What are Reserve Funds?

That sinking feeling

The last thing any leaseholder wants is to find that their service charge is suddenly ramped up to pay for unforeseen repairs. So what’s the solution?

Leases often call for landlords to establish a ‘sinking’ or ‘reserve’ fund which allows residents to build up a sum of money to cover the cost of expensive works such as structural repairs, external decoration or wholesale window replacement. There are several advantages to maintaining a reserve fund, even if your lease doesn’t call for one. Sinking funds:

• earn interest as they are held for a longer period than regular service charge monies which increases the fund and helps ease the impact of rising repair costs;
• allow payments to be spread, in some cases, over many years; and
• even out annual charges, avoiding one-off bills and helping leaseholders budget in advance.

If your lease calls for a sinking fund, it may also determine how much is to be paid by each resident. If this is not the case, the charge levied by the landlord must be ‘reasonable’ and having a maintenance schedule in place (see page?) makes contributions to a sinking fund transparent. However, leaseholders have the same right to challenge unreasonable charges via the LVT as with annual service charges.

Any unused payments made to a sinking fund are not normally repaid to leaseholders if they move out of the block, but all leases are different and this may be the case if the lease specifies it.

There is more information on service charges and sinking funds on  the LEASE website at www.lease-advice.org