Reserve Fund Contributions

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    Reserve Fund Contributions

    Some great advice here so thought I would post my question and see what others think and any advice you can offer.

    We live in a block of 50-60 flats and pay a monthly Service Charge which includes a contribution to the Reserve Fund. Freeholder and Managing Agent have recently realised the balance is too low to cover expected works (repairs are due in the next few years) so have increased contributions to cover the shortfall.

    Majority of the building is 10 years old, but some flats converted from a disused part of the building are only 4 years. The owners, myself included are disputing the fairness of this considering they are now expected to cover the shortfall from previous years.

    What's the general feeling on this, and how could it be challenged? Obviously OK to pay our share but shouldn't need to pay extra because managing agent hasn't collected enough in previous years and only had use of communal areas and facilities for last 4 years.

    For example, reserve fund contributions for first 7 years of building = £50 PA, now £250 PA to cover shortfall.

    #2
    Are you one of the 4 year flats, objecting because they collected two little before your flats came on the scene?

    Comment


      #3
      Yes, that's correct.

      Comment


        #4
        Well reserve funds are not intended to cross subsidise between lessees for later works. If anything you should be asked to make up the difference. How exactly were these new leases constructed that would allow a theft of pre-existing funds?

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          #5
          Originally posted by AndrewDod View Post
          Well reserve funds are not intended to cross subsidise between lessees for later works. If anything you should be asked to make up the difference. How exactly were these new leases constructed that would allow a theft of pre-existing funds?
          OK, perhaps I wasn't completely clear and may be using the wrong terminology.

          The funds are more for scheduled works, like 10 years repainting of the exterior, 10 years interior painting of communal areas etc.

          My point is that the management company knew this was required as per the schedule, so should have taken contributions for this spread over the 10 years with us included from year 6 paying the same amount as we've only had 4 years use of the building.

          For reference, the part of the building where the new flats exist were non residentuial previously (B1 classification I think?) but vacant since new, so the liability for contributions in the first 6 years should fall with the owners prior to them being flats?

          Had the contributions been managed responsibly, they would be consistent over the 10 years and oropertiknate for each owner/ occupant.

          ​​

          Comment


            #6
            You need to re-orientate your thinking to understand the basic concepts here.

            Putting aside the issue of the fact that leases would have altered to accommodate the new builds for the moment.

            a) Reserve funds are NEVER intended to be there to fully fund works. Things are payable when they are payable.
            b) The idea that "use" of something has anything whatever to do with pay-ability is false. What is payable is what the lease says is payable -- use (or time of use) has nothing to do with it. If the lease says you are responsible for paying for all of the repairs to the balcony of the flat above yours over all time, and you have no balcony yourself -- that is what you pay even though you only moved in 2 weeks ago. It is the contract you signed.
            c) Reserve funds notionally change the price of the thing (the lease) you bought. So if a block of 10 has a £100,000 reserve fund, you might have paid £10K more for your flat. You can't come afterwards to get your cake having already eaten it (or visa versa wanting cake already eaten by others).

            There are huge issues with bolting on new flats to an existing block and how the leases of the other existing flats were changed. They would somehow have had to agree to that. You however bought the lease you bought as it was when you bought it.



            Comment


              #7
              Thank you.

              A) As the lease stipulates, contributions are taken for a reserve fund for scheduled works and repairs. Part of the agreement surrounding this is to have the accounts managed responsibly which would include forward planning for anticipated work. It's reasonable to expect this to be budgeted for as it frequently is similar situations. The purpose being to avoid situations as you describe.
              B) Yes, but also the contract which was signed by the management company - to manage the accounts responsibly and allow for future planning, which they have failed to do. The interpretation of the lease would be a proportional contribution, otherwise your argument 'theoretically' could be simplified so that one leaseholder is responsible for the majority of the costs most of the time if you take the simplistic view
              C) I'm not sure what your cake analogy is suggesting. To give an alternative.

              If a container requires filling up to a time when the water will be used.

              Over 10 hours
              Hour 1 - Total amount required/ hours/ contributing parties
              Hours 1-10 contributions made
              At hour 6, contributing parties change and new party takes on contributions in line with previous
              Management adjust each year if there are shortfalls or excesses

              What has happened

              Over 10 hours
              Hour 1 - Total amount required/ hours/ contributing parties
              Hours 2-6 - Insufficient contributions made but problem ignored
              Hour 6-7 - Still insignificant contributions made and problem still ignored
              Hour 8 - Panic as to how the final level will be reached and disproportionate contributions requested.

              The management company have failed to plan sufficiently, monitor the account and make adjustments, manage shortfalls and retain consistency.

