Service Charge Reserve Fund: Purchase & Sale

andrew1522

Hi, this is my first post. I am hoping someone will be able to help or offer advice of their experiences.

When I bought my flat, I agreed to pay the vendor his ownership interest of the service charge reserve fund. In its simplistic form, I viewed it as purchasing a bank account holding cash.

Now that I am in the process of selling the same flat, the purchaser's solicitor has advised the purchaser not to pay for my ownership interest in the service charge reserve fund account.

Has anyone experienced this? Is there a norm to dealing with the Service Charge reserve fund balance on purchase/sale and are there any exceptions as how how it is dealt with?

Thank you for your time reading this.

G_M

The norm is to ignore it.

The fund is typically held by the freeholder, or a management company, and is for the benefit of the building.

When leases change hands, any reserve fund is ignored, although it is sensible for a buyer to establish if one exists and whether it is large enough to cover whatever likely costs might arise.

sparky130a

andrew1522 wrote: »

When I bought my flat, I agreed to pay the vendor his ownership interest of the service charge reserve fund. In its simplistic form, I viewed it as purchasing a bank account holding cash.

Then you were overly generous.

It's not a bank account holding cash,mainly because you'll never be able to draw down on it.

More a policy that indemnifies you against large capital expenditure on the building. This of course depends on the funds held.

AdrianC

andrew1522 wrote: »

Is there a norm to dealing with the Service Charge reserve fund balance on purchase/sale and are there any exceptions as how how it is dealt with?

Absolutely.

The norm is to ignore it completely, as it's a sunk investment in the future maintenance of the building.
The exception is for the buyer to pay an additional sum of money, equivalent to a share of the fund, to the vendor.

The reserve fund waxes and wanes, according to the work that's been done, and needs doing. If you're taking the amount of money into account, you ought to also take the amortisation of longer-term maintenance costs into account, too.

So if £20k of painting of a block of 10 flats needs doing every decade, then once a decade £20k comes out of the service charge. Every year, £2k goes in, £200 per flat. But you could easily view that as £200/flat of paintwork "depreciation" amortised every year, so the service charge and the pending bills balance out.

andrew1522

Thanks for all the comments.

My issue is slightly more complicated than I have described.

The purchaser discounted their offer for 100% works. I agreed on the condition that they reimburse us for what we have paid towards these works. Ie. These 2 conditions go hand in hand so neither party would benefit at the cost of the other.

The reserve fund holds 40% equivalent of the cost of the works and these funds have been allocated to the works. Further demands are being sent out for the difference.

They now refuse to reimburse us the costs paid that were already in the reserve fund but are still happy to take the full discount in price, thereby asking us to pay twice for the works.

In hindsight, we should have asked them to not discount the price and that we would pay for the works in full.

ThePants999

Well, tell them the price just went up!

AdrianC

andrew1522 wrote: »

Thanks for all the comments.

My issue is slightly more complicated than I have described.

The purchaser discounted their offer for 100% works. I agreed on the condition that they reimburse us for what we have paid towards these works. Ie. These 2 conditions go hand in hand so neither party would benefit at the cost of the other.

The reserve fund holds 40% equivalent of the cost of the works and these funds have been allocated to the works. Further demands are being sent out for the difference.

They now refuse to reimburse us the costs paid that were already in the reserve fund but are still happy to take the full discount in price, thereby asking us to pay twice for the works.

In hindsight, we should have asked them to not discount the price and that we would pay for the works in full.

Hold on a minute... This is actually a question about a section 20 notice?

<shrug> The deal you've agreed is the deal you've agreed. If you want to vary that, then you need the other person to agree to that variation - and if it's going to suddenly cost them a chunk more, then...

andrew1522

Thank you for your post.

Yes it is related to section 20 and I agree that the terms agreed should be followed but the issue is they are not following them. The reason behind this is that their conveyancer has advised them to not pay for the existing funds in the reserves which will pay towards the works. The same works for which they have taken a full discount on the purchase price.