reservefunds Advice
mIchaelmaunder taylor explains why every block should have a reserve fund and why leaseholders are obliged to pay into it
savingforarainyday
It Is quIte commonformanaging agents to comeacross newclientswhorequire expensivemajorworks to be carried out, but themoney needed to pay for the project hasn’t
beencollected.Thisusuallyresultsin inflatedservice charge demands beingsentto leaseholders to collectall themoney needed within one financial year. Of course, some leaseholdersmay not be able toimmediately find the additionalmoney and the end result is
oftenadispute.Toavoid this situation, all landlordswould bewell-advised to consider settingupareserve fund to collectmoney each year to put aside for futuremajorworks. In 2011, a service charges disputeknownas
Garside -v- RFYC Ltd washeard in theUpper Tribunal, inwhichthe affordability ofmajor workswas discussed. Thejudge explained that it is common practice,where the terms of thelease permit,for servicecharges to be demandedonaccountovertimetoestablish a reserve fund. The idea is that the landlord spreads the cost ofmajorworks as far as reasonably possible tominimise thefinancial impact on lessees. If thelease allowsfora reservefundbut thelandlord failstouse it,thenitcould lead toadetermination of unreasonableness by the First-Tier Tribunal (FTT –previously theLVT). Thiswouldmean that thelandlordwouldhavetopay back the monies into the service charge account. The judge in Garside advised that the
financialimpact of collecting thismoney fromleaseholders canbedeterminedby consideringtheamount of servicecharge beingdemanded, thenatureand location of the property, and bymaking comparisons with theamount demanded in previous years. Thedegreeofdisrepair andthe urgencyofthe work arealsolikelytoberelevant, aswell as the increase in the cost of theworks if carried out in phases rather thanunder onecontract. Amanagingagent should have arough idea of the useful life of each component
By collecting
enoughmoney in advance, future costs will bemore affordable
of thebuildings theymanage,sothattheycan collectenoughmoney in advanceand spread the cost as far as reasonably possible. Usually this informationisnoted on alongterm maintenance plan (LTMP)whichlists the age of each component,whenitisdue forcyclical maintenance or replacement, andacost estimate of thework that will be required. Once an LTMPhas beendrawnup it is a live document,whichmeans that it should be updatedwhennewinformationcomes to light orwhenmajorworks are carried out. PropertyManagersmay notknowoff-
the-cuffwhena component is due for cyclical maintenance or replacement. As an alternative to incurring fees toemploy surveyorsorother consultantstowork this out, the propertymanager couldmake enquiries with the service providers used at the propertywhowill have a good idea of component life spanand the likely costs involved in replacement or refurbishment. The RICS Service Charge Residential
Management Code,which should be adhered to by allmanagingagents, states that the usualway ofworking out howmuch money is to go into the reserve fund each year, assuming the leasemakes no other provision, is to take theexpectedcost of futureworksand divide it by thenumber
escape liabilitytopay by pleadingpoverty
...thelesseecannot
of yearswhich will pass before that costis
incurred.Italsorecommendsseeking new estimates(includingfeesandVAT) fromtime to timeandtoadjustpaymentsintothe fund accordingly. Of course, someleaseholdersmay object
to having to paymoney towardsworks that might be carried out after they sell their flat. However, it isimportanttoexplain that the existenceofareserve fund benefitsboth leaseholders and landlords. After all, a flat in awell-managedblock with a‘rainyday fund’ to be used if andwhensomething goeswrong ismore attractive to a purchaser than one in a blockwhere there is no such fund andwhere the purchaser will have to pay a share of the expensiveworks that are due. To help getthismessageacross, It canbe
very helpful to hold ameeting with residents to discussthe LTMPandproposedreserve fund contributions. For leaseholdersunable orunwillingtoattend, takeminutesand circulate themafterwards. The property managerorRMCshould be able to justify contributionsbyreference towork required, expected cost, andwhenthework is to be carried out. It is alsoworthnoting that the RICS Code states that,where thelease doesn’t allowfor a reserve fund, youshould consider seekingthe agreementofthe leaseholders to vary theleases, ormake an applicationtothe FTT for an Order of Variation. Fromthe leaseholder’s point of view, if your
block doesn’t already have a reserve fund and it is decided that one should be established, it isn’tpossible to avoid paying into it on the basisthatyou cannot afford theadditional payments. As the the judge in Garside commented in 2011: “It isimportant tomake clear that liability
to pay a service charge cannot be avoided simply on thegrounds of hardship,evenif extreme. If repairwork is reasonably required at a particular time, carried out at reasonable cost and to a reasonable standard and the cost of it is recoverable pursuant to the relevantlease,thenthe lessee cannot escape liability to pay by pleading poverty”. As ever,itpaystounderstandyour
lease.Having bought aleasehold property,you have certain obligations to fulfil andwhere propertyownership is concerned-asinevery otheraspectof the law- ignorance is no defence.●
michaelmaundertaylor isa graduatesurveyorwithchartered surveyorsMaunderTaylor
Flat Living issue 17 25
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