Reserves not ring fenced to specific purposes

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    Reserves not ring fenced to specific purposes

    Hi,

    My property is managed by an RMC, who is doing a very poor job (and has selected and kept the worst Property Manager around).

    They keep including in service charges demands some provision for reserves against the various schedules, but they don't state their purpose (e.g. redecoration).

    In the annual budgets, they also use existing reserves for whatever they want, including gardening or just balancing out the budgets (meaning a short-term perception that things are managed properly and stay on budget, while depleting the funds for their intended purpose).

    My understanding is that reserves have to be accrued for specific stated purposes, and then only used for those purposes (else it's unfair for long term owners), and that a yearly statement should be showing what reserves were used for (specific expenditure).

    Is that correct?

    Thanks,
    T.

    #2
    A reserve fund can only be created if it is permitted by the lease, which should also set out the purposes for which it may be used. Gardening would not normally be a permitted purpose.

    Sometimes the lease will permit surpluses to be added to the reserve fund, again it depends on the wording of the lease.

    Deficits should not be deducted from the reserve fund but managing agents sometimes do to save issuing demands with covering notices. They also argue sometimes that if a balancing charge has not been made to the leaseholder, the leaseholder is unable to challenge that charge.

    The lease will also state whether or not the reserve fund must be kept in a separate bank account.

    The annual service charge accounts should summarise the movements on the reserve fund balance,

    Agents often use reserve fund monies for other purposes and argue that it is temporary and the funds will be replenished. Whether or not they can do so again depends on the wording of the lease.

    The main problem is if service charge expenditure is disallowed by a Tribunal, it is usually the reserve fund which suffers.

    There are many contenders for the worst managing agent award.

    Comment


      #3
      Technically, I think, reserve funds can be used for any purpose for which the service charge can be used; it is sinking funds that have a specific purpose. However, for the demands to be reasonable, there must have been a proper budget, which would have had to identify a provisional purpose for the reserves.

      Most leaseholders would rather reserves were used that that there were mid-year calls for extra payments.

      Comment


        #4
        The terms reserve fund and sinking fund have become interchangeable

        Comment

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