaults
in payment by a proprietor.
(section 43(5) ) id the subsection on the duties
and powers of management corporation to recover monies in an action in court
for monies due to the management corporation for work, repairs or act
done on behalf of parcel owners. )
What is inadequate here?
Unfortunately, the present legislations
do not provide much guidance on the collection and the study of the fund leading
to frequent grouses by strata property owners. Where the laws are unclear, HBA
believes that we must be guided by its intent, that we must pursue equity and
fairness with a sinking fund that is transparent and accountable to its contributors.
Developers who are managing strata estate pending
the issuance of strata titles should
start by having regular meeting to communicate
with buyers. When repainting works are required, for example, tenders should
be invited and owners should be consulted for their consent. Owners should play
an active role by forming a pro-tem committee or residents association upon
Sinking fund study
As the exact amount appropriate for a sinking
fund is difficult to establish, the first management party should project the
cost of repairs expected over the next 5 to 25 years. If the building is going
to be repainted every five tears, what is the projected cost?
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 the owners. It should also be reviewed,
updated and revised annually.
Misappropriation of Sinking fund
The sinking fund is in fact a trust fund entrusted
to a trustee who plays the role of a ‘stakeholder’ who should provide owners
with a copy of the annual audited accounts. Such funds not used for a reasonable
period of time should be placed in an interest-bearing account. Those stakeholders
who unilaterally dig into the fund without proper authorization should be held
responsible and accountable. Misappropriation of the fund is tantamount to criminal
breach of trust (CBT) and is punishable by imprisonment. It would make things
clearer if the Ministry of Housing and Local Government can come up with a directive
to all strata estate developer- managers of the same for those strata estates
sold before the enforcement of the new Schedule H.