Reserve Fund - thousands spent behind our backs - what can we do?

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    I'd actually be most concerned about the reserves adjustment. I think the rest is the result of years of incompetent management, and then a new accountant trying to bring the accounts back into shape. The freeholder should be most worried all the expenditure over 18 months ago, which has not previously been reported to the leaseholder, and therefore may not have been chargeable to them, even though they benefited from it.


      The "reserve fund" is unspent money collected from the service charges paid by leaseholders ( and this money is set aside for future maintenance of the building )
      There should not be any "bad debts" charged to the "reserve fund".


        The reserve fund, from an accounting point of view, is not money in the bank. It includes debts.

        When a service charge demand is issued, the reserve fund goes up as does accounts receivable.

        When a leaseholder pays their service charge, there is no change in the reserve fund value, but accounts receivable goes down and cash in the bank goes up.

        When it becomes apparent that the service charge will never be paid, the accountant must reflect that the organisation is in a worse position than it would have been if the debts was recoverable, and they do that by reducing the reserves. I can't remember whether the balancing transaction is to reduce accounts receivable, or whether it is to increase a bad debts account.

        You keep confusing the cash and bank figure, with the more technical concept of a reserve fund that the accountant is using. TECH 03/11 says accruals accounting should be used unless the lease forces otherwise, and this meaning of reserves is the result of using accruals accounting, rather than the cash accounting that small unincorporated business are allowed to use.


          Assuming accounts were served - not clear here? - you'd expect to see the written off debtors amount under assets on the balance sheet for the year end before the period in which the reserves were reduced. or at least see that a similar sum was included in that total. If the debtors in that year were less it wouldn't make sense.

          If no accounts served, if a lessee requests a summary of costs in accordance with s21, LTA 1985, the landlord must provide the summary within one month of the request or within six months of the end of the accounting period in question, whichever is the later.

          ICAEW TECH 03/11 is a must read for lessees interested in how they should be informed about service charges. Find a free pdf to download by Googling the name.

          Check if the lease allows deficits on the income and expenditure account to be funded from a contingency fund or reserve. Usually, any net deficit or surplus is treated as an amount owed by or to lessees and must either be excess/balance charged if deficit or be credited against future service charges if surplus.

          A deficit should appear on the balance sheet as under assets as recoverable extra income, which should then be invoiced within a few weeks of the accounts being served.

          A surplus should appear on the balance sheet under liabilities (due refunding) which should then be credited within a few weeks of the accounts being served.
          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.


            Originally posted by Gordon999 View Post
            The "reserve fund" is unspent money collected from the service charges paid by leaseholders ( and this money is set aside for future maintenance of the building )
            There should not be any "bad debts" charged to the "reserve fund".
            Yes my thoughts too..I think the Service Charge fund and the reserve fund are separate entities, every LH will have to pay a service charge and funds may or may not be payable in advance and therefore build up as a fund, but not every lease allows a reserve fund and if it does it is built up to cover unforeseen large maintenance projects, IMO it cant be dipped into to recover debts or previous mistakes.

            Id certainly want to know what the bad debts and accounting mistakes are.

            Id assume S21 & S22 could be used to demand inspection of the Reserve fund accounts in the same way as standard Service Charge accounts.


            Holding funds in trust

            The recent case of Caribax v Hinde House Management Company [2015] UKUT 0234 (LC) reminds landlords of the importance of complying with S.42 of the Landlord and Tenant Act 1987 to hold reserve and sinking funds in trust. The reserve/sinking funds should be held in a separate bank account to the service charge monies.
            Advice given is based on my experience representing myself as a leaseholder both in the County Court and at Leasehold Valuation Tribunals.

            I do not accept any liability to you in relation to the advice given.

            It is always recommended you seek further advice from a solicitor or legal expert.

            Always read your lease first, it is the legally binding contract between leaseholder and freeholder.


              The OP is out of time on S21 and S22, unfortunately.

              I don't think the two funds are considered different from the point of view of those sections.

              The issue of bad debts still comes down to the confusion between the bank account and the reserve account on the balance sheet.


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