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Communal fees – sinking fund

Some Management Committees in Cyprus have set up a ‘sinking fund’; money set aside to replace/renew/repair items like swimming pool equipment, watering systems, external redecoration, etc.

Communal fees – sinking fundIN ADDITION to ‘communal fees’ paid towards the annual cost of insuring, maintaining, repairing, restoring and managing jointly-owned properties, some Management Committees (MC) in Cyprus have set up a ‘sinking fund’.

A sinking fund is money collected and set aside to pay for unscheduled maintenance and repair of equipment that is not part of the planned annual maintenance activity. This includes redecoration of exterior walls, stairwells and roof, replacement of swimming pool liners, lift breakdowns, etc.

Although it is sometimes ignored a sinking fund protects the owners of units having to find money at short notice. E.g. If swimming pool equipment fails and needs replacing the owners could suddenly find themselves having to pay hundreds, possibly thousands, of Euros for the replacement equipment and labour costs.

However, to stay within the law, monies collected for a sinking fund should not be combined with the communal fees collected. This will result in a surplus in the account that could lead to legal problems as MCs in Paphos and Famagusta discovered last year when they took no-payers to court. The District Courts ruled that as the communal fund was in surplus there was no need for further contributions to the communal fees.

Setting up a Sinking Fund

As there is no provision in the Jointly-Owned Buildings Law for a sinking fund, the majority of the unit owners have to agree to it by passing a motion at a General Meeting of Owners as described in Part V of the law.

Assuming the majority of unit owners agree the motion to set up a sinking fund, they need to agree a motion setting out the total money to be collected during the forthcoming year.

Once the total money to be collected has been agreed, a further motion setting out each unit’s contribution to the fund has to be agreed. Although there is no requirement for each unit’s contribution to be assessed on the size of the unit as set out in the Standard Regulations contained in the Jointly-Owned Buildings Law, it will probably be more acceptable if the calculation is the same used for calculating  communal fees.

Finally, the MC needs to set up a separate bank account for the sinking fund.

(Note that total money to be collected for the sinking fund and communal fees can be revised at any time at a General Meeting of Owners, including their Annual General Meeting.)

Readers' comments

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  • jan says:

    The District Court’s decision just about sums up Cyprus for me. So can I avoid paying my electricity bill as EAC is in profit? What utter nonsense.

    Ed: It’s the law that’s crazy. It should allow Management Committees to run along similar lines to other home-owner associations. They need operating funds for scheduled activities and reserve funds for unscheduled activities – held in separate bank accounts.

    There’s an article – The Difference Between Operating Funds and a Reserve Account – that explains how this works elsewhere for home-owner associations.

  • Chris says:

    Can you please provide further details of the court cases. Thank you

    Ed: You’ll find an article on the court cases at Legal status of a management committee – and the actual court judgements on the cylaw.org website.

  • Steve says:

    The idea of a sinking fund to avoid the need to ask owners to pay large unexpected amounts at short notice sounds good, but there are some drawbacks. When units are sold the seller effectively donates all the seller’s unspent previous contributions to the buyer, who may then have the benefit of a piece of expensive maintenance being paid for with little or contribution from the new owner.

    In addition, the sums lodged in sinking funds can grow over time to temptingly large amounts which some owners feel should be spent on other things, such as improvements, when such use of funds was not envisaged in the original sinking fund proposal and if changed by vote at an AGM, still would be using funds that at the time of collection were solely intended for maintenance.

    Ed: Any solution to the problem has its drawbacks. Even when someone sells they do not get back any the communal fees they’ve paid in the current year. The external walls of buildings will probably have to be redecorated every 5 to 7 years and it should be possible to schedule other future work (e.g. replacement pool liner). If the amounts grow to large then some money could be put in the communal fund and reduce the communal fees for that year. With careful budgeting and management of the funds it should e possible to overcome most of the drawbacks.

    I have a friend in London who is also the chairman of a Management Committee. Over a few year the sinking fund paid for replacing the windows of all the apartments.

  • Ray Atkinson says:

    I thought it was a requirement that Management Committees had a contingency fund?

    Ours has had one for some time to cover the cost of pool liner replacement when it has to be done, with a contribution added to it each year in the calculation of our annual contribution.

    Ed: Take a look at Legal status of a management committee and also an English translation of the law.

  • Stuart Lodge says:

    Ok so a sinking fund sounds reasonable, if all agree.
    What about those that are still in areas with existing communal fees.?

    Ed: A sinking fund is on top of the communal fees – used for for unscheduled maintenance and repairs that are not part of the planned annual maintenance activity.

  • Peter Davis says:

    A similar system exists in the UK where local authorities get money from the rates, not just to cover the cost of running their services, but also to invest the extra in risky areas such as Icelandic Banks where some Councils lost millions.

  • Tony Hales says:

    Does anyone know where I can buy the drugs that the judges have access to?

    Ed: It’s not the judges that are a problem – the law is a mess; full of inconsistencies.

  • Deanna says:

    I always thought ‘communal fees’ covered all eventualities…..
    Obviously not, unless they are not being used properly.

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