Reserve funds and long-term maintenance plans

A reserve fund, also called a sinking fund, is money collected through the service charge each year towards large, predictable costs such as a new roof, redecoration or a lift replacement. It means the bill does not land all at once. It can only be collected if the lease allows it.

Why have one

It spreads the cost fairly. Each owner pays towards the wear and tear during the years they own the flat, so the whole bill does not fall on whoever owns it when the work is done.
Essential repairs are not delayed for lack of money.
It avoids sudden large demands that some owners will struggle to pay.
Buyers and their solicitors look for one. A healthy fund makes a flat easier to sell.

What the lease says

Everything depends on the wording of the lease.

If the lease says a fund ‘shall’ or ‘will’ be kept, the landlord must keep one, even if some leaseholders would prefer not to pay into it.
Some leases do not use the word ‘fund’ but allow the service charge to include the cost of future works. That is enough.
Some leases allow a reserve only for particular items, such as lifts or plant. The money can then only be collected for, and spent on, those items.
If the lease is silent, there is no power to collect a reserve. A voluntary fund has no legal standing, and anyone can decline to pay or ask for their money back.

Where leases do not allow a reserve fund, they can be varied, by agreement or through the First-tier Tribunal, although a tribunal variation is not automatic.

How the money is held

Reserve fund money is held on trust for the leaseholders under section 42 of the Landlord and Tenant Act 1987, and any interest it earns belongs to the fund. Professional rules require it to be kept in a client account, separate from the agent’s own money. At Butlin Property Services, client money is held in a dedicated client trust account with Barclays Bank and is checked every year by accountants.

The fund is held for the building’s leaseholders as a group, not in individual pots. When a flat is sold, the seller’s contributions stay in the fund, unless the lease says otherwise.

The long-term maintenance plan

The right contribution comes from a plan, not a guess. A long-term maintenance plan lists the main parts of the building, estimates when each will need work and what it will cost, including fees and VAT. It should cover the roof, windows, outside walls and decoration, shared interiors, lifts, electrics, drainage, and roads and boundaries. Ideally the plan starts with a surveyor’s report on the building.

The sum is simple: the likely cost of each item, spread over the years left before it falls due. A £40,000 roof expected in ten years needs £4,000 a year. In a block of 20 flats paying equal shares, that is £200 a flat each year.

No plan can forecast exactly. Costs and priorities change, so the plan and the contributions should be reviewed every year when the budget is set. Leaseholders are still consulted under Section 20 before the money is spent on major works.

Year-end surpluses

If the service charge account ends the year with a surplus, it can be added to the reserve only if the lease allows that. Many leases say a surplus must be credited or refunded to leaseholders.

If there is no reserve fund

A building without a fund still needs a plan. Leaseholders should be told well ahead what work is coming and roughly what it will cost, so that they can save for it. Work should not be put off because money has not been set aside. Delay usually makes the repair more expensive, and a tribunal can find the extra cost unreasonable.

Where a backlog has built up, the tribunals have said that the financial effect on leaseholders is a proper factor in deciding whether to phase the work, alongside how urgent it is and whether phasing would cost more overall.

How we set contributions

For the developments we manage, the reserve contribution is part of the yearly budget, which we prepare for the freeholder or the directors of the management company to review and agree. If you would like to know how the figure for your building was reached, ask your property manager, or see the service charge section of our FAQs.