Is Your Sinking Fund Being Abused?
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Owners of strata properties would certainly be familiar with maintenance charges and sinking fund payments that they need to fork out each month.
According to the Strata Management Act 2013 (SMA 2013) which came into effect in June 2015, a strata owner or occupier needs to pay a monthly maintenance fee or service charge to the Joint Management Body (JMB) or Management Corporation (MC) which will be used to manage and maintain the common property of the strata development.
Under the same Act, strata owners are also required to contribute to the sinking fund which is normally at the rate of 10pc of the total amount of the maintenance charges.
While you may be told that the funds are being used to maintain the common property of the development, have you as an owner ever checked to ensure the funds are being appropriately used for the purpose specified under the Act?
Do you know that there is a provision under the SMA 2013 which tells you exactly what the sinking fund can be used for?
Chur Associates managing partner and founder Chris Tan tells EdgeProp.my that during the developer’s management period, the amount of contribution to the sinking fund is fixed at 10pc of the charges also known as the maintenance fees in Subsection 13(4) of SMA 2013 whereas during the period managed by the JMB or MC, the amount of contribution to the sinking fund shall not be less than 10pc of the charges.
Pursuant to Subsections 25(4) and 61(3) of the SMA 2013, the JMB and MC may fix the rate of the sinking fund to more than 10pcof the charges provided that such a rate is passed during a general meeting.
“The rationale [to fix the sinking fund at more than 10pc of the charges] is simple. The sinking fund is important — it is called the rainy day fund.
“One day, if the lift breaks down and it costs RM200,000 to repair, it will be very taxing on everyone. If we look at the expenditure during the developer’s management period, you may find that you hardly touch the sinking fund as everything is still new and under a warranty.
“But moving forward, when the JMB or MC takes over, which can be many years down the road, and a huge capital expenditure arises, you would need to use the sinking fund and sometimes, whatever collected may not even be enough,” says Tan.
When to use the sinking fund?
Under the SMA, one of the times you can use the sinking fund is for “the acquisition of any moveable property for use in relation to the common property”.
“For instance, if you have a swimming pool [as a common property], you would need a pump in order to be able to use the swimming pool. In this context, the pump is a moveable property for use in relation to the common property which is the swimming pool.
“Let me pose another example. What if the JMB or MC decides that they want to buy a shuttle bus to chauffeur the residents from one place to another? Then you can’t use this clause in this context. Although you are buying a shuttle bus which is a moveable property, it is not for use in relation to any common property,” Tan explains.
The Act also allows the sinking fund account to be used for the “renewal or replacement of any fixture or fitting comprised in any common property” such as the lifts, while another clause states that the sinking fund can be used for any other capital expenditure as the JMB deems necessary.
“But a lot of times, a lot of things (expenditures) which the JMB is not sure of will fall into this clause. For example, the shuttle bus. Buying a bus to shuttle the residents is not for use in relation to the common property, but if you want to get a buggy to be used for maintaining the roads which are deemed common property, then it may fall under the clause,” offers Tan.
When the JMB or MC is not sure whether to use the sinking fund or not, it is better to tap on the wisdom of the crowd and have a resolution passed at a general meeting.
“A decision made in the general meeting means that it is made by all owners. This is provided that all the necessary quorum has been met and there is no irregularity in the way the general meeting has been conducted.
“But then again, if it is an outrageous [resolution] like buying a Lamborghini for the chairman, then that is outright wrong,” Tan explains.
What about maintenance charges?
When it comes to maintenance charges, the funds collected are to be used only to maintain the common property.
“There should be a budget prepared each year outlining the items to be paid. For instance, you will expect to spend a certain sum for cleaning the swimming pool, to maintain the lift, landscaping, security and others. Such expenditure will be presented in the budget with an indication of how much is expected to be spent.
“But if you have to go over and above the budget, then it would be wise to get it tabled during the general meeting,” offers Tan.
Strata property owners should also “check the books” and play their part in ensuring that the maintenance fee collections are used appropriately.
Don’t ignore the common property
To prevent unwarranted spending in the long run, Architect Centre Sdn Bhd accredited architect and trainer Anthony Lee says owners should pay attention to the common property areas and note any defects once they get the keys to their properties.
