Improper use of reserve/sinking fund

sebtomato

Hi,

I live in a block of flat, and the lease does mention the right for the manager to create a reserve/sinking fund for future planned expenditure.

However, instead of leaving the money alone for large expenditures coming up, they keep depleting the fund to balance the accounts at the end of the year (basically, to pay the difference between what was budgeted for incorrectly, and higher actuals) so that those final accounts look good, and also use reserve for paying for instance gardening bills (which is routine work).

My understanding is that:
* A reserve fund should have a proper schedule (identified future items to "save" for)
* Using the reserves for other purposes than planned items, and in particular to balance routine cost, is unfair to some people and would be against the lease

What's people's view on recommended practices?

Thanks,
Seb

moneyistooshorttomention

Have you got anything in writing saying exactly what that reserve fund is to cover, ie listing off in precise detail things like, for instance:

- roof repair and replacement as needed
- etc
- etc

...just naming the first thing I would expect reserve fund money to go towards in those circumstances....

I'd be inclined to think gardening bills were everyday routine stuff that some people have to pay separate service bills for.

Now curious as to how these things work?

Is there a reserve fund on the one hand? AND yearly service charges (as a separate bill) on the other hand?

BitterAndTwisted

Strictly, the reserve funds/sinking fund should be used as described. However, you'd be paying extra once they calculated the shortfall and send you a demand for the balancing-payment at year-end, so the end result is the same.

I can't tell you how many complications there are when lease-holders don't pay their service-charges on time, or if they withhold them altogether! Then there are no funds to pay contractors, they suspend service and the leaseholders start complaining that routine maintenance isn't being performed! Sometimes the property management company can't win whatever they do

sebtomato

The way it works is that a yearly budget forecast is prepared for service charges, and it includes provision for reserves, and also taking money from reserves if required (e.g. redecoration is due, and we are using money from the "pot" saved).

We do have a list of items the reserves are built/accrued for (e.g. redecoration every 10 years), as per the large expenditure forecast, but then money is taking out for different purposes.

The issue with taking money out of reserves for routine maintenance/expenditure (such as gardening) is that it's depleting reserves for what they are meant to be.

When the time arrives that a large expenditure is due (e.g. roof repair), then the money due to be saved for that purpose is not there anymore, so the current leaseholders are hit with a large increase in yearly service charges (which is the opposite of the point of having reserves), and long term leaseholders are worse off, compared to people who are only leaseholders for a few years, and then sell (as they didn't pay their share of the building wear).

My question is: can the property manager keep taking money out of reserves for different reasons than their intended purposes (such as just balance year end final budgets)?

eddddy

sebtomato wrote: »

When the time arrives that a large expenditure is due (e.g. roof repair), then the money due to be saved for that purpose is not there anymore, so the current leaseholders are hit with a large increase in yearly service charges (which is the opposite of the point of having reserves), and long term leaseholders are worse off, compared to people who are only leaseholders for a few years, and then sell (as they didn't pay their share of the building wear).

I'm not sure that your logic makes sense.

Every flat pays their share of service charges / maintenance costs as documented in the lease. It doesn't matter how often a flat changes hands.

(When a flat is sold, anticipated maintenance charges should be reflected in the price. But that's up to the buyer and seller. It doesn't impact other leaseholders. )


I think your main point is that you would prefer to 'spread the cost' of big maintenance jobs over many years, rather than paying in a big chunk.

You can propose that to your freeholder. But there may be other leaseholders who prefer not to hand over money until it's actually needed.

I don't think your freeholder is currently doing anything unreasonable.

moneyistooshorttomention

I always thought that the whole purpose of a sinking fund was specifically in order that leaseholders didn't get one heck of a shock with a big repair bill (eg that roof) at any point. I thought the way these funds operate is that someone somewhere sits down and works out that, say, the roof is due to need replacing at a guess in 10 years time and therefore says "Right - the sinking fund needs to have one-tenth of the cost of that roof put to one side by everyone each year. Then, come the time the roof has to get replaced, then the money is there to pay for it".