              Comment


                #8
                You really don't understand how this works. My points were clear. There is no requirement whatever to collect all funds in advance, and yes it can be possible for some lessees to think they are being treated unfairly - because fairness has nothing to do with it. The amount of time your flat had use of the common areas is TOTALLY IRRELEVANT.

                Comment


                  #9
                  Originally posted by AndrewDod View Post
                  You really don't understand how this works. My points were clear. There is no requirement whatever to collect all funds in advance, and yes it can be possible for some lessees to think they are being treated unfairly - because fairness has nothing to do with it. The amount of time your flat had use of the common areas is TOTALLY IRRELEVANT.
                  With all respect, this is about the accounts not being managed responsibly over the 10 years and inadequate financial planning on the part of the management company which is relevant.

                  Comment


                    #10
                    You only have rights from when you buy the lease. Whatever happened beforehand does not give you any right of action. Sorry

                    Comment


                      #11
                      Originally posted by Mag20 View Post

                      With all respect, this is about the accounts not being managed responsibly over the 10 years and inadequate financial planning on the part of the management company which is relevant.
                      Show me the lines in law, RICS guidance or your lease which say that all money for all works (or indeed any money at all) has to be funded upfront via "adequate financial planning". This might be the way you want the world to be but it is not (and if future works had already been pre-funded you would have paid an equivalent amount more for your property).

                      No it is not relevant. Your lease is however (as it existed at the time you bought - with the associated size of reserves at that stage).

                      In fact the exact opposite argument can be made to the one you make -- financial planning and collection of amounts due under the lease upfront is often inappropriate, and facilitates fraud.

                      Comment


                        #12
                        Originally posted by AndrewDod View Post

                        Show me the lines in law, RICS guidance or your lease which say that all money for all works (or indeed any money at all) has to be funded upfront via "adequate financial planning". This might be the way you want the world to be but it is not (and if future works had already been pre-funded you would have paid an equivalent amount more for your property).

                        No it is not relevant. Your lease is however (as it existed at the time you bought - with the associated size of reserves at that stage).

                        In fact the exact opposite argument can be made to the one you make -- financial planning and collection of amounts due under the lease upfront is often inappropriate, and facilitates fraud.
                        As I already said above, the lease stipulates contributions are taken for future scheduled works and repairs.

                        Post #7
                        Point A

                        Got it? 👍

                        If it's stipulated in the lease, the management company should stick to it, as well as the leaseholder making contributions. Only the management company has an overview of the schedule of works, duration, anticipated timeline and costs.

                        Comment


                          #13
                          Saying that the lease makes provision for a reserve fund is not the same as saying that all scheduled works can only be funded from reserves. Nor does the provision to collect a reserve mean that such reserve has to be collected at all (as I mentioned, reserves can often be inappropriate).

                          Anyhow I am not going to be responding further here.

                          Comment


                            #14
                            Originally posted by Mag20 View Post
                            Part of the agreement surrounding this is to have the accounts managed responsibly which would include forward planning for anticipated work. It's reasonable to expect this to be budgeted for as it frequently is similar situations.

                            The management company have failed to plan sufficiently, monitor the account and make adjustments, manage shortfalls and retain consistency.
                            Sorry but you can argue all you like here...it will make no difference to the reality.

                            Firstly, reasonableness is not the basis upon which leasehold tenure was created or is managed. At least not "reasonableness" as the world normally applies the term.

                            Service charges are variable and collected by virtue of the terms of the lease. If the lease says payments 'on account' this means you pay based on the landlord's estimate in advance. If the lease permits a reserve, not all do, then the landlord ESTIMATES for future costs and applies a contribution. Nobody can know in advance what work will cost in future, no matter how well a budget is managed.

                            Pots of cash will be estimated in year X for various future works over years Y and a sensible approach will be to inflation index the cost year on year. There is no way to guarantee the estimate will cover actual. How could that be so?

                            People who pay into a reserve lose their money when they sell if the estimated 'pots' weren't incurred, and their successors benefit by not being charged in full when the work does happen.

                            A reserve is designed to 'iron out' year on year surges in costs. But if it fails, you still pay, grateful there was anything in the reserve kitty to start with.

                            Then we come to management. If you seriously expect -or can find it codified anywhere - that leasehold property managers must operate to a standard such as your granny looking after her bungalow, you will be disappointed.
                            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


                              #15
                              No problem. Thanks for your input.

                              I maintain that the lease applies equally to both parties, with our duty as leaseholders being to make contributions, and the management company's obligation being to collect them as appropriate and proportional for future scheduled works. Perhaps it's different for larger buildings, but this is definitely what is stated in the lease and used as justification to collect them in correspondence.

                              Comment

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