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To Reserve or Sink it? 

Have you received your service charge demand showing that you also contribute towards a reserve or sinking fund?  If so, have you ever wondered what the difference is and what these monies are used for?  Why have you been asked to pay them but fellow leaseholders in other buildings haven’t?

What are the main differences?

It’s not always easy to identify the differences between these two funds, mainly because lease terminology tends to be convoluted and ambiguous.  Sinking funds are generally used as a means of allowing the collection of additional funds for specific works that do not occur regularly, for example, a roof or lift replacement.  Reserve funds are funds that accrue over a period of time until they’re required to cover a large item of unforeseen expenditure or to cover a shortfall in the service charge income when compared to the budgeted amount for any service charge year.  In some instances, the lease will determine exactly how much can be collected for the reserve fund from each leaseholder in every given year.  However, this is uncommon and the amount is usually determined by the landlord or their appointed representatives.  Reserve funds can be used for a wide range of service charge costs, such as unexpected drainage works.

If you feel that paying into these funds only costs you more money, bear in mind the long term benefits.  These funds are there to protect you as a leaseholder, from suddenly having to pay large, unforeseen bills.

What should a managing agent do?

Under the guidance of a building surveyor, a managing agent will often prepare a cyclical 5 or 10 year maintenance plan that helps to determine what works are required and what monies need to be collected.  The plan identifies the level of works required, the timescales involved and an estimate as to the likely costs.

It’s important to note that not all leases allow for the collection of these funds.  But relying purely on your service charge may mean you won’t have a sufficient buffer to protect you from having to pay for unplanned but necessary works.  Leasehold law is complicated and many people struggle to understand that such a system can leave you unprepared and out of pocket.  When purchasing a property, it’s vital that you obtain the necessary information relating to the finances of the building and a full understanding of any planned or proposed works.

What can be done?

 Many in the industry are keen for reserve funds to become mandatory, alleviating the concerns of leaseholders in this way.  The Law Commission recently published their recommendations to transform home ownership for millions of people in England and Wales – it’s estimated that 4.3 million leasehold homes currently exist in England alone.  The report was written in tandem with proposals previously set out by the Government to reform leasehold law, tackling a number of issues that leaseholders face.  What is clear is that the Government are keen to avoid a situation whereby mandatory reserve fund requirements mean that leasehold properties become unaffordable for a portion of the market, such as first time buyers.

For the majority, service charge demands that have increased in recent months / years to incorporate a reserve or sinking fund have been put in place to bridge the gap between budgets, costs and essential works.  Discovering that you need to pay more as a result of these funds may initially seem unfair until you understand that they mitigate instances of high unexpected demands in the future.

What are the alternatives?

 Many leaseholders interpret an easy way out by asking to defer any non-essential but necessary maintenance works.  However, the long term effects of this are often increased costs due to an increase in the level of work required.  As managing agents, we endeavour to work with our landlords and leaseholders to ensure that adequate planning is in place.  As a sector, we must try to educate our clients on the importance of understanding their lease, their finances and the future maintenance requirements of their property.