Brady Solicitors’ guest blogger Gordon Whelan, specialist service charge accountant at Haines Watts, explains how to overcome the challenges of quantifying reserve funds should they be challenged by leaseholders.
There can be few areas in service charge accounts that cause more angst for property managers than reserve funds.
Because of the forward looking nature of reserve expenditure, it is inherently difficult to quantify and justify the amounts collected and the balances held for future expenditure. Given this, it is not unusual for property managers to be challenged by lessees about reserve funds and whether they are entirely necessary.
Under this type of pressure, the property manager can always fall back on the claim that the amount being carried in reserves is based on his professional judgement. But often the conclusion drawn by the lessee will be that the reserve is some form of “bucket” account, arbitrarily arrived at, and something that he/she may not benefit from (e.g. if they leave the premises before the expenditure is carried out).
The stakes were raised on this issue following the conclusions of the recent case of Syed Balkhi v Southern Land Securities Limited. In summary, the property manager overestimates reserve fund contributions at his peril!
Overcoming the difficulties of reserves
One solution to help overcome these difficulties is to include relevant information about reserve fund expenditure in the notes to the service charge accounts. Such a note, when skilfully presented, can convey important information about expenditure plans and we have been experimenting with this approach with managing agents and getting positive feedback. This ticks a number of boxes;
- As the service charge accounts are annual documents the balance on the reserves can be monitored regularly by lessees. Any revisions through the year (e.g. arising from a surveyor’s report) can be highlighted in the annual accounts.
- The property manager doesn’t need to prepare a separate document or letter to explain the reserve fund plans and so it is cost effective to all parties.
- It gives valuable information to lessees and provides transparency about forward funding reserves.
- As the note will be checked by an independent accountant it adds credibility to the reserve balance.
- The openness can improve dialogue between the lessee and agent.