Reserve fund

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    Reserve fund

    Hello
    Our lease requires us to pay into a reserve fund, is this fund subject to S20 consultation? Or would the monies be used as stated in the lease for regular cyclical decoration which would come under repair and maintenance? Meaning as its cyclical no S20 required even though the amounts from the reserve for each flat would exceed the £250.00 threshold?

    #2
    No section 20 needed for reserve fund, the consultation is only required when money is spent

    Comment


      #3
      A reserve fund will be for expensive repairs known to exist in the future, as in 5 years time., such as the roof has been inspected inside and out and will cost £ 50,000 to replace ( if you only have 4 flats, thats £ 12,500 EACH.)

      If there are no identified major ( roof / tarmac driveway etc, expenses required in the next 5 to 10 years, then nothing needs be put in a reserve fund.

      A reserve fund is for IDENTIFIED works, and not to suplement the normal yearly running costs.
      That's why I inspect the property personally, once a year, ( roof every 7 years ) to see what wants doing, before I issue the service charges for the next year, with my director hat on, and not with a leaseholder hat on as leaseholders refuse to comprehend that they can let their own freehold house fall into disrepair, but they can not let a building that is packed with unrelated leaseholders fall into disrepair, nor can they insist thet they will make the other leaseholders suffer by letting the directors ( who are usually leaseholders with their own agenda ) say-- hmmm, costs too much, we wont maintain or fix that item -- happened too often on my watch, wich I don't allow.

      Leasholders and directors when they arrive are not close associaties, friends, family, THEREFORE the lease and the laws Must be enforced by the directors.

      S20, tHRE IS NOTHING MAGICAL ABOUT S20'S, it's just a normal maintenence demand service charge, that the Government have stated, if a job costs a leaseholder more that " 250, an S20 is required.

      And S20 payment is required BEFORE works commence, not after.

      Comment


        #4
        Thank you again

        Comment


          #5
          Originally posted by ram View Post
          If there are no identified major ( roof / tarmac driveway etc, expenses required in the next 5 to 10 years, then nothing needs be put in a reserve fund.
          That will depend on how the reserve fund is intended to be used.
          If a reserve fund is intended to spread the cost of the more expensive maintenance jobs evenly between all leaseholders, it may be reasonable to collect payments over a longer period. Flat roofs, for example, cost a lot to replace and are likely to last about 20 years. It can therefore be reasonable to collect payments for work that isn't expected to be needed for a longer period (although personally I would prefer not to pay into any reserve fund because of the risks of the money being stolen, or used inappropriately).

          Comment


            #6
            As far as I know, if there is - lets say £ 10,000 in a reserve fund ( for specific items ) for 5 flats and if that reserve fund is not expected to be spent in the next 4 to 6 or more years,( even as short as 1 yrear ) then you don't get that money back when you sell [ you don't get your £ 2000 back ].
            But you may be asked to reduce the sale price to cover the forthcoming expense, then all you do is add £ 2000 to the sale price before hand ( flats and houses are vastly overprices anyway, so adding £ 2000 is a drop in the ocean.)

            In my dealings, leasholders, who are normally directors ( less than 6 flats ) always refuse to have a reserve fund if lease allows, because it's their money, and why should the freeholder have it when the work wont be done for year or more, so the bank balance is always zero at the end of the year.

            I always sugest that the leaseholders personally input funds into their account so the balance always has a minimum, carried over every year , of between £ 1000 to 2000 ( in total, not each ) for emergency repairs, stating that £ 1000 for unknown emergency work ( drains blocked - basement flat becomes Venice )
            that only allows for 2 men - 9 hours each ( one day of work ) to repair anything that could not be forseen.





            Comment


              #7
              Originally posted by Macromia View Post
              That will depend on how the reserve fund is intended to be used.
              If a reserve fund is intended to spread the cost of the more expensive maintenance jobs evenly between all leaseholders, it may be reasonable to collect payments over a longer period. Flat roofs, for example, cost a lot to replace and are likely to last about 20 years. It can therefore be reasonable to collect payments for work that isn't expected to be needed for a longer period (although personally I would prefer not to pay into any reserve fund because of the risks of the money being stolen, or used inappropriately).
              Yes Macromia that is my worry also, how are these funds protected....can the landlord just send a bill to me with a demand for an advance for monies without saying what the monies are for, no explanation whatsoever and I thoughts under section 19(2) L&T act that any advance monies demanded need to be reasonable and no consultation offered?

              Comment


                #8
                The intention of a reserve fund is to spread the costs of "use and occupation" as evenly as possible throughout the life of the lease to prevent penalising leaseholders who happen to be in occupation at a particular moment when major expenditure occurs. RICS code 7.5.

                The problem is that landlords do misuse the funds, they raid funds to finance service charge arrears and pay for expenditure which was not included within the budget. In many cases, there is no evidence of any thought process behind the sums demanded, it is more a case of think of a number which can be collected. It should be calculated properly and the leaseholders should be informed eg estimated cost of replacing a lift spread over 25 years, estimated redecoration cost spread over 5 years etc.

                You can apply to the FTT if you consider that the annual charge is unreasonable but it is rare for a Tribunal to find that the charge is unreasonable, even when the amount varies substantially from year to year. It usually states that it is reasonable for a landlord to provide for contingencies and allows any charge to be made which goes against the principle of the RICS code.

                Comment


                  #9
                  Thanks Eagle 2 I get that however the landlord is not saying what the monies are for it simply states in the budget a sum of £1400 required in two weeks time!!!!!!!

                  Comment


                    #10
                    So from my understanding the Reserve Fund is a fund created to ensure that sufficient money is available to pay for large items of expenditure in the scheme, rather than towards day-to-day, regular repairs, maintenance or management. Sometimes also called contingency or sinking funds or long term maintenance funds, the funds can only be used for the purpose for which they have been collected. Such funds are raised either by contributions from service charges where the leases allow this and sometimes by the operation of a formula in leases, which provides for a fixed amount to be paid on any sale of a relevant dwelling. These funds are subject to being held in trust in accordance with section 42 of the Landlord and Tenant Act 1987.

                    Comment


                      #11
                      What a reserve fund can be used for may be restricted by the terms in the lease.

                      Best practice will usually be to make it clear to leaseholders what the funds are for, and then to only use them for that purpose, but leases will sometimes (perhaps often) be written in a way that allows the freeholder to use reserves pretty much whenever they like.

                      Comment


                        #12
                        Thank you Macromia its a grey area then in some leases?

                        Comment


                          #13
                          Originally posted by Starlane View Post
                          Thank you Macromia its a grey area then in some leases?
                          It will depend on the what the lease says about a reserve fund, and whether or not it restricts the way that the fund is allowed to be used.

                          Comment


                            #14
                            It is important as well to check if the lease requires the reserve/sinking fund to be held in a separate bank client account. If there is only a general bank client account, it is often raided for other purposes.

                            Comment


                              #15
                              SO the lease provision states ....To set aside ( which setting aside shall for the purpose of the Sixth Schedule be deemed an item of expenditure incurred by the Lessor) such sums of money as the Lessors reasonably require to incur in replacing maintaining renewing and decorating those items which the lessor hereby covenants to replace maintain renew or decorate ( such sums set aside to be a sinking fund)

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