Planned maintenance is likely to be easier to manage and less expensive than an ad hoc approach. It could also help you avoid unexpected emergencies and premium-rate callout costs.
Unless you already have a plan in place, a good first step would be to take stock and have a professional survey undertaken to assess the whole of the building. Make sure it includes a written report that highlights the significance and priority of any repairs required now and that may be needed within the foreseeable future. You may be able to combine this with a revaluation of the building.
The survey report should enable you to prioritise works, such as:
- Regular inspections (lifts, boilers, fire alarms etc).
- Urgent and requiring immediate attention.
- Requires attention within 18 months.
- Requires attention within the next 5 years.
- Requires further investigation.
- A desirable improvement with no timescale.
You can then build – and budget – for a 5 to 10 year plan and decide how to manage the works. This will probably involve deciding on how to manage the tender process and researching contractors too.
Where there is a residents’ management company, the leaseholders may choose to rely on the surveyor to specify the schedule of works and appoint contractors. Of course, it also means that leaseholders will often look to the directors of the management company if things go wrong and it’s wise to have Directors and Officers Liability cover in place [LINK: https://deacon.co.uk/products/directors-and-officers-2/]
A planned maintenance approach can allow time to raise the necessary funds, rather than having sudden large spikes in service charges that leaseholders may have trouble paying on time if not forewarned.
Major works and S20 consultation
The Commonhold & Leasehold Reform Act 2002 requires a three-stage consultation procedure to follow when carrying out works where the contribution from any lessee will exceed £250, or a long-term agreement where the contribution from any lessee will exceed £100 in one financial year. Its commonly called Section 20 (or S20) consultation because it is based on Section 20 of the Landlord & Tenant Act 1985, amended and updated… You can find out more about how to manage the “Section 20” consultation process HERE.
Reserve and Sinking funds
Many leases will allow for contribution towards a reserve fund in the service charges. A reserve fund is designed to ensure leaseholders help contribute towards unexpected expenses. A sinking fund is similar to a reserve fund, but is for more specific purposes.
Typically, a reserve fund a is built up over a short period of time, such as a year or two, to an amount that the freeholder believes is needed to cover an unexpected shortfall. With good budgeting and management of the block, the reserve fund generally does not need to be a large amount and acts as a top up of service charge contribution as and when needed. Building up a reserve fund for a short period ensures you can bridge the gap between the forecast and actual expenditure.
Most leases do not stipulate the amount leaseholders need to contribute to the reserve fund each year, so it is down to the freeholder or management company to determine it. The law provides checks and balances, and leaseholders have the right to challenge the reasonableness of service charges by applying to the First-tier Tribunal.
Sinking funds are a means of collecting extra funds for specific costs that occur occasionally. Examples are painting or roof repairs that are needed every 5 or 10 years, but do make sure your lease allows you to add a sinking fund contribution to the annual service charge.
Do keep in mind that Section 42 of the Landlord and Tenant Act 1987 requires you to hold reserve and sinking funds in trust. Though they are billed as part of the service charge, they should be held in a separate bank account. Here’s some useful advice on managing service charge money.
In summary, reserve and sinking funds should mean that leaseholders never need to face a large one-off bill. The existence of healthy reserves can also make a flat more attractive to new buyers. A good management company will have a thorough understanding of the needs of the building and be able to set these advance charges at just the right level to avoid surprising anyone with a potentially unexpected hefty bill.
The sole purpose of this article is to provide guidance on the issues covered. This article is not intended to give legal advice, and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and/or market practice in this area. We make no claims as to the completeness or accuracy of the information contained herein or in the links which were live at the date of publication. You should not act upon (or should refrain from acting upon) information in this publication without first seeking specific legal and/or specialist advice. Arthur J. Gallagher Insurance Brokers Limited trading as Deacon accepts no liability for any inaccuracy, omission or mistake in this publication, nor will we be responsible for any loss which may be suffered as a result of any person relying on the information contained herein.
Reviewed 26 April 2022