FTB, Very unclear on Service Charge Vs Reserve Fund contribution

Heardy92

Hi everyone!

I'm fairly progressed through the process of buying my first home (a leadhold flat) but have received some correspondence from my Conveyancer on Service Charge and Reserve fund contributions which have me very concerned. I have already queried the wording with them but they normally take a few days to respond, so was hoping someone on here might be able to give me some clarity for the sake of my nerves! 

This is in the lease report received from my conveyancer:

SERVICE CHARGE
You are liable to pay a service charge contribution towards the upkeep and repair of the
common parts. The service charge is currently £1,461.76. Please note that following the
production of the year end accounts, your service charge contribution may increase to
compensate for any deficit or repair works due to be done or already completed.

There is a reserve fund in place which would be used to cover regular or unexpected repair and
maintenance at the discretion of the Management Company, however we cannot confirm as to
whether this will be sufficient to cover any future works. If there are not sufficient reserves to
cover any future works an additional charge can be levied from each lessee in order to cover
the cost of the same. The current required contribution to the reserve fund is £2,500 per annum.
Once a completion date is agreed we will confirm apportionments with the seller’s solicitor so
that the seller and yourself each pay your share of the service charge for your period of
ownership.

The £1461 service charge I have always been aware of since the start of the buying process, however the wording in the above has me worried that the reserve fund contribution is £2500/annum on top of this (which would porbably be cause for me to reevaluate the whole purchase to be honestly).

Could anybody help me to understand how this reserve fund point normally works?

Many thanks! 

Slithery

Heardy92 said:

The £1461 service charge I have always been aware of since the start of the buying process, however the wording in the above has me worried that the reserve fund contribution is £2500/annum on top of this (which would porbably be cause for me to reevaluate the whole purchase to be honestly).

Correct.
The service charge covers insurance and regular maintenance, things like cleaning and electricity for the common areas, gardening, window cleaning etc.
The reserve fund is for other big ticket items. For example if you need a new roof or lifts need replacing instead of all the leaseholders getting a bill for say £20k the reserve fund is used. It's usually a good idea to have one.

AFF8879

I don’t believe I’ve ever come across a reserve fund being charged separately to the service charge, it’s usually a line item in the budget. It’s possible that the £2.5k per annum covers all flats in the block- is it a relatively small development?

If it is indeed separate, and you’re liable for a total £3.9k per annum, I’d be running a mile as that feels like an obscene amount- even for a flat in London with communal pool, gym, lifts etc. But I wouldn’t panic just yet until you get 100% confirmation.

Was the level of annual charges advised when you made an offer? The EA particulars cannot be legally relied upon but they’re also not usually a million miles out.

daveyjp

How many leaseholders contribute to the service charge and sinking fund?

Is £2500 is per leaseholder or the total amount paid into the sinking fund each year across all leaseholders?  The statement from the conveyancer doesn't say either way.

Also find out how much is in the reserve fund.  There comes a point where it can be too much.

AdrianC

I'd certainly expect £2.5k to be the annual total across all flats - and part of the service charge.

Think of it as a savings account for future work.

Heardy92

Thanks for taking the time to respond guys. 

@AFF8879 - It's a converted flat with 3 flats in the building, so very small. The £3.9k level of charges definitely wasn't advised, the EA originally quoted £1800/annum service and £125 ground rent which is why I'm hoping the conveyancer has just been quite vague with their write-up. 

@daveyjp - It'll be 3 leaseholders contributing, I'm really hoping that the £2500 is spread across all 3 as it seems far too much otherwise. Thanks for the advice, I'll ask the conveyancer about the current reserve fund pot.  

eddddy

Ultimately, you need to get all this confirmed via solicitors - but as a starting point, to help you get to the bottom of this more quickly, I would phone the EA and say something like:


"My solicitor seems to be saying that the seller is paying £2.5k into a sinking fund each year. Can you ask the seller if this is correct? If it is, can you ask the seller why? For example, is there a big job planned, like a roof replacement?

If it's not correct, can you ask the seller how much they actually pay into the sinking fund each year?"


Some sellers might be dopey, and have no clue, Some sellers might be dishonest, and fib. But with most people - if they're really paying £2.5k a year - they would have asked why, and have a pretty good idea.


You can't rely on what the seller (or EA) says - you need to get everything confirmed via solicitors. But doing things this way round might speed the process along, and identify potential problems earlier.

pinkpiglit

FWIW, our reserve fund and service charge is always billed separately. 

Reserve fund collection is twice a year (eg Q1 and Q3) and the service charge is billed for the other quarters,  (Q2 and Q4).  Thus a payment goes out every quarter.

firebubble

The 'reserve fund' is what is also known as a sinking fund. Your replies to enquiries should tell you whether major works using the reserve fund have been carried out in the last 3 years, but if you're concerned, ask your solicitor to raise an enquiry going back further - for example, 10 years, to get the full picture. In flats, the expensive repairs are usually the roof and lifts, so see if you can find out when these were last done.

What you want to establish is whether major works are coming in the next year or two (ie before you've had a chance to build up a chunk of cash in the reserve fund), otherwise if your reserve fund at that point isn't big enough, you'll be liable for the rest of your flat's contribution.  

NameUnavailable

Reserve funds can be whatever surplus is left over from each years overall service charge, or it can be an amount to cover a known future expense like reroofing or redecoration of communal areas etc.

With the information your conveyancer sent there should be a form that has been completed by the freeholder or management company about the service charges and any recent or future works that are planned. Have you seen that? What does it say?

If the roof needs replacing in a few years time then £2.5K per flat would seem likely (and I would be seeking a large price reduction or running away) but if it's a reserve fund for works in general then £2.5K between all seems more likely although a high amount and probably in addition to the service charge so you need to find out if that is the case, and then ask why - there must be and idea for what that money is likely to be spent on.

saajan_12

Wouldn't rely on people making conclusions based on the number seeming high / low. It entirely depends on what the standard is for the area, and whether that's priced in. 

A 4k total charge is not unusual in city flats, particularly when they have lifts / pools / staff onsite. How that's split between service charge and sinking / reserve fund may vary by property - some may use sinking fund for more frequent things that occur every say 3 years, while others may treat that as a regular expense for service charges and use sinking fund only for 10+ yearly issues. 

You just need to get it confirmed by the solicitor, how much the service charge and sinking fund contribution are, PER FLAT.