Often, Lee says, the new owners will merely focus on their own units and facilities.
“Between the first six months to two years [when the project is completed], this is the time where people start moving in.
“They are usually not technical people. They could have been living in landed properties and they may not fully understand what strata living is all about. Furthermore, during that initial period when a new property is handed over, some of the common property areas may not be completed yet,” Lee explains, homing in on areas such as external wall painting, the roofs, pumps and big ticket items such as mechanical and electrical fixtures.
“The owners may assume that the developers will solve all these issues but sometimes, the contractor who is supposed to fix the things may not do it properly,” says Lee.
Tan: The rationale [to fix the sinking fund at more than 10pc of the charges] is simple, the sinking fund is important — it is called the rainy day fund.
Furthermore, many issues do not manifest themselves when the building is new.
“When the JMB comes in later, they may find that the Defects Liability Period (DLP) has expired or is almost expiring and all these common property defects have not been picked up, because how do you expect untrained people to pick up these technical issues such as leaks, cracks, equipment failure and untested electrical installations?
“When the problem escalates, that is when they (the JMB or MC) have to dig into the sinking fund to repair these things which could have been repaired by the developer if the problem was detected in the early days,” he says.
“The JMB or MC will have to engage independent accredited building inspectors to produce a report on what went wrong. Who pays for that? The money will come from the service charges or the sinking fund,” Lee elaborates.
Lee also highlights the need for managements to have transparency in their financial accounts. Chur Associates’ Tan concurs, adding that when owners take over the accounts from the developer during the JMB period, they have to be very cautious and look into the details.
Thus, Lee wants to encourage owners to not just focus on their own units but the overall development, because when they buy into a property, they are essentially buying into the entire building.
“Yes, we are not buying into the neighbour’s house but we are buying the walls, the lifts and the pumps. Property developers should be honest during the sales period on sustainable management – whereby the developer should be putting up an expected future cost of running the building. They need to be very truthful such as when you are buying into exclusivity, it equates to less people living in the building [which means higher maintenance fees for each owner],” says Lee.
The developer is usually there to help you in the transition phase [handover from the developer to the owners] so that the owners can carry out their own sinking fund plan subsequently.
Use of maintenance charges
Under Act 757 of the Strata Management Act 2013, the maintenance account shall be solely used for the purpose of meeting the actual or expected general or regular expenditure necessary in respect of the following:
• Maintaining the common property in good condition on a day-to-day basis
• Paying for the expenses incurred in providing cleaning services for common property, security services and amenities for the occupiers of the building
• Paying any premiums for the insurance effected under this Act or any other insurance approved by a special resolution in a general meeting
• Complying with any notice or order given or made by the local authority in respect of periodical inspection of any building in the development area in the manner as specified in the Street, Drainage and Building Act 1974
• Minor painting works on the premises of the common property
• Carrying out inspection of all electrical wiring systems of the common property and replacing or repairing any faulty wiring systems;
• Carrying out inspection, maintenance and repair of the main water tanks
• Paying rent and rates, if any
• Paying any fee incurred for the auditing of the accounts required to be maintained by the JMB under this Act
• Paying all charges reasonably incurred for the administration of the accounts required to be maintained by the JMB under this Act as may be determined by the Commissioner of Buildings
• Paying the remuneration or fees for the managing agent appointed under the strata management before existence of the Management Corporation
• Paying any expenses, costs or expenditure in relation to the procurement of services, including the engagement of consultants, legal fees or costs and other fees and costs, properly incurred or accepted by the JMB in the performance of its functions and exercise of its power under this Act
• Meeting other expenses of a general or regular nature relating to the maintenance and management of the building or land intended for subdivision into parcels and the common property
Use of sinking fund
The sinking fund account shall be used solely for the purpose of meeting the actual or expected capital expenditure in respect of the following matters:
• The painting or repainting of any part of the common property
• The acquisition of any moveable property for use in relation to the common property
• The renewal or replacement of any fixture or fitting comprised in any common property
• The upgrading and refurbishment of the common property
• Any other capital expenditure as the JMB deems necessary