Is there a difference between a interim charge and reserve fund?

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    Is there a difference between a interim charge and reserve fund?

    I have a long lease from 1985 which states that interim charges have to be paid every 6 months on a specified date. I have recently bought this flat and have been asked to place a sizeable amount of money into a reserve fund despite there being no section 20 notices and all the large works being completed before I bought the flat. I know that I have to pay the service charge but there is no mention in the lease anything about reserve or sink funds. It just states a interim charge has to be paid (as part of the service charge). Does this just mean that the budgeted service charge has to be paid upfront every 6 months or that I have to pay into this reserve fund?

    #2
    If the lease makes no mention of a reserve fund or sinking fund then none has to be paid is my understanding. Read the lease carefully for words such as actual expenditure or future expenditure or such like.

    Funny story. Our lease says actual or reserved for future etc under service charge items but when we complained at the old LVT that our reserve fund was used in an odd way, the tribunal said we had no case because no reserve fund was allowed in the lease. Never did feel those guys read our lease, mind, just rushed us along so they could get to lunch on time.
    Do not read my offerings, based purely on my research or experience as a lessee, as legal advice. If you need legal advice please see a solicitor.

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      #3
      As already noted, payments on account are not the same as reserve funds. However, I think I would need to see the the context in which interim charge is used, to make sure that it really does mean payment on account.

      Section 20 is only needed before the money is actually spent. In particular, real sinking funds will not generate a section 20 for many years, only doing so in the year in which the work is done.

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        #4
        Before we enfranchised our freehold we had a situation where the managing agent paid the sinking funds back to selling lessees in the belief that it was the lessees' funds.

        I believe it is the case that the funds stay with the lease and cannot be paid back to the lessee. This assumes of course that a sinking fund is required within the lease.

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          #5
          Ideally, if there is a reserve fund, the lease will make it explicit that the actual leaseholder has no right to it.

          Comment


            #6
            Ah, the reserve fund versus sinking fund conundrum...never can keep these straight. Lease definately needs to be express about either (see Brady Sol. for one) and the freeholder gets to keep all that cash at end of leases - assuming that ever happens.

            These funds are notoriously abused. Before we got RTM an agent issued a long term budget indexed for inflation that when you ran it on in a spreadsheet would have accumulated over £400K at end of original term just for roof replacement - with other pots of cash on top. So what happened if concrete tiled roofs survived original term and just needed repairing now and then? So far we've spent about £2K on mortar patching.

            There are different ways to calculate a reserve fund but agents seem to like the 'grab as much as possible and hoard' approach. Also hoard any year end surplus for reserves too, whatever the lease says about refunding net credits. A leases is "small print" to some and from my experience block managers/book keepers rarely read them - maybe boss of agency opens them once when bidding for the contract?
            Do not read my offerings, based purely on my research or experience as a lessee, as legal advice. If you need legal advice please see a solicitor.

            Comment


              #7
              You are only obligated to pay what the lease states you are contracted to pay, and you only need to pay in accordance with the terms of the lease.

              If your lease makes reference to 'interim payments', it is likely that these are advanced payments towards the services charges for the year (although the exact wording of the lease will be important). The lease will also likely make reference to payment of a balancing charge (if costs are higher than the amount received as interim payments) or what will happen to overpayments.

              Reserve funds are collected to ensure that funds are available when predictable major works become due. If the people managing a block plan expenditure well, collecting for a reserve fund means that the cost of major works (e.g. the replacement of a flat roof) can be spread across the lifetime of the previous roof, and all leaseholders will pay a fair contribution depending on how long they own the lease.
              However, if the lease and any legal 'amendments', make no reference to a reserve fund, you do not need to pay into one and shouldn't voluntarily do so - but you do need to make sure that you can meet large service charge demands when they become due.

              Comment


                #8
                Thanks for this. After a look through the lease and raising this with the managing agent I have this e mail back:

                “ Whilst the lease does not specifically provide for a named “reserve fund”, para 5.4.16 states that the Lessors should “set aside… such sums of money as the Lessors shall reasonably require to meet such future costs as the lessors shall reasonably expect to incur… “. Para 2 of the Fifth Schedule states that “any surplus carried forward from previous years shall not include any sums set aside for the purposes of Clause 5.4.16 of this lease.” This therefore allows the Lessors to carry over sums of money from one accounting period to another for future works, hence a reserve fund is in effect provided for in the lease.”

                i am a little confused. Is the managing agent right? I have attached the two relevant pages.

                The reserve fund contribution has been around 5,000 a year and from this year 2,500. It seems like a lot and we have never been provided with a capex for the expected spend.

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