Do you understand the difference between a reserve fund and a sinking fund? Do you know if you can demand one-off service charge payments, or payments in advance? The service charge experts at Brady Solicitors, interprets the different ways in which a residential lease can make provision for service charge payments.

Residential leases will usually contain a provision for the leaseholder to pay a service charge to the landlord or management company. At Brady Solicitors we regularly help clients to resolve disputes that occur because the service charge demand was not made in accordance with the lease. One reason perhaps for this is the different ways in which service charge monies can be demanded from leaseholders and the subtle variations from one residential lease to another.

In addition to the periodic service charge requirements, we explain some of the different service charge clauses you might find in a residential lease.

Reserve funds

Some leases, though not at all, contain a provision that allows a management company or landlord to seek sums of money from the leaseholders to set aside to pay for future major works, such as periodic redecoration of the exterior and common parts of the building.

The concept of the reserve fund was established for the purpose of meeting recurring expenditure whilst evening out the annual service costs.

Reserve funds result in all residents paying towards the long-term cost of maintaining the building, and the purpose of the fund is to build up monies in order to cover irregular and expensive works.

Sinking funds

A sinking fund lease clause is extremely similar to that of a reserve fund in that it helps management companies and landlords to have a fund in which they can build up monies to cover future major works and repairs.

The important difference between a sinking fund and a reserve fund is that monies in a sinking fund are generally used to cover specific costs which might only be incurred once or twice during a lengthy lease term such as replacement of the lifts or the roof.

Monies held in both reserve funds and sinking funds must be held in separate accounts to monies collected through the regular, periodic service charge.

An important fact to bear in mind is that assuming the lease allows for the creation of a true sinking or reserve fund, the landlord only needs to use the money in the fund when carrying out the particular works. Consequently if the monies have not been used by the time a tenant’s lease has expired there is no requirement to refund that tenant’s contribution.

One-off/emergency payments

Some leases allow management companies and landlords to claim on demand from the leaseholder sums of money as a ‘one-off’ due to works which are required (usually of a major nature) and which are urgent and necessary.

So long as a lease contains a provision permitting the management company and landlord to do so, leaseholders can be requested to make payment unexpectedly as a one-off.

Payments in advance

Lastly there is often a clause in leases enabling management companies or landlords to collect payments from leaseholders in advance of the actual expenditure for that accounting period being incurred and calculated. If the payments made in advance of the total expenditure being calculated exceed the actual total expenditure, often those sums are carried forward into the next service charge period.

Whilst some leaseholders mistakenly believe that those monies are held in a reserve or sinking fund, this is incorrect. As opposed to reserve and sinking funds, those monies received in advance are not placed in a separate account, but rather in accounts specifically to fund the service charges which occur in each accounting period.

Specialist service charge and leasehold expertise

For help with interpreting your lease or resolving a service charge dispute, talk to the property management experts at Brady Solicitors.

You may also find this article on reserve funds interesting: Reserves – the property managers’ nightmare