Video: Sinking funds, reserve funds and depreciation charges

Sinking funds, reserve funds and depreciation charges are all ways of making financial provision for future repairs or replacements of plant and machinery.

In addition to regular expenditure on services, owners and occupiers may need to make provision for occasional one-off outlays on replacing major items of equipment (for example a heating system). Major expenditure of a regularly recurring nature (for instance external redecorations) can also cause significant fluctuations in the amount of service charge payable each year.

To the extent that these items can be foreseen, it may make sense for both parties to spread the cost over a number of years by setting up a sinking fund, replacement fund or reserve fund, rather than charging the whole cost to the current tenant(s) in the year in which the expenditure is incurred.

Main contributors: Peter Forrester (Savills Ltd).

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