Owning one unit in a block of apartments is different from owning a house. You own your home and share the common parts: the stairs, lifts, compound, water tanks and security. The costs of keeping those shared parts in good order are met through a service charge and a sinking fund. Buyers and landlords who ignore them are surprised by bills. This guide explains how they work.

Sectional titles

Kenya's Sectional Properties Act allows each apartment to have its own title, called a sectional title, with a share in the common property. The building is administered by a management corporation made up of the owners, or in older schemes by a management company or the developer. The rules, the share each unit pays and the owners' voting rights are set out in the registered documents, so ask for them before you buy.

What the service charge pays for

The service charge covers the recurring costs of the shared parts:

  • Security guards, cameras and access control
  • Cleaning, garbage collection and gardening
  • Water pumping, borehole or tank costs and electricity for common areas
  • Lift maintenance and generator fuel
  • Building insurance
  • Management fees and audit costs

The charge is normally split by unit size or by an agreed share. It is paid monthly or quarterly, and non-payment can lead to penalties or a claim against the owner. A reasonable charge should come with an annual budget and accounts that owners can inspect.

What the sinking fund is for

A sinking fund is a reserve for large, infrequent costs that everyone will eventually bear: repainting, roof repairs, lift replacement, resurfacing the parking. Owners pay a small amount every month so there is cash when the work is needed, instead of a sudden large levy. A scheme with no sinking fund is a warning sign, because repairs will be delayed or financed by a one-off bill. Ask for the balance of the fund and the planned works. A savings and sinking fund tracker can help owners' committees record contributions and spending.

Before you buy

  1. Ask for the service charge statement and the arrears for the unit you are buying. Debts may follow the unit.
  2. Read the last two annual accounts and the latest budget.
  3. Check the management structure: is there a registered corporation, and are meetings held?
  4. Inspect the common areas for wear, leaks, water supply and security.
  5. Confirm there are no pending levies for major works.
  6. Add the monthly charge to your affordability calculation, with land rates and insurance. See costs of buying property: a checklist.

Tax treatment for landlords

A landlord who lets the unit can deduct the service charge as an expense when taxed on profit under annual tax. If the landlord pays MRI on gross rent, no deductions are allowed, so the charge is a pure cost. Compare the two routes with the MRI vs annual tax comparison and read MRI or annual rental tax. The sinking fund contribution is generally a capital reserve rather than an immediate expense, so ask your accountant how to treat it. For the wider list of costs, see deductible expenses for landlords.

Where service charge is billed on commercial premises, VAT may apply to it, because it is part of the supply: check VAT on commercial rent.

Who pays: owner or tenant?

The tenancy agreement should say whether the tenant reimburses the service charge. Many landlords include it in the rent. If the charge is billed separately, state the amount and how it can change, and keep receipts. Rent that includes service charge is still gross rent for tax. Use the rental income tax calculator with the full rent.

When you sell

A buyer will ask for a clearance certificate showing the service charge is paid. Any gain on sale is subject to capital gains tax: estimate it with the capital gains tax calculator and read selling a property: capital gains tax steps.

Frequently asked questions

Can the management company raise the service charge? Yes, through the process in the rules, usually by a vote at a general meeting after presenting a budget.

What if a neighbour does not pay? The corporation can recover arrears through the process in the rules and, if necessary, through a court claim.

Is a sinking fund refundable when I sell? Usually not. It belongs to the scheme, so the buyer benefits from the balance. Check the rules for your building.

Is service charge the same as rent? No. Rent is paid to the landlord for use of the unit. Service charge pays for shared services and is collected by the management body.