Reserve Fund Guide

WHAT IS A RESERVE FUND

A reserve fund is a fund held by the Freeholder or Managing Agent on behalf of the Leaseholders and is set aside to cover the cost of major works or cyclical maintenance projects and improvements expected in the foreseeable future, usually a period of 10-20 years.

The reserve fund pays for works on the whole building and its grounds on behalf of all the Leaseholders. Should the Lease specify that a reserve fund is allowed, every Leaseholder has the responsibility to pay into the reserve fund for the period they own their home. It should also be noted that unless the lease specifies this, contributions to the reserve fund from annual service charges are not refundable when an apartment is sold and remains in trust for the benefit of the block.

HOW ARE RESERVE FUNDS BUILT UP

For every service charge a Leaseholder pays, a portion of the money goes towards the reserve fund. The reserve fund must go into a dedicated bank account and any interest this money makes while in the account belongs to the block.

The block’s annual budget should show how much is being collected into the reserve fund for the upcoming year. The money builds up over time, and the annual accounts sent to Leaseholders show a statement of the overall amount saved in the reserve fund for your block.

HOW IS IT DIFFERENT FROM SERVICE CHARGES

The service charge you pay goes towards the day-to-day running costs of your block and is used to cover items such as buildings insurance, maintenance, repairs, gardening and communal facilities, as well as for any staff that might work at the block.

The reserve fund is collected to help contribute towards the cost of future non-annual costs such as external redecorations, internal redecorations, carpet replacements or a lift replacement. Having money in your reserve fund means that when large projects such as these come up there’s already money set aside to help fund them.

WHY DO WE NEED A RESERVE FUND

A reserve fund with a healthy balance will allow the Freeholder or Managing Agent to cover the cost of major works without demanding additional service charges from Leaseholders in that particular accounting year. A well-managed reserve fund will also enhance the value of the property as prospective buyers will see this as an advantage over leasehold blocks without a reserve fund.

The importance of paying into this fund is often overlooked. It is easy to justify paying for something that you can see needs doing immediately, but not so easy to rationalise putting money aside for jobs that may need to be done in the future.

The reserve fund is there so that your block will always stay in the best possible condition. Regular maintenance and repair will help increase the lifespan of the block for as long as possible. This will also help to protect the value of the property.

Before major works (where costs are likely to exceed £250 for any apartment) are carried out, all apartment owners are informed of the proposed work, including details of the tenders from independent contractors, and invited to comment on the proposed works and costs.

DOES EVERY BLOCK HAVE A RESERVE FUND?

You can only collect a reserve fund if the terms of the lease allow for this. The lease may allow contributions to be collected as part of the annual service charge, which must be reasonable in order to satisfy the requirements of the Landlord and Tenant Act. If there isn’t any mention of a reserve fund in the lease, then there are a couple of options;

You could collect one anyway, with the written agreement of Leaseholders. However, this isn’t ideal because they would maintain the right to ask for their funds back at any time.
A better option might be to discuss with Leaseholders the option of getting the lease amended so that it does then permit the collection of a reserve fund. However, it should be noted that lease variations are difficult to achieve unless all of the parties including the Landlord or Freeholder agree to the proposed changes.

HOW MUCH MONEY SHOULD BE IN A RESERVE FUND?

There are many varying factors which makes this is difficult question to answer. The amount you need to spend over the lifetime of your block will depend on the size of the block, the number of flats in it and many other considerations such as the facilities inside, how the block is constructed and even the weather. The reserve fund is calculated based on an estimate of how much the works are expected to cost and when they are due to take place.

WHAT INFORMATION ARE THE FREEHOLDERS OR MANAGERS REQUIRED TO PRODUCE?

The Leaseholder has a legal right to request service charge accounts at the end of each accounting year. This summary must provide full details of any reserve fund, which would include the income to the fund, the separate items of expenditure and any interest that has accrued. The summary should also clarify the balance of the reserve fund on the last day of the accounting year.

CAN RESERVE FUNDS BE TRANSFERRED TO OR FROM THE SERVICE CHARGE ACCOUNT

The lease may specify what action can be taken in regard to moving funds between the service charge account and the reserve fund account. If the lease does not mention this, the guidance set out in the legislation and the government approved codes of practice should be followed:

The Freeholder or Managing Agent should not use reserve funds to meet any deficit in the annual service charge, unless all of the Leaseholders agree. A deficit occurs when the actual expenditure of managing the block proves to be greater than the estimated annual expenditure.

Unless the lease allows, the Freeholder or Residential Managing Agent should not transfer any surplus to the reserve fund. A surplus occurs when the estimated expenditure proves to be more than the actual expenditure for that year.

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