Buying an apartment involves a layer of due diligence that house purchasers rarely have to think about: the finances of the owners’ management company (OMC) that runs the building. Two terms come up again and again in this context, service charges and sinking funds, and buyers sometimes believe they mean the same thing. They do not, and understanding the difference can save you from an unpleasant surprise a year or two after you move in.
What is a service charge?
The service charge is the annual fee every apartment owner pays to the management company to keep the building running day-to-day. It covers things such as:
- Buildings insurance for the development
- General maintenance, cleaning, and gardening
- Waste management and refuse collection
- Repairs to common areas, such as lifts, hallways, and car parks
- Concierge or security services, where these are provided
- Management fees and the legal and accounting costs of running the OMC
In short, the service charge pays for the ongoing, recurring costs of the building. It is similar in principle to a monthly utility bill, in that it covers what is used and consumed each year.
What is a sinking fund?
A sinking fund is different. It is a separate savings account, held apart from the day-to-day service charge account, which the management company builds up over time to pay for large, non-recurring works. These are the big-ticket items that do not need attention every year but will need attention eventually, such as replacing a roof, upgrading lifts, repainting external render, replacing fire alarm systems, or resurfacing a car park.
Under the Multi-Unit Developments Act 2011, management companies are required to establish a sinking fund within three years of taking ownership of the common areas, and each apartment owner must contribute a minimum of €200 per year, or such other amount as is agreed by members at a general meeting. The idea is straightforward: rather than hitting owners with a large, unexpected bill when the roof finally needs replacing, the cost is spread out and saved for gradually, year on year.
Why the distinction is important to understand for buyers
A concern clients often raise with our conveyancing team is why the service charge figure quoted to them by an estate agent did not seem to match what the management company was actually collecting. The answer is usually that the sinking fund contribution is a separate line item, and it is easy for a buyer to overlook it, or to assume it is included within a headline service charge figure when it is not.
More importantly, a healthy sinking fund is a genuine indicator of how well a development has been managed. Research carried out by the Society of Chartered Surveyors Ireland found that the statutory minimum of €200 a year is, in many developments, considerably less than what is actually required to fund future works, and that a large proportion of managed buildings have had to raise emergency levies on owners because their sinking fund reserves were inadequate. If you buy into a development with an underfunded sinking fund, you may find yourself facing a substantial one-off levy shortly after you move in, on top of your ordinary service charge.
Key things buyers need to be aware of
Before you sign a contract to purchase an apartment, it is worth asking your solicitor to check the following on your behalf:
- The current sinking fund balance and how it compares with the number of units and the age and condition of the building. An older development with a small reserve is a red flag.
- Whether a Building Investment Fund report or similar long-term maintenance plan exists. This is a professional assessment of future capital works and the funding required to meet them, and its absence often signals that contributions have simply been set at the statutory minimum without proper analysis.
- Recent minutes of the OMC’s annual general meetings, which will show whether any special levies have been proposed or raised in recent years, and why.
- The most recent set of management company accounts, to confirm the sinking fund is held in a genuinely separate account, as required by law, rather than mixed in with day-to-day service charge income.
- Whether the current owner is up to date with both service charge and sinking fund contributions, since arrears can sometimes follow the unit rather than the seller.
- The annual service charge budget itself, broken down by category, so you know precisely what you are paying for.
We always encourage our clients to raise these questions early, ideally before an offer is accepted, rather than leaving them until the final stages of conveyancing when there is less room to negotiate or to walk away.
Where to find more information
The Citizens Information website provides a clear overview of how management companies, service charges, and sinking funds operate under the Multi-Unit Developments Act 2011. The Society of Chartered Surveyors Ireland has also published detailed research and consumer guidance on sinking funds in apartments and on service charges more generally, both of which are worth a read for anyone considering an apartment purchase.
Talk to our conveyancing team
Checking the financial health of a management company is not something most buyers have the time, or the specialist knowledge, to do thoroughly on their own. The conveyancing team here at McCarthy + Co Solicitors LLP routinely reviews management company accounts, sinking fund statements, and AGM minutes as part of the pre-contract enquiries on apartment purchases, so that our clients understand exactly what they are buying into before they commit.
If you are considering purchasing an apartment and would like guidance on the sinking fund, service charges, or any other aspect of the conveyancing process, please get in touch with our team. We would be happy to help you through the process with confidence.
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