Obviously most of us operate on a very different basis as individual home-owners living in standard freehold houses - and we often tend to think "I'll deal with that if/when it happens" and cross fingers that that day will never come basically. So - us individual home-owners can get told, as I was, "That roof on your first house will last another 3-5 years" by the surveyor and think "well I plan on selling the house during that timespan anyway". In the event I had to stay in the house over 20 years before I could sell it - and the roof went on me about 12 years after buying the house.

But leasehold flats with these sinking funds are a totally different thing and - because other people are involved - then I would think they have to operate on this basis??

I think we need to know what the law has to say about sinking funds, ie:
- does the law dictate there will be one
- what does the law say those sinking funds are meant to cover
- what does the law have to say about any shortfalls in money there in that sinking fund if expensive repairs need to come from it.

So - does anyone know what the law does say about this?

sebtomato

eddddy wrote: »

I'm not sure that your logic makes sense.

I think it does: all leaseholders should pay a proportion of the large expenditures, in proportion to how long they have been using the property. For instance, if redecoration is happening every 10 years, people should pay 10% each year.

With the current mechanism of using reserves for other purposes than intended/saved for, it's the incumbent who is paying the large cost when it occurs, e.g. someone moving in on year 10, and paying 100% of the redecoration cost.

sebtomato

moneyistooshorttomention wrote: »

I think we need to know what the law has to say about sinking funds, ie:
- does the law dictate there will be one
- what does the law say those sinking funds are meant to cover
- what does the law have to say about any shortfalls in money there in that sinking fund if expensive repairs need to come from it.

So - does anyone know what the law does say about this?

It depends on what the lease says:

- is there a need for one: no, unless the lease mentions one, but it's usually recommended practice to level out ongoing service charges
- what sinking funds meant to cover: "Reserve funds are built towards future cyclical expenditure (such as the
replacement of the lift of the re-covering of a roof and/or general
block redecoration)."
- shortfalls: the leaseholders still have to pay from service charges

eddddy

There are no laws about sinking funds.

It's a really simple choice. If a roof will need replacing in 10 years time, and a leaseholder's contribution will be £5000 - the choices are:

a) pay £500 per year into a sinking fund for 10 years
b) wait 10 years and then pay a lump sum of £5000

The freeholder can decide which route to take.

If the leaseholders don't like the freeholder's choice, they can use their legal rights to take over the management, and do it differently.

But I suspect that some people would prefer option a, and others would prefer option b.

eddddy

sebtomato wrote: »

I think it does: all leaseholders should pay a proportion of the large expenditures...

Maybe a simple example will help...

There are 5 flats in a block. Each flat pays 20% of maintenance fees.

You own flat no 1, so you pay 20% of maintenance fees.

Flat no 2 changes hands every 2 years. You don't care. You always pay 20% of maintenance fees.

(It's up to the buyers/sellers of flat no 2 to make adjustments for who has/hasn't paid big maintenance fees)

sebtomato wrote: »

e.g. someone moving in on year 10, and paying 100% of the redecoration cost.

So this is taken account of in the selling price.

e.g.
In Year 9 - Mr X buys a flat for £100,000 - because it looks shabby, and there will soon be a big redecoration bill, and there is no sinking fund.

in year 10 - Mr X has to contribute £5000 to redecoration

in year 11 - Mr X sells the flat for £105,000. It sells for £5000 more because it is newly decorated, and so there will be no moe redecoration bills for 10 years.

moneyistooshorttomention

eddddy wrote: »

There are no laws about sinking funds.

It's a really simple choice. If a roof will need replacing in 10 years time, and a leaseholder's contribution will be £5000 - the choices are:

a) pay £500 per year into a sinking fund for 10 years
b) wait 10 years and then pay a lump sum of £5000

The freeholder can decide which route to take.

If the leaseholders don't like the freeholder's choice, they can use their legal rights to take over the management, and do it differently.

But I suspect that some people would prefer option a, and others would prefer option b.

Good point.

I know I'd prefer the b. option personally - as I'd know the person who was putting money to one side for "sinking fund" purposes in those circumstances would be someone I was sure I could trust (ie myself). Option a. would mean lots of investigation on my part to make sure my "sinking fund" money was safe in their hands...