Ideal level of Reserve Fund?

[Esio Trot]

We are due to take over three blocks of six one-bedroom flats, each block arranged over three floors, as managing agent on 1 January 2010. The leases are 999 years, with 976 remaining.

The existing managing agents have resigned, mostly due to arrears of service charges and their distance from the block, and two of the leaseholders are about to have proceedings started against them.

The effect of the arrears has virtually wiped out the few thousand in the reserve fund, and the existing agent has warned us that there may be an overall deficit on the day they hand over.

If there were no arrears, the reserve fund should have £4,300 in it.

Even this figure seems very low for a reserve fund. Does anyone have a rule-of-thumb on how to work out the ideal level of a reserve fund? Any suggestions on a figure for the above flats?

[Poppy]

Read the lease. Is a "reserve" fund permitted at all? If so, what is its purpose? To account for non-payers or go to towards a big planned project?

[jeffrey]

Really, a 'reserve' fund is no such thing. Paying lessees should not have to subsisdise non-paying lessees.
Rather, it's a 'sinking' fund- to spread major capital expenditure over many years, the number to be roughly equal to the expected replacement scheme. For instance, if flat roof's estimated lifespan is about 25yrs., about 4% of a new roof's cost should be collected annually and put-aside for that purpose.

[Esio Trot]

Is a "reserve" fund permitted at all? If so, what is its purpose? To account for non-payers or go to towards a big planned project?

It is a company limited by shares and a reserve fund is covered by the Articles of Association.

There is no 'big planned project' at the moment, but last year perimeter fencing was replaced on one side at a cost of £4,000. This was paid for by an additional charge on current owners, there being little in the way of reserves. No doubt there will be other ad-hoc items over time.

Some of the current leaseholders who bought in the months before the levy were up-in-arms at having to contribute - in the past the managing agent did not think to have a regular annual charge to cover large cost items.

It has been suggested to me that a charge of £200 a year should be a minimum.

[Poppy]

You have not answered the question about what if anything is permitted under the lease.

[Esio Trot]

You have not answered the question about what if anything is permitted under the lease.

It's a pretty standard lease where the lessee (the Ltd Co) covenants with the lessor to maintain, insure etc.

Without quoting a great deal of the Articles of Association, the directors of the limited company are then empowered to do whatever is needed - provided that any monies received is used solely for the objects of the company (i.e. performing the covenants etc). No monies can be paid out as dividends or extracted in any other way.

[Poppy]

I don't understand why you are skirting my question. You are employed as an agent, not one of those suspicious freeholders. I’m not talking about the Articles of Association. The members cannot tell you how much of a fund to keep unless/until you tell us whether the freeholder is allowed a fund in the first place.

The answer lays in the lease. If it permits the collection of monies on top of actual expenditure, then you’ll have your answer.

[jeffrey]

But the leaseholders [i.e. not 'company members' as such] can:
a. authorise a sinking fund's creation even if the lease does not so provide; or
b. seek a Variation Order [s.35(2)(g) or s.37 of LTA 1987].

[Poppy]

Over to you Esio Trot, Have the lessees requested the creation of a sinking fund or sought a variation order?

[Esio Trot]

I don't understand why you are skirting my question ...

The answer lays in the lease. If it permits the collection of monies on top of actual expenditure, then you’ll have your answer.

I'm not skirting the question. I can't tell you about money, as there is no mention of it in the lease other than the requirement to pay ground rent, the amount and time schedule.


Over to you Esio Trot, Have the lessees requested the creation of a sinking fund or sought a variation order?

There are no lessees, as a group, only one - the Ltd Co. Each flat has one share in the company. These shareholders appoint directors, and these directors have fairly extensive powers without needing to refer back to the shareholders.

The flat owners, as members of the company, approve the budget for the next year at an AGM. This budget has provision for the contribution to the reserve fund, but this has not, until the last couple of years had anything put by for any large expenditure that might crop up.

The lease between the freeholder and Ltd Co makes no mention of money. It simply has covenants to insure, keep in good repair, and allow the freeholder to enter and inspect etc.

[jeffrey]

Eh? There must be more than one lessee- or else what properties do the company's members own?

[Gordon999]

We are due to take over three blocks of six one-bedroom flats, each block arranged over three floors, as managing agent on 1 January 2010. The leases are 999 years, with 976 remaining.

The existing managing agents have resigned, mostly due to arrears of service charges and their distance from the block, and two of the leaseholders are about to have proceedings started against them.

The effect of the arrears has virtually wiped out the few thousand in the reserve fund, and the existing agent has warned us that there may be an overall deficit on the day they hand over.

If there were no arrears, the reserve fund should have £4,300 in it.

Even this figure seems very low for a reserve fund. Does anyone have a rule-of-thumb on how to work out the ideal level of a reserve fund? Any suggestions on a figure for the above flats?

I suggest that you prepare an annual service charge budget based as follows :

Annual costs :

Buildings insurance under block of flats policy
Cleaning costs
Gardening costs
Electricity costs
Accountancy + company maintenance costs
Refuse bins costs
etc

Reserve fund for cyclic expenses :

External painting total cost ( divide by 4 if done on 4 yearly cycle)
Internal decoration total cost ( divide by 6 if done on 6 yearcycle)
Boundary fence total renewal cost ( divide bysay 10 years ? )
Emergency repairs ( say 100 pds per flat yearly)
Stairs carpets ?

This should help you to save up a reserve fund to deal with any emergency over the first five years. Then on review , you can reduce if there is too much held in reserve.

[jeffrey]

Plus big occasional costs- roof?

[Poppy]

Thank you. So you have established that the lease does not require a reserve of any kind but the lessees have voluntarily requested one. It is a matter for them to decide the reserved amount. Gordon999’s suggestion gives food for thought.