What are reserve funds?

Many leases provide for the landlord to collect sums in advance to create one or more reserve or ‘sinking’ funds. The purpose of such funds is to build up a sum of money to cover the cost of irregular and expensive works such as external decorations, structural repairs or lift replacement.

There are usually two reasons for maintaining such a fund. The first is to ensure that all occupiers contribute to major works, not just those who are in occupation at the time they are carried out. The second is to even out the annual charges, avoiding large one-off bills, and to assist with leaseholders’ budgeting.

Leases sometimes say how much is to be contributed each year, but usually they do not and it is left to the landlord to determine the contributions. However, they must be reasonable and, because these are just like any other service charges, leaseholders have the same rights to challenge these charges, if they believe they are unreasonable, at the LVT.

Reserve funds should earn interest because they are generally held for a longer period than day-to-day service charges, which goes some way to meet increasing budget costs. Information on the holding of service charges and reserve funds can be found in the paragraph ‘Holding of service charges – Trust Accounts’ (see below).

Contributions to the reserve fund are generally not repayable when a flat is sold, but may be if the lease so provides.

A useful source of information provided by the Leasehold Advisory Service.

Right to Management Info works in partnership with service charge specialists Knight Accountants based in Hastings & St Leonards on Sea, East Sussex.

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