Management Company taking Loans out of Reserve Fund

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    Management Company taking Loans out of Reserve Fund

    Can the Management Company take a Loan from the Reserve Fund to cover arrears.

    There is a line in the Accounts "Loan from Reserve Fund" 50k and the Reserve Fund Balance correspondingly reduced by 50K.

    If they can't what piece of legislation can I quote?

    Probably not but it will depend on the wording of the lease.

    The only landlord and tenant legislation is L&T 1987 S42, which makes the reserve fund held in trust.

    Any other legislation would be relating to breach of trust, but the existence of a breach of trust is dependent on the wording of the lease.

    This is very common, and they are being unusually honest in actually recording it this way. Normally what they do is treat the reserve fund as a pool of money and simply take more than the defaulter's share out of it. The practical alternative is that work doesn't get done at all.


      As LH64 says, it is not unusual for a management company to raid the reserve fund monies. The lease should spell out the purpose of a reserve fund and lending monies is unlikely to be authorised, so there is probably a breach of the terms of the lease.

      50k is an enormous amount to be lending and arrears should not be running at that level, whatever the size of your building, It suggests that there are other problems, leaseholders are dissatisfied with the reasonableness of the charges or the management company is not carrying out its duty to collect debts. I suggest that you ask for some further explanation.

      You should also ask for details of the terms of the loan. Interest would be earned if monies were held on deposit, so unless interest is being charged on the loan, those leaseholders who are paying in accordance with the lease are suffering at the expense of those who are not paying on the due dates.


        Thank you, 35 Flats in total, the only entry for Reserve Fund is :-

        "such sum as the Management Company shall determine as desirable to be set aside in any year towards a reserve fund to make provision for expected future substantial capital expenditure"


          The context also matters. My lease is written in a way that would equate to there being one reserve fund per flat, which would tend to contraindicate any cross loans.


            Is "capital expenditure" defined in the lease? It is usually meant to refer to larger items of repairs and maintenance which do not recur annually., It would appear that the loan is not permitted. An average of £1,400 arrears per leaseholder is excessive, there seem to be major problems which need addressing.


              Thanks Guys

              What the Reserve Fund is to be spent on is not defined however there is this :-

              "an account of the Service Charge (distinguishing between actual expenditure and reserve for future expenditure)"

              The MC have never specified when monies have been taken from the Reserve Fund, nor have I evidence that the Loan has been paid back.

              So one last question as I'm in the FTT process and dealing with MC Solicitor. Can I ask to see Bank Statements?


                The reserve fund may only be used for its intended purpose ie capital expenditure. The MC does not have the right to ask for monies to be used as loans. It may also be ultra vires unless the Memorandum of Association permits the Company to grant loans.

                Do the service charge accounts indicate how much is held in the bank reserve fund account?

                You can ask the MC to allow you to inspect the bank statements and if they refuse, you can ask the Tribunal to issue a direction requiring the MC to disclose them to you. The usual excuse is Data Protection and any personal information could be redacted but the statements should be disclosed.


                  The reserve fund collected through the annual service charge levy belongs to the "leaseholders" and the unspent money held in the reserve fund account should for future maintenance costs of the building. Its not a money bank for making loans to cover freeholder expenses .

                  Capital expenditure belongs to the freeholder's account and such funding should not be drawn out from the leaseholder's service charge money for building maintenance.


                    "Capital" may have been used sloppily, but even if it was used in the sense of improvement, there is nothing stopping the lease from doing that, and is common for right to buy properties from social landlords. Its just very uncommon for private sector leases.


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