As well as service charges for ongoing management and maintenance work, residential leaseholders often have to contribute to funds that will be held in reserve to cover major works, be they planned (such as external decoration) or unexpected (when, say, lifts or boilers eventually need replacing.)
The idea is that you make small additional contributions throughout the life of the development and are not going to be asked for big, one-off payments at the time the works are required.
Contributing to such funds, where they exist, will be a condition of your lease and, because an individual’s contributions are not refundable when he or she sells their flat, the fund is always a valuable reassurance for current residents that the building can be expected to be kept in good condition. Besides, a healthy fund will generally add value to a flat when you come to sell.
There are two types of reserves: sinking funds and reserve funds. Sometimes the terms are used interchangeably, but it’s useful to be aware of what funds your building has and, whatever they are called, so you know what works are provided for and what, if any, might come as a nasty surprise.
Reserve funds enable a management company or landlord to accumulate money to pay for future recurring major works, such as periodic redecoration of the exterior and common parts of the building or new carpets.
Sinking funds are similar but are generally used to cover specific one-off costs which might only arise once or twice during a lengthy lease term such as new lifts, windows or a replacing the roof.
Money held in both reserve funds and sinking funds must be held in separate accounts to sums collected through the regular service charges. It is held on trust for the benefit of the leaseholders. You could liken the service charges to a current account, while the reserve funds are a savings account.
Of course, there is no guarantee that there will be enough money in the fund to pay for works when required, you may still be required to make additional one-off contributions at the time the works are required. You should expect your landlords, residents’ management company or managing agents to have planned maintenance and capital expenditure plans, to keep them updated and to set contributions to the reserve funds accordingly. Make sure, too, that contributions are not being kept artificially low, which might benefit the current leaseholders but can be bad news for longer-term residents and anyone wanting to sell their flat. Any buyer’s solicitor will be sure to make enquiries about the adequacy of reserve funds.
Don’t forget that you do have a say before major works are commissioned through the Section 20 consultation process.
What if there are no reserves?
Some leases allow management companies and landlords to demand money as a ‘one-off’ for urgent and necessary works. Bills for removing high risk cladding following the Grenfell tragedy are extreme examples (the government’s £200m fund only covers ACM aluminium composite.
Also, there may be a clause in leases enabling management companies or landlords to collect payments from leaseholders in advance.
Clearly, there is peace of mind in knowing that reserves are in hand. So, If you are looking at buying your freehold and/or varying a lease which has either no provisions or ambiguous, it might be worth talking to other residents involved in the purchase and to your solicitor about the benefits of building up the right level of funding.
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