When should reserve funds be used for maintenance projects?

Brady Solicitors’ block management specialists look at the implications of the Caribax v Hinde case on managing agents’ use of service charge reserve funds.

The Caribax v Hinde House Management Company [2015] case concerned whether the landlord should be funding maintenance works from the reserve fund or through additional service charge contributions. The case centred on the key point of whether or not the monies held by the landlord could be classed as a true reserve fund.

The estate at the centre of the dispute is a leasehold development with 34 properties. Between 2010 and 2012, the landlord had issued service charge demands for almost £50,000 of additional contributions to cover some of the maintenance to common parts.

Seven of the leaseholders brought a case against the landlord on the basis that various maintenance items should be paid for out of the estate’s reserve fund, and not by way of additional contributions.

What did the lease say?

Whilst the lease stated that the service charge payments were to include a contribution towards the maintenance of common parts, the lease also required the landlord to hold the service charge payments on trust, and to pay for the maintenance works out of a designated trust fund.

Section 42 of the Landlord and Tenant Act 1987 explains that a reserve fund containing service charge monies must be held on trust, in a designated account at a relevant financial institution. 

The landlord had set up two reserve funds but neither was held on trust.

At the first hearing in the First-tier Tribunal, the landlord admitted they were in breach of the lease by not holding the reserve fund on trust.

They argued that this however meant that the fund could not be classed as a reserve fund – and so did not need to be used to fund the maintenance works.

The tribunal agreed and found in favour of the landlord.

The leaseholders appealed, and it was heard in the Upper Tribunal. The leaseholders successfully argued that, regardless of the correct set-up of the reserve fund, the monies for the works were available and the landlord should use these funds before issuing additional demands for contributions.

The judge agreed, finding that even though there was no designated trust fund in place, there was an effective reserve fund and that the landlord should use this first for repairs and maintenance.

What should we learn from the Caribax case?

If a reserve fund can be shown to exist – whether held on trust or not – landlords should consider carefully whether to first meet maintenance costs from this reserve fund before issuing demands for further contributions through the service charge.

Depending on the circumstances, it could be argued that further demands for contributions could be made in the future.

We would of course always recommend ensuring that reserve funds are correctly set up, in accordance with your lease, and held on trust as prescribed by Section 42 of the Landlord and Tenant Act 1987.

For help with your legal property management challenges, please contact the block management specialists at Brady Solicitors on 0115 985 3450 or by email.

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