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What is a reserve fund?

Joe Minihane
Written by  Joe Minihane
Jonathan Leggett
Reviewed by  Jonathan Leggett
5 min read
Updated: 30 Apr 2024

How does a reserve fund differ from a sinking fund? And what repairs will a reserve fund typically cover? Read on and we'll explain all...

What is meant by a reserve fund?

A reserve fund is a dedicated pot of cash that is used to cover the cost of repairs for a building owned by a number of leaseholders.

The money is held by either the landlord or manager of the building and is put into trust, meaning that these monies cannot be used for anything other than repairs.

Helpfully, that means if your freeholder or landlord goes bust, that money cannot be used to pay creditors.

Reserve funds are held for the long term, up to 20 years, and can be accrued over a long period.

The idea is that they will protect leaseholders from having to find extra money for repairs and maintenance in the event of an emergency.

Where does the money for a reserve fund come from?

Reserve fund money is paid by leaseholders as part of their service charge. This may be paid monthly or yearly, depending on the terms of your lease.

It is separate from a management fee, which is used to cover landlord or freeholder costs.

Remember, if you’re a first time buyer and looking at a leasehold property, that paying into a reserve fund will push up your monthly payments and that is not included in your mortgage.

What are the benefits of a reserve fund?

There are multiple benefits to having a reserve fund. These include:

  • Your landlord or freeholder having ready access to a large cash pot to pay for repairs

  • Minimising the need to find additional funds for major works

  • Having the chance to build up a large fund over a number of years

  • Prospective buyers not having to worry about finding money to pay for ongoing repairs

Who decides how much to pay into a reserve fund?

Usually the landlord, manager or freeholder will decide how much leaseholders have to pay into a reserve fund. This can vary depending on the changing cost of materials for repairs.

If leaseholders all agree to the fee, then it will most likely come out of your service charge. If agreement cannot be reached, it’s possible to ask the Leaseholders’ Association (LA) to negotiate a fee or, in the worst case scenario, ask a First Tier Tribunal (FTT) to set the fee.

A good landlord or freeholder will update a document called a Cyclical Maintenance Schedule.

This shows when repairs, such as repainting communal areas or ad hoc gutter repairs are needed, so that they can tweak the amount required for the reserve fund accordingly.

Is a reserve fund a sinking fund?

A reserve fund and sinking fund are slightly different. A reserve fund is used for everyday maintenance jobs, while a sinking fund tends to be used for major works that are known to be required and have a set schedule.

This could include replacing roof beams that are no longer safe or changing a communal boiler.

Can reserve funds be used for repairs?

Yes. Reserve funds are designed to offset the need for big payouts from leaseholders whenever unexpected problems occur, especially minor works like leaky drains or crumbling plaster.

Leaseholders will agree which areas the funds will cover and then arrange with the manager to get any work in the diary, with the fund being used to cover costs.